Registration No. 333-

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

 

FORM S-11

FOR REGISTRATION UNDER THE

SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

Clipper Realty Inc.

(Exact name of Registrant as specified in governing instruments)

 

 

4611 12th Avenue, Suite 1L

Brooklyn, New York 11219

(718) 438-2804

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

David Bistricer

Co-Chairman and Chief Executive Officer

Clipper Realty Inc.

4611 12th Avenue, Suite 1L

Brooklyn, New York 11219
  (718) 438-2804 

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Robert W. Downes Daniel M. LeBey
Sullivan & Cromwell LLP Vinson & Elkins LLP
125 Broad Street Riverfront Plaza, West Tower
New York, NY 10004 901 East Byrd Street, Suite 1500
(212) 558-4000 Richmond, VA 23219
(212) 558-3588 (Facsimile) (804) 327-6310
  (804) 479-8286 (Facsimile)

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
    (Do not check if a smaller reporting company)  

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Securities Being Registered   Proposed
Maximum
Aggregate

Offering Price (1)
    Amount of
Registration Fee
 
Common Stock, $0.01 par value per share   $ 100,000,000     $ 11,590  

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes shares of our common stock that the underwriters have the option to purchase.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date or dates as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

The information set forth in this preliminary prospectus is not complete and may be changed. We may not distribute these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS

Subject to Completion, Dated October 7, 2016

 

Clipper Realty Inc.

 

 

Shares of Common Stock

 

 

This is the initial public offering of Clipper Realty Inc. We are a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multi-family residential and commercial properties in the New York metropolitan area, with an initial portfolio in Manhattan and Brooklyn. We are selling                shares of our common stock, $0.01 par value per share, and the selling stockholders named in this prospectus are selling                shares of our common stock. We will not receive any proceeds from the sale of our common stock by the selling stockholders.

 

We expect the public offering price to be between $                and $                per share. Currently, no public market exists for the shares. We will apply to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “CLPR”.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and will be subject to reduced public company reporting requirements.

 

We have been organized and operate in conformity with the requirements for qualification and taxation as a real estate investment trust (“REIT”) under the U.S. federal income tax laws. We have elected to be treated as a REIT commencing with our taxable year ended December 31, 2015, and we expect to satisfy the requirements for qualification and taxation as a REIT for subsequent taxable years. To assist us in qualifying as a REIT, among other reasons, our charter generally limits beneficial ownership by any person to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Investing in the common stock involves risks. See “Risk Factors” beginning on page 25 of this prospectus.

 

    Per Share     Total  
Public offering price   $       $    
Underwriting discount (1)   $       $    
Proceeds, before expenses, to us   $       $    
Proceeds, before expenses, to the selling stockholders   $       $    

 

 

(1) See “Underwriting” for additional disclosure regarding the underwriting discount and expenses payable to the underwriters by us and the selling stockholders.

 

We have granted the underwriters an option to purchase up to an additional                shares from us at the public offering price set forth in the table above, less the underwriting discount, within 30 days after the date of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Delivery of the shares of common stock is expected to be made in book-entry form on or about                , 2016.

 

 

 

FBR

 

 

 

The date of this prospectus is                , 2016.

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
SUMMARY 1
   
THE OFFERING 19
   
RISK FACTORS 25
   
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS 55
   
USE OF PROCEEDS 57
   
DISTRIBUTION POLICY 58
   
CAPITALIZATION 60
   
DILUTION 61
   
SELECTED HISTORICAL FINANCIAL DATA 62
   
PRO FORMA FINANCIAL INFORMATION 66
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 73
   
OUR BUSINESS AND PROPERTIES 92
   
MANAGEMENT 110
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 119
   
INVESTMENT POLICY AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES  124
   
SELLING STOCKHOLDERS 125
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 126
   
DESCRIPTION OF CAPITAL STOCK 130
   
CERTAIN PROVISIONS OF MARYLAND LAW AND CLIPPER REALTY’S CHARTER AND BYLAWS 140
   
DESCRIPTION OF THE LIMITED PARTNERSHIP AGREEMENT OF OUR OPERATING PARTNERSHIP 146
   
DESCRIPTION OF THE LIMITED LIABILITY COMPANY AGREEMENTS OF OUR LLC SUBSIDIARIES 151
   
SHARES ELIGIBLE FOR FUTURE SALE 156
   
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES 158
   
UNDERWRITING 175
   
VALIDITY OF COMMON STOCK 182
   
EXPERTS 182
   
WHERE YOU CAN FIND MORE INFORMATION 183
   
INDEX TO COMBINED FINANCIAL STATEMENTS F-1

 

None of us, the selling stockholders or the underwriters have authorized anyone to provide any information or to make any representation other than as contained in this prospectus or any free writing prospectus prepared by, or on behalf of, us. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date or as of another date specified herein. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

 - i -

 

 

GLOSSARY

 

In this prospectus, unless the context otherwise requires or indicates:

 

· references to “50/53 JV” are to 50/53 JV LLC, a Delaware limited liability company;

 

· references to the “Aspen acquisition” are to the acquisition on June 27, 2016 of the building located at 1955 First Avenue, New York, NY;

 

· references to “Berkshire” are to Berkshire Equity LLC, a Delaware limited liability company;

 

· references to “class A LLC units” and “class B LLC units” are to class A LLC units and class B LLC units in our predecessor entities, respectively, which have the terms described under “Description of the Limited Liability Company Agreements of our LLC Subsidiaries”;

 

· references to “Clipper Equity” are to the real estate business of David Bistricer in which our company did not invest in connection with the formation transactions;

 

· references to “Clipper Realty” are to Clipper Realty Inc., a Maryland corporation;

 

· references to “Clipper TRS” are to Clipper TRS, LLC, a Delaware limited liability company;

 

· references to the “Code” are to the Internal Revenue Code of 1986, as amended;

 

· references to the “Company,” “our company,” “we,” “our” and “us” are to Clipper Realty and its consolidated subsidiaries;

 

· references to the “continuing investors” are to holders of interests in the predecessor entities who received class B LLC units or shares of our common stock upon consummation of the formation transactions;

 

· references to “continuing investors registration rights agreement” are to that certain registration rights agreement, dated as of August 3, 2015, by and among Clipper Realty and each of the Holders (as defined therein) from time to time party thereto;

 

· references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

 

· references to the “formation transactions” are to the series of investment and other transactions described in this prospectus that were consummated prior to and in connection with the private offering;

 

· references to “GLA” are to gross leasable area;

 

· references to “Gunki” are to Gunki Holdings LLC, a Delaware limited liability company;

 

· references to the “JOBS Act” are to the Jumpstart Our Business Startups Act of 2012;

 

· references to the “non-contributed properties and businesses” are to properties and businesses that are controlled by our continuing investors but that are not part of our predecessor entities and were not contributed to us in the formation transactions;

 

· references to the “offering” are to the initial public offering of our common stock as described in this prospectus;

 

 - ii -

 

 

· references to the “OP units” are to units of limited partnership in our operating partnership, which have the terms described under “Description of the Limited Partnership Agreement of Our Operating Partnership”;

 

· references to the “operating partnership” are to Clipper Realty L.P., a Delaware limited partnership;

 

· references to the “predecessor entities” or “LLC subsidiaries” are to 50/53 JV, Berkshire, Gunki and Renaissance;

 

· references to the “Predecessor” are to our Predecessor, which consists of the predecessor entities;

 

· references to the “private offering” are to the private offering of 10,666,667 shares of our common stock, which closed on August 3, 2015;

 

· references to the “registration rights agreement” are to that certain registration rights agreement, dated as of August 3, 2015, between Clipper Realty and FBR Capital Markets & Co., as the initial purchaser/placement agent for the benefit of the investors in the private offering, as amended;

 

· references to “Renaissance” are to Renaissance Equity Holdings LLC, a New York limited liability company;

 

· references to the “SEC” are to the United States Securities and Exchange Commission;

 

· references to the “Securities Act” are to the Securities Act of 1933, as amended;

 

· references to the “selling stockholders” are to our stockholders named in the “Selling Stockholders” section in this prospectus; and

 

· references to “series A preferred stock” are to shares of 12.5% Series A Cumulative Non-Voting Preferred Stock issued by the Company on January 28, 2016 in a private offering pursuant to Regulation D under the Securities Act.

 

 - iii -

 

 

MARKET DATA

 

Market data used in this prospectus have been obtained from independent industry sources and publications as well as from research reports prepared for other purposes. While we are not aware of any misstatements regarding any market data presented herein, such data involve uncertainties and are subject to change based on various factors, including those discussed under “Cautionary Note Concerning Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

BASIS OF PRESENTATION

 

In this prospectus, unless the context otherwise requires or indicates: (i) information regarding occupancy levels and rental rates is presented as of August 1, 2016; (ii) average rental rates per square foot are presented on an annual basis; (iii) references to square feet refer to leasable square feet; (iv) information assumes no exercise by the underwriters of their option to purchase additional shares of common stock; and (v) references to percentages on a “fully diluted basis” as of any date assume that the LTIP units and class B LLC units outstanding on such date are exchanged for shares of our common stock and that any restricted stock units outstanding on such date are vested and settled in exchange for shares of common stock.

 

 - iv -

 

 

 

SUMMARY

 

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Before investing in our common stock, you should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere herein.

 

See “Glossary” for certain defined terms used, and “Basis of Presentation” for certain explanations with respect to the information presented, in this prospectus.

 

Overview

 

We are a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multi-family residential and commercial properties in the New York metropolitan area, with an initial portfolio in Manhattan and Brooklyn. The Company was formed to continue and expand the commercial real estate business of the Predecessor. Our primary focus is to continue to own, manage and operate our initial portfolio and to acquire and reposition additional multi-family residential and commercial properties in the New York metropolitan area.

 

Clipper Realty was incorporated on July 7, 2015. On August 3, 2015, we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately $130.2 million. In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a REIT for U.S. federal income tax purposes and we have elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.

 

The Company owns:

 

· two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan, which we collectively refer to as the Tribeca House properties;

 

· one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings, which we refer to as the Flatbush Gardens properties or complex;

 

· two primarily commercial properties in Downtown Brooklyn (one of which includes 36 residential apartment units), which we refer to as the 141 Livingston Street property and the 250 Livingston Street property; and

 

· one residential/retail rental property at 1955 1 st Avenue in Manhattan, which we refer to as the Aspen property.

 

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.

 

 

 - 1 -

 

 

 

The table below presents an overview of the Company’s portfolio as of August 1, 2016.

 

Address     Submarket     Year Built/
Renovated
    Leasable
Sq. Ft.
    # Units     Percent
Leased
    2016 Base
Rental
Revenue
(in millions)
    Net Effective
Rent Per
Square Foot
 
Multifamily                                                        
50 Murray Street     Manhattan       1964       394,238       389       91.8 %   $ 24.0     $ 67.06  
53 Park Place     Manhattan       1921       85,423       116       94.0 %   $ 5.3     $ 65.42  
Flatbush Gardens complex     Brooklyn       1950       1,734,885 (1)     2,496       96.8 %   $ 35.5     $ 21.14  
250 Livingston Street     Brooklyn       1920       26,819 (2)     36       89.2 %   $ 1.3     $ 54.35  
Aspen     Manhattan       2004       165,542       232       98.2 %   $ 5.3     $ 32.61  
                      2,406,907       3,269       95.9 %   $ 71.4     $ 30.94  
                                                         
Commercial                                                        
141 Livingston Street     Brooklyn       1959       206,084 (3)     1       100.0 %   $ 8.2     $ 40.00  
250 Livingston Street     Brooklyn       1920       266,569 (4)     1       100.0 %   $ 5.6     $ 20.92  
Subtotal-office                     472,653       2       100.0 %   $ 13.8     $ 29.24  
                                                         
50 Murray Street (retail)     Manhattan               44,436       7       100.0 %   $ 2.3     $ 51.07  
50 Murray Street (parking)     Manhattan               24,200       1       100.0 %   $ 1.1     $ 44.06  
53 Park Place (retail)     Manhattan               8,600       1       100.0 %   $ 0.3     $ 39.19  
141 Livingston Street (parking/other)     Brooklyn               9,989 (3)     1       (5)   $ 0.3     $ 32.68  
250 Livingston Street (retail)     Brooklyn               990       1       100.0 %   $ 0.1     $ 83.45  
250 Livingston Street (parking)     Brooklyn                               $ 0.2        
Aspen (retail)     Manhattan               21,060       3       100.0 %   $ 0.9     $ 42.60  
Aspen (parking)     Manhattan                               $ 0.3        
                                                         
Subtotal-retail                     109,275       14       100.0 %   $ 5.5     $ 50.39  
                                                         
Total                     2,988,835       3,285       96.7 %   $ 90.7     $ 31.40  

 

 

(1) Comprises 59 buildings.
(2) Conversion of floors 9-12 into residential units occurred in 2003-2005, 2008-2009 and 2013, with renovation of residential units on the 12 th floor from 2014 to the present.
(3) Measured according to Real Estate Board of New York (“REBNY”) standards.
(4) Has been remeasured to 353,895 square feet according to REBNY standards.
(5) Month-to-month.

 

 

 - 2 -

 

 

 

 

The Tribeca House properties , purchased in December 2014, consist of two nearly adjacent properties in the Tribeca neighborhood of Manhattan. The Company manages the two related properties as a single unit and the residents of both properties share all services and amenities. They comprise approximately 480,000 square feet of leasable area with 505 residential apartment units and approximately 77,200 square feet of retail space (comprising approximately 53,000 square feet of street-level and mezzanine-level retail space and an externally managed garage).

 

· The residential apartment units, featuring ceilings as high as 11 feet and extensive amenities, are approximately 93% occupied at an average rental rate of approximately $66 per square foot, up from $61 per square foot at acquisition. The retail space, which includes a premium fitness club, is fully occupied at an average rental rate of approximately $48 per square foot, up from approximately $43 per square foot at acquisition.

 

· The Company’s primary goals for the residential portion of the Tribeca House properties are to improve service levels and quality of finishes in the buildings commensurate with those expected by residents in the Tribeca neighborhood. We believe that accomplishing this, as well as managing the re-leasing process more efficiently than the prior owner, will position us to achieve comparable rents in excess of $80 per square foot in the Tribeca neighborhood as of August 24, 2016, according to StreetEasy listings.

 

· We believe that our average rental rate of approximately $48 per square foot under in-place leases for the retail portion of the Tribeca House properties is significantly below market for comparable retail properties, based on current leasing activity in the surrounding Tribeca submarket. For example, on July 1, 2015, we signed a lease for a 3,186 square foot street-level retail unit at our Tribeca House properties providing for a rental rate of $140 per square foot, which is a 237% increase over the average rental rate under our existing retail leases. Similarly, according to a report by REBNY, the average asking retail rental rate in downtown Manhattan, which includes the Tribeca neighborhood, was $143 per square foot as of April 2016. Accordingly, we believe we will be able to significantly increase retail rental revenue from our Tribeca House properties as in-place leases (which have a current average lease term of 9.5 years) expire over time and are re-leased at higher market rates.

 

 

 - 3 -

 

 

 

· In addition, we have the opportunity to monetize apartment units through conversion to for-sale condominium or cooperative units, which we believe would have a potential market value in excess of $2,100 per square foot based on StreetEasy listings for comparable buildings in the Tribeca neighborhood as of September 26, 2016. This value compares favorably to the December 2014 purchase price of approximately $998 per rentable square foot. Any sales of condominium or cooperative units would be conducted by a taxable REIT subsidiary (a “TRS”), which would be subject to U.S. federal, state and local income tax on any gain from, and transfer tax from, the sale of the units.

 

The Flatbush Gardens property complex , purchased in September 2005, extends over 21.4 acres and consists of 59 primarily six-story buildings containing a total of approximately 1.7 million rentable square feet and 2,496 residential apartment units, and space for approximately 240 vehicles in parking structures.

 

· The property is approximately 97% occupied at an average rental rate of approximately $21 per square foot. The property is subject to rent stabilization, a form of New York City rent regulation that limits the amount of legally allowable rent increases. Current in-place rents are, on average, 18% lower than the legal maximum rent that may be charged pursuant to rent regulation. We believe this provides an opportunity to increase rents with increasing market rates before being limited by rent regulation.

 

· Since acquisition in 2005, our management team has undertaken a renovation and repositioning strategy that has included upgrades to both the exterior and interior of the buildings. These have included replacements or upgrades to building systems and components, including elevators, basements, boilers, roofs, parapets, facades, sidewalks and landscaping, as well as a refurbishing of apartment interiors on turnover of residents. As a result of our effort in managing the complex, including these upgrades, we have reduced outstanding New York City violations from over 8,000 at the time of the acquisition to approximately 359 currently, and substantially improved resident safety. In addition, our management team proactively attempts to remedy potential violations that are reported by residents. We have been able to consistently increase rents as a result of these efforts, as well as external market factors. Average rent per square foot increased from $18.88 (94.4% occupancy) at December 31, 2013 to $19.69 (95.6% occupancy) at December 31, 2014 to $20.63 (97.0% occupancy) at December 31, 2015 and $21.14 at August 1, 2016 (96.8% occupancy). Since acquisition in 2005, the average rent per square foot has risen from approximately $13.25 to approximately $21.14, a 60% increase.

 

· We estimate that approximately $18 million will be required to complete a comprehensive renovation and modernization program through the end of 2017, which may include enhanced landscaping on a renovated terrace area; restored, renovated, upgraded or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; façade restorations; installation of revenue generating laundry and storage areas in restored basement areas; and modernization of building-wide systems, including security cameras and lighting. These improvements are designed to increase the overall value and attractiveness of the Flatbush Gardens complex and contribute to tenant repositioning efforts, which seek to increase occupancy, raise rental rates, increase aggregate rental revenue and improve tenant credit quality. We believe we will be able to continue to increase rents as leases expire and units are re-leased.

 

· Flatbush Gardens is currently not built to its maximum floor-area ratio (“FAR”) and therefore, subject to various regulations and approvals, may have expansion potential. In this regard, we are reviewing the regulatory, architectural and financial issues regarding building approximately 500,000 additional square feet by adding four floors above certain of our 59 buildings at Flatbush Gardens. However, there can be no assurance that we will be able to pursue this FAR expansion project or that if we are able to expand Flatbush Gardens, that the expanded buildings will provide a return to recover our investment.

 

The 141 Livingston Street property in the Downtown Brooklyn neighborhood, purchased in 2002 along with the below-mentioned 250 Livingston Street property, is a 15-story, 206,084 square foot GLA office building.

 

· In December 2015, the property’s main commercial tenant, the City of New York, executed a new 10-year lease at $40.00 per square foot, with effect as of June 2014. Under the lease, the tenant has an option to terminate the lease after five years; however, if it decides to continue to occupy the building at that time, the annual rent will increase by 25%, or $2.1 million, to $50.00 per square foot beginning the sixth year of the lease.

 

 

 - 4 -

 

 

 

· The lease requires us to refurbish the building’s air-conditioning system and perform other upgrades, which we estimate will cost a total of approximately $5.2 million. Additionally, we intend to spend a total of approximately $2.6 million through 2017 to make other improvements, including elevator replacement, boiler and roof replacement and building systems upgrades.

 

The 250 Livingston Street property , purchased in 2002 along with the 141 Livingston Street property, is a 12-story commercial and residential building. It has 266,569 square feet GLA of office space and 36 residential apartment units totaling 26,815 square feet.

 

· The leasable office space recently has been remeasured according to REBNY standards to approximately 353,000 square feet, an increase of approximately 33%.

 

· The property’s sole commercial tenant, the City of New York, has leases expiring at the end of 2016 (with respect to approximately 30% of total office space) and 2020 (with respect to the remaining approximately 70% of office space), with current lease rates that are approximately 50% of the rate recently negotiated at the 141 Livingston Street property with the same tenant. We have agreed upon a term sheet with the City of New York for renewal of the lease expiring at the end of 2016 at $40.00 per square foot for increased square feet measured according to REBNY standards that would increase annual rent by approximately $2.6 million. The lease on this portion of the building would terminate with the lease expiring in 2020. However, there can be no assurance that we will reach agreement with the City of New York on the extension or renewal of the leases for all or a portion of their office space.

 

· To more fully optimize available space, from 2003 through 2013, we converted the top four floors of the building into 36 apartment units, which are 89% occupied at an average rental rate of approximately $54 per square foot.

 

The Aspen property , purchased on June 27, 2016, is located at 1955 1 st Avenue, New York, NY in Manhattan. The property is a seven-story building which comprises 186,602 square feet, 232 residential rental units, three retail units and a parking garage.

 

· The residential units are subject to regulations established by the New York City Housing Development Corporation (“HDC”) under which there are no rental restrictions on approximately 55% of the units and low and middle income restrictions on approximately 45% of the units. The residential apartment units are approximately 98% occupied at an average rental rate of approximately $33 per square foot. The retail space is fully occupied at an average rental rate of approximately $42.60 per square foot.

 

· While the building is relatively new, the Company believes there is an opportunity to increase rents by improving certain of the finishes of the property. We believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property.

 

The Company is led by David Bistricer, its Co-Chairman and Chief Executive Officer, who has over 30 years of real estate experience specifically in acquiring, expanding, renovating, repositioning and managing properties in our line of business. Mr. Bistricer, who has a strong reputation within the New York metropolitan area for real estate acquisitions, management, repositioning and marketing expertise, together with our senior management team, has developed our strategy with a focus on broker relationships and the cultivation of our track record of execution. Our senior management team averages approximately 21 years of experience covering all aspects of real estate, including asset and property management, leasing, marketing, acquisitions, construction, development, legal and finance.

 

Competitive Strengths

 

We believe that the following competitive strengths distinguish our company from other owners and operators of commercial and multi-family residential properties:

 

Diverse Portfolio of Properties in New York Metropolitan Area . Our current portfolio of commercial and multi-family residential properties in Manhattan and Brooklyn is located in one of the most prized real estate markets in the world. The combination of supply constraints, high barriers to entry, near-term and long-term prospects for job creation, vacancy absorption and rental rate growth make New York City an extremely attractive place to own real property. Our management believes that, in light of the land and construction costs, our current portfolio could not be replaced today on a cost-competitive basis. As described above, we own two primarily commercial properties in the Downtown Brooklyn neighborhood, one multi-family residential property complex in the East Flatbush neighborhood of Brooklyn, one primarily multi-family residential property group in the Tribeca neighborhood of Manhattan and one primarily multi-family residential property in a transitional neighborhood located just north of the Yorkville neighborhood of Manhattan. We believe that we are one of the only REITs with a portfolio solely composed of multi-family residential, commercial and retail properties in the New York metropolitan area. Further, our multi-family residential portfolio is diversified by tenant demographics (both luxury and work-force units).

 

 

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Expertise in Repositioning and Managing Multi-family Residential Properties. Our management team has substantial expertise in renovating and repositioning multi-family residential properties. At the Flatbush Gardens property, beginning in 2006, we have engaged in a property renovation program that includes replacement or upgrades to building systems and components as well as the refurbishment of apartment interiors. As a result of our effort in managing the property, including these upgrades, we have reduced outstanding New York City violations from over 8,000 at the time of the acquisition to approximately 359 currently, and substantially improved resident safety. At the 250 Livingston Street property, from 2003 through 2013, we converted the top four floors into 36 residential apartment units (presently approximately 89% occupied) to more fully optimize available space. We believe that the post-renovation high quality of our buildings and the services we provide also attract higher income and credit-quality tenants and allow for increased cash flow.

 

Attractive Commercial and Residential Properties in Densely Populated Metropolitan Communities. Our commercial properties in Downtown Brooklyn are located in a premier commercial corridor that features convenient access to mass transportation, a diverse tenant base and high pedestrian traffic. The commercial portfolio consists of approximately 474,000 square feet (remeasured to approximately 560,000 square feet) leased to the City of New York.

 

Our residential properties in Tribeca are located in a neighborhood that has one of the highest average market rents in Manhattan and one of the lowest vacancy rates in Manhattan (based on a CitiHabitats market report as of July 2016 combining Tribeca with the adjacent SoHo neighborhood) as well as convenient access to mass transit. We believe that these favorable market characteristics, coupled with our plans to reposition the Tribeca House properties to provide better service levels and finishes, will allow for improved rents and financial results for the Tribeca House properties over the next two to three years.

 

Our newly acquired Aspen residential property in Manhattan is a relatively new building occupying a full city block in a transitional neighborhood located just north of the Yorkville neighborhood, which, according to StreetEasy, as of September 29, 2016, has average asking rents per square foot of approximately $48, as compared to the average existing rent in the Aspen property of approximately $33 per square foot. Additionally, according to New York City projections, the new Second Avenue subway line, the first phase of which is currently scheduled for completion in late 2016, will extend to within two blocks of the Aspen property. We believe these transitional activities and our plans to upgrade the finishes of the property will allow for improved rents and financial results for the Aspen property over the next two to three years.

 

Our residential property complex in the East Flatbush neighborhood is located in an entry-level, low-cost area that provides more reasonably priced housing than that in Manhattan and more upscale Brooklyn neighborhoods. The complex has convenient access to public transportation, including the Newkirk Avenue and Flatbush Avenue – Brooklyn College subway stations. Brooklyn College, Beth Israel Hospital and SUNY Downstate Medical Center are all within approximately one mile of the complex and a higher-priced condominium development has begun in East Flatbush. Additionally, surrounding neighborhoods are experiencing higher rents. We believe that these nearby improvements to the residential market, coupled with our ongoing renovation and repositioning strategy, will steadily allow higher rents, improved tenant credit quality and improved financial results for the Flatbush Gardens property.

 

Experienced and Committed Management Team with Proven Track Record over Generations. Our senior management team is highly regarded in the real estate community and has extensive relationships with a broad range of brokers, owners, tenants and lenders. We have substantial in-house expertise and resources in asset and property management, leasing, marketing, acquisitions, construction, development and financing, and have a platform that is highly scalable. Members of our senior management team have worked in the real estate industry an average of approximately 21 years, and David Bistricer and Sam Levinson, Co-Chairmen of our board of directors, have worked together for approximately 17 years. Our senior management and their immediate family members own shares of our common stock and LLC units of our predecessor entities that are exchangeable into shares of our common stock on a one-for-one basis, which will in the aggregate represent about         % of our common stock on a fully diluted basis immediately following this offering. As a result, we believe the interests of management are aligned with those of our stockholders, creating an incentive to maximize returns for our stockholders.

 

Balance Sheet Well Positioned for Future Growth . We have established a target leverage ratio in the range of 45% to 55%. We define our leverage ratio as the ratio of our net debt (defined as total debt less cash) to the fair market value of our properties. We will seek to use the net proceeds of this offering, together with our cash on hand, which at June 30, 2016 was $104 million, to fund approximately $31 million of certain capital improvements to reposition and modernize our properties through 2018, repay up to $100 million of debt and fund acquisitions of properties consistent with our strategy of acquiring multi-family or commercial properties in the New York metropolitan area. In addition, we expect to benefit from organic deleveraging through ongoing cash flow generation and increases in property values over time. As of June 30, 2016, we had total net debt outstanding of approximately $710.8 million, before debt issuance costs, all of which is property-level debt, indicating a leverage ratio of approximately 53.7%, which is within our target range. We are not obligated to maintain any specific leverage ratio and our leverage ratio may from time to time be higher or lower than our target level, which may be changed by our board of directors.

 

 

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As of June 30, 2016, our debt had a weighted average interest rate of 4.3%, a weighted average maturity of 4.4 years, and 43.5% of the debt was fixed-rate indebtedness. For the six months ended June 30, 2016 and the year ended December 31, 2015, our pro forma adjusted earnings before interest, income tax, depreciation, amortization and stock based compensation (“Adjusted EBITDA”) was $22.3 million and $45.9 million respectively; and pro forma net loss available to common stockholders was approximately $0.8 million and $0.4 million, respectively. We have approximately $460 million of debt maturing in 2016, subject to three one-year extensions at our option.

 

Strong Internal Growth Prospects. We have substantial rent growth potential within our current portfolio as a result of the strong historical and projected future rental rate growth within our submarkets, contractual fixed rental rate increases included in our leases, incremental rent potential from the lease-up of our portfolio and anticipated rent increases resulting from our ongoing property repositioning efforts. For the 141 Livingston Street property, the main commercial tenant, the City of New York, entered in December 2015 into a new 10-year lease, resulting in an overall increase in annual rental revenue of approximately 149% as compared to the prior lease. For the 250 Livingston Street property, a property featuring a similar class of office space as the nearby 141 Livingston Street property, the same tenant has leases expiring in December 2016 and August 2020. We have entered into a term sheet to renew the lease terminating in December 2016 on annual terms that would increase rent by approximately $2.6 million. Should a new lease for the lease expiring in August 2020 be entered into on the same annual terms (adjusted for the increase of rent under the 141 Livingston Street lease to $50.00 per square foot beginning the sixth year of that lease), the implied increase in annualized rent for that lease would be $8.5 million beginning in September 2020. For the residential Tribeca House properties, we believe we can achieve substantial increases in rents based on comparable rents in the Tribeca neighborhood and our intention to improve service levels and quality of finishes in the buildings commensurate with standards at comparable buildings in the neighborhood. Currently, residential rents in our Tribeca House properties average approximately $67 per square foot, whereas comparable residential rents in the Tribeca neighborhood average in excess of $80 per square foot (based on StreetEasy listings as of August 24, 2016), indicating an opportunity to increase our total 2016 rental revenue as of August 1, 2016 by approximately $7.1 million per year ($5.8 million predicated on attainment of market rents and $1.3 million on attainment of higher occupancy). As of August 1, 2016, 2.0% of the apartments in our Tribeca House properties rented below $50 per square foot, 17.6% rented between $50 and $60 per square foot, 39.6% rented between $60 and $70 per square foot, 27.4% rented between $70 and $80 per square foot, 11.3% rented between $80 and $90 per square foot, and 2.2% rented above $90 per square foot. (We also expect that real estate tax expense will increase by approximately $4.7 million as a result of cessation of certain exemptions and abatements and increased assessments). At the newly acquired Aspen property, we believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property. For the Flatbush Gardens residential complex, we believe we can achieve steady increases in rent approximating $1 to $2 million total per year as a result of our property renovation programs and increases in market rents already experienced in surrounding neighborhoods. Average rent per square foot increased from $18.88 (94.4% occupancy) at December 31, 2013 to $19.69 (95.6% occupancy) at December 31, 2014 to $20.63 (97.0% occupancy) at December 31, 2015 and $21.14 at August 1, 2016 (96.8% occupancy). Since acquisition in 2005, the average rent per square foot has risen from approximately $13.25 to approximately $21.14, a 60% increase. As a result of the rent stabilization laws and regulations of New York City (including, in particular, a determination of the New York City Rent Guidelines Board in June 2016), effective for at least one year beginning October 1, 2016, increases for rent stabilized apartments, comprising approximately 46% of our apartments at our Flatbush Gardens property, will be limited to no increase for one-year leases and 2% for two-year leases.

 

 

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Business and Growth Strategies

 

Our primary business objective is to enhance stockholder value by increasing cash flow from operations and total return to stockholders. The strategies we intend to execute to achieve this goal include:

 

Increase Existing Below-Market Rents. We believe we can capitalize on the successful repositioning of our portfolio and improving market fundamentals to increase rents at several of our properties. At the 250 Livingston Street property, we have 266,569 square feet of leases with the City of New York that expire in December 2016 and August 2020, which have been remeasured according to REBNY standards to approximately 353,000 square feet and for which we believe we can achieve increases in rent similar to the increase achieved recently at nearby 141 Livingston Street, featuring a similar class of office space. We have executed a term sheet with the City of New York for the portion expiring December 31, 2016, increasing GLA from the current 79,424 square feet at $21.50 per square foot to approximately 107,000 square feet at $40.00 per square foot, which would generate additional annual revenue of approximately $2.6 million. This lease, if executed, would terminate with the other lease expiring August 2020 presently covering 187,145 square feet at $18.49 per square foot. Should a new lease be entered into at that time to the remeasured square feet of 245,903 and rent of $50.00 per square foot (as indicated in the lease with the City of New York at our neighboring 141 Livingston Street property), we would realize additional aggregate annual rental revenue of approximately $8.5 million. We also believe that the significant growth in Downtown Brooklyn as a residential location offers a potential alternative to convert 250 Livingston Street and/or 141 Livingston Street to residential apartments, an activity for which management has demonstrated expertise. Our management will continue to evaluate alternative strategies for these buildings to maximize risk-adjusted returns to stockholders. At the Tribeca House properties, the buildings’ average rent of $67 per square foot is significantly below the average rent for other comparable Tribeca rentals in excess of $80 per square foot based on StreetEasy listings as of August 24, 2016. We believe we can achieve significant growth in rents over the next two to three years by improving service levels and quality of finishes in the buildings, and more efficiently managing the re-leasing process. We also believe that the average rental rate of approximately $48 per square foot under in-place leases for the retail portion of the Tribeca House properties is significantly below market, as evidenced by a lease we signed in July 2015 to rent our only then-vacant street-front retail space at the Tribeca House properties for $140 per square foot, a space that had been vacant since 2001. Two other leases comprising approximately 4,600 square feet expire in 2019. At the Flatbush Gardens complex, as a result of our renovation and repositioning strategy since 2006 and our intention to continue refurbishing the property, as well as improvements in the residential rental market in surrounding neighborhoods, we believe we can continue to improve tenant quality and increase rents, as demonstrated by the above-mentioned steady increase in aggregate rents per square foot and continued high occupancy levels. At the newly acquired Aspen property, we believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property.

 

Disciplined Acquisition Strategy Focused on Premier Submarkets and Assets. Since 1979, David Bistricer has overseen the acquisition of multi-family residential and commercial properties, including our current portfolio, primarily in our targeted submarkets of New York City. We intend to continue our core strategy of acquiring, owning and operating multi-family residential rental and commercial properties within submarkets that have high barriers to entry, are supply-constrained, exhibit strong economic characteristics and have a pool of prospective tenants in various industries that have a strong demand for high-quality commercial space. We believe that owning assets within New York City, one of the best residential and commercial markets in the United States, will allow us to generate strong cash flow growth and attractive long-term returns. We will opportunistically pursue attractive opportunities to acquire multi-family residential and commercial properties, focusing our acquisition strategy primarily on multi-family residential properties in densely populated communities in the New York metropolitan area (primarily in Brooklyn and Manhattan) and, to a lesser extent, on commercial properties, where we will maintain a disciplined approach to ensure that our acquisitions meet our core strategy. Our strong balance sheet, access to capital and ability to offer operating partnership units in tax deferred acquisition transactions should give us significant flexibility in structuring and consummating acquisitions. We seek to acquire properties that will command premium rental rates and maintain higher occupancy levels than other properties in our markets. We are a highly active market participant that reviews numerous acquisition opportunities annually; however, we are highly selective in the properties that we ultimately acquire. We intend to strategically increase our market share in our existing submarkets and selectively enter into other submarkets in the New York City metropolitan area with similar characteristics. Our acquisition strategy will focus primarily on long-term growth and total return potential rather than short-term cash returns. We believe we can utilize our deep industry relationships and our expertise in redeveloping and repositioning both residential and commercial properties to identify acquisition opportunities where we believe we can increase occupancy and rental rates. Many of our Predecessor’s acquisitions were sourced on an off-market basis. As long-term owners and operators in our submarkets, we have a reputation among the broker community for moving expeditiously and for being a reliable counterparty.

 

Proactive Asset and Property Management. We believe our proactive, service-intensive approach to asset and property management helps increase occupancy and rental rates, manage operating expenses and maximize Adjusted EBITDA. We provide our own fully integrated asset and property management platform, which includes in-house legal, marketing, accounting, finance and leasing departments for our portfolio, and our own tenant improvement construction services. The development and retention of top-performing property management personnel have been critical to our success. We utilize our comprehensive building management services and our strong commitment to tenant relationships to negotiate attractive leasing deals and to attract and retain high credit-quality tenants.

 

Capital Program to Reposition Assets. We believe we can reposition our properties through a capital program to achieve rent growth in an expedited fashion. Together with our cash on hand, which at June 30, 2016 was $104 million, we intend to set aside approximately $31 million from the proceeds of this offering to cover this program through 2018 (as well as to repay up to $100 million of debt and fund acquisitions of properties consistent with our strategy).

 

 

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Our Tribeca House properties will undergo an upgrade to common areas (media/conference room, game room, children’s room, basketball court and roof) and a redesign of our lobbies at a cost of approximately $5.0 million in 2016 and 2017—all with the goal of enhancing the experience of our renters as they first enter the building and utilize the common areas. Concurrently, we intend to redesign and replace floors, kitchens, lighting and appliances on the interior of apartments as new renters move in at a cost of approximately $4.8 million in 2016 and 2017 and approximately $1.5–$2.0 million per year thereafter. We expect the improved experience in common areas will support higher rents consistent with the rent levels in the neighborhood.

 

At our Flatbush Gardens apartment complex, which consists of 2,496 apartments in 59 buildings clustered around seven courtyards spread over 21.4 acres, we expect to undertake a significant modernization program. We have undertaken and expect to continue projects to landscape and waterproof a significant terrace area and refurbish a number of lobbies, stairwells and windows for tenant enjoyment, to upgrade outdoor lighting and install a comprehensive security camera network for enhanced security and to refurbish basement areas for installation of revenue generating laundry facilities and storage units at a cost of approximately $12.4 million in 2016 and 2017. Supported by these improvements to common areas, we then may perform substantial upgrades to an increasing number of apartments (floors, windows and appliances), which may cost approximately $3.8 million for up to 125 units in 2016 and 2017 in addition to more routine refurbishments of $1.7 million to up to 335 units.

 

Our 141 Livingston Street property will have approximately $5.2 million of improvements to the elevators and air conditioning mechanics in accordance with the new lease with the City of New York described above that has increased our rent from approximately $3.3 million per annum to approximately $8.2 million per annum. In addition, we expect to spend approximately $2.6 million to modernize elevators, replace a boiler and roof and install a modern building management system. At our 250 Livingston Street property we expect to renovate the facade and entrance and build new penthouses at a cost of approximately $3.1 million. Lastly, at our Aspen property, while the building is relatively new, the Company presently expects to spend a minimum of $1 million to improve certain finishes of the property.

 

 

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Private Offering and Formation Transactions

 

In August 2015, we issued and sold 10,666,667 shares of our common stock, $0.01 par value per share, at an offering price of $13.50 per share, to various institutional investors, accredited investors and offshore investors, in reliance upon exemptions from registration provided by Rule 144A and Regulation S and pursuant to Regulation D under the Securities Act. 1,000,000 of the shares in the private offering were sold directly by us to members of our management and board of directors, and their friends, family members and affiliates. We received approximately $130.2 million of net proceeds from the private offering.

 

In connection with the private offering, we consummated the following formation transactions:

 

· We formed our operating partnership as a Delaware limited partnership, of which we are the sole general partner. The holders of LTIP units, discussed below, are the initial limited partners of our operating partnership.

 

· We invested the net proceeds from the private offering in our operating partnership and our operating partnership invested such proceeds in the predecessor entities in consideration for class A LLC units in each predecessor entity. Our operating partnership became the managing member of each of our predecessor entities.

 

As a result, we acquired an indirect ownership interest in the Company’s initial portfolio of properties (which continue to be owned by the predecessor entities) and have the exclusive power under our predecessor entities’ limited liability company agreements to manage and conduct the business and affairs of those entities and their properties through our operating partnership, subject to certain limited approval and voting rights of the other members, which are described more fully below in “Description of the Limited Liability Company Agreements of Our LLC Subsidiaries.” Our operating partnership’s interest in our predecessor entities generally entitles us to share (on an aggregate basis) in cash distributions from, and in the profits and losses of, our predecessor entities in proportion to our operating partnership’s percentage ownership in those predecessor entities on a fully diluted basis, although our share of any distribution from any particular predecessor entity may differ from our share of distributions from other predecessor entities and from one distribution to another, based on the amount distributed by each LLC subsidiary.

 

· Prior to the contribution by our operating partnership described above, our predecessor entities distributed approximately $15 million of available unrestricted cash to the continuing investors.

 

· The continuing investors had their LLC interests in the predecessor entities converted into class B LLC units in the predecessor entities. The class B LLC units entitle the holders to a preferred distribution equal to the lesser of (i) the per OP unit distribution paid by our operating partnership or (ii) a pro rata share (determined for this purpose without regard to any class A LLC units held by our operating partnership) of all of the cash flow of the applicable predecessor entity. The operating partnership, as the holder of class A LLC units in each of the predecessor entities, is entitled to the entire remaining distribution from each predecessor entity. The class B LLC units are exchangeable, together with one share of our special voting stock, for an amount of cash equal to the fair market value of a share of our common stock or, at our election, one share of our common stock, subject to certain adjustments and restrictions. In addition, we issued to one continuing investor 755,939 shares of our common stock. See “Description of the Limited Liability Company Agreements of Our LLC Subsidiaries.”

 

The following table sets forth the number of shares of common stock and class B LLC units issued to our continuing investors attributable to the respective properties, debt attributable to the contributed properties as of August 3, 2015, and implied contribution value as of that date:

 

 

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    Total Shares of
Common Stock and
Class B LLC Units
    Value of Shares of
Common Stock and
LLC Units at the
Offering Price
($13.50/share)
    Plus: Debt
Assumed
    Implied
Contribution Value
 
                                 
Tribeca House     7,393,333     $ 99,809,996     $ 460,000,000     $ 559,809,996  
Flatbush Gardens     8,753,335       118,170,023       170,000,000       288,170,023  
141 Livingston     6,540,000       88,290,000       55,000,000       143,290,000  
250 Livingston     4,386,667       59,220,005       36,000,808       95,220,813  
                                 
Total Contributed Properties     27,073,335     $ 365,490,024     $ 721,000,808     $ 1,086,490,832  

 

· We issued a number of shares of our special voting stock to our continuing investors equal to the number of class B LLC units issued to them. Our special voting stock is a series of voting stock that does not share in any distributions to our stockholders, including distributions upon our liquidation, dissolution or winding up, but gives the holder thereof one vote per share on all matters on which our common stockholders vote (other than certain matters relating to special election meetings, as described in this prospectus). The special voting stock permits our continuing investors to vote in accordance with their economic interests, as if they had exchanged their class B LLC units for shares of our common stock.

 

· Our operating partnership formed Clipper TRS. We jointly elected with Clipper TRS for Clipper TRS to be treated as a taxable REIT subsidiary under the Code for U.S. federal income tax purposes. Clipper TRS and/or its wholly owned subsidiaries may provide certain services to the tenants of our properties.

 

· We granted to members of our senior management team a total of 290,002 LTIP units, and to our non-employee directors a total of 105,001 LTIP units, all of which are subject to certain vesting requirements. The LTIP units represent profits interests in our operating partnership, which are exchangeable for units of limited partnership (“OP units”) in our operating partnership upon reaching capital account parity with OP units.

 

· We granted a total of 16,666 LTIP units to two Clipper employees (who are not members of our senior management team), all of which are subject to certain vesting requirements and represent less than a 0.1% ownership interest in our company on a fully diluted basis.

 

 

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· We entered into a tax protection agreement with our continuing investors pursuant to which we agreed to indemnify the continuing investors against certain tax liabilities incurred during the 8-year period following the private offering (or with respect to item (iv) below, certain tax liabilities resulting from certain transfers occurring during the 8-year period following the private offering) if those tax liabilities result from (i) the sale, transfer, conveyance or other taxable disposition of any of the properties of our LLC subsidiaries, (ii) any of Renaissance, Berkshire or Gunki failing to maintain a level of indebtedness allocable for U.S. federal income tax purposes to any of the continuing investors such that any of the continuing investors is allocated less than a specified minimum indebtedness in each such LLC subsidiary (in order to comply with this requirement, (1) Renaissance needs to maintain approximately $101.3 million of indebtedness, (2) Berkshire needs to maintain approximately $125.8 million of indebtedness and (3) Gunki needs to maintain approximately $34.4 million of indebtedness), (iii) in a case that such level of indebtedness cannot be maintained by the applicable LLC subsidiary, failing to make available to such a continuing investor the opportunity to execute a guarantee of indebtedness of the LLC subsidiary meeting certain requirements that would enable the continuing investor to continue to defer certain tax liabilities, or (iv) the imposition of New York City or New York State real estate transfer tax liability upon a continuing investor as a result of the formation transactions, private offering, this offering and/or certain subsequent transactions (including subsequent issuances of additional LLC units or interests, issuances of OP units by the operating partnership, issuances of common stock by Clipper Realty, issuances of common stock in exchange for class B LLC units or dispositions of property by any LLC subsidiary), or as a result of any of those transfers being aggregated. See “Risk Factors—Risks Related to Real Estate.” We estimate that had all of their assets subject to the tax protection agreement been sold in a taxable transaction immediately after the private offering, the amount of our LLC subsidiaries’ indemnification obligations under the tax protection agreement (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $364.9 million. In addition, we estimate that if New York City or New York State real estate transfer taxes had been imposed on our continuing investors, the maximum amount of our LLC subsidiaries’ indemnification obligations pursuant to the tax protection agreement in respect of New York City or New York State real estate transfer tax liability (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $74.9 million (although the amount may have been significantly less). We do not presently intend to sell or take any other action that would result in a tax protection payment with respect to the properties covered by the tax protection agreement.

 

· All of the previous employees of our Predecessor’s management companies who spent a majority of their time on matters related to the properties in our portfolio became our employees. We entered into two services agreements with entities that own interests in the non-contributed properties and businesses. One of these agreements is a services agreement under which the non-contributed properties and businesses continue to provide us with the services they previously provided to the properties in our portfolio and one is a services agreement with the non-contributed properties and businesses pursuant to which our employees continue to provide the services they previously provided for those non-contributed properties and businesses. We expect that the net amount paid by or to us under these agreements will not exceed $120,000 per year. See “Certain Relationships and Related Party Transactions—Non-Contributed Properties and Businesses.”

 

· As a result of the formation transactions and the private offering, as of June 30, 2016, we had approximately $710.8 million of total net debt, before debt issuance costs.

 

The completion of the private offering and the formation transactions resulted in material benefits to our senior management team, our directors and our continuing investors, including the following (all amounts are based on an initial public offering price of $                per share, which is the midpoint of the price range set forth on the front cover of this prospectus):

 

· David Bistricer, our Co-Chairman and Chief Executive Officer, beneficially owns 12.5% of our common stock on a fully diluted basis and 12.2% of the voting power in our company (    % and    %, respectively, immediately following completion of this offering, or    % and     %, respectively, if the underwriters exercise their option to purchase additional shares in full), with a total value of approximately $                , represented by 4,278,058 class B LLC units, 4,278,058 shares of special voting stock, and 185,186 LTIP units (including LTIP units awarded in 2016) and 318,262 shares of our common stock purchased in the private offering.

 

· Sam Levinson, our Co-Chairman and the Head of our Investment Committee, beneficially owns 22.3% of our common stock on a fully diluted basis and 22.3% of the voting power in our company (    % and     %, respectively, immediately following completion of this offering, or     % and    %, respectively, if the underwriters exercise their option to purchase additional shares in full), with a total value of approximately $                , represented by 1,119,415 shares of our common stock, 7,296,279 class B LLC units, 7,296,279 shares of special voting stock and 115,741 LTIP units (including LTIP units awarded in 2016). This amount includes shares of our common stock, class B LLC units and shares of special voting stock held by entities in which Mr. Levinson is the managing member.

 

 

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· Lawrence E. Kreider, our Chief Financial Officer, beneficially owns 0.2% of our common stock on a fully diluted basis (       % immediately following completion of this offering, or     % if the underwriters exercise their option to purchase additional shares in full), with a total value of approximately $                , represented by 57,779 LTIP units (including LTIP units awarded in 2016).

 

· JJ Bistricer, our Chief Operating Officer, beneficially owns 0.2% of our common stock on a fully diluted basis (     % immediately following completion of this offering, or     % if the underwriters exercise their option to purchase additional shares in full), with a total value of approximately $                , represented by 63,334 LTIP units (including LTIP units awarded in 2016).

 

· Jacob Schwimmer, our Chief Property Management Officer, beneficially owns 5.9% of our common stock on a fully diluted basis and 5.8% of the voting power in our company (     % and      %, respectively, immediately following completion of this offering, or     % and     %, respectively, if the underwriters exercise their option to purchase additional shares in full), with a total value of approximately $                , represented by 2,188,334 class B LLC units, 2,188,334 shares of special voting stock and 57,779 LTIP units.

 

· We entered into employment agreements with David Bistricer, Lawrence Kreider, JJ Bistricer and Jacob Schwimmer providing for salary, bonus and other benefits, including certain payments and benefits upon a termination of employment under certain circumstances and the issuance of equity awards. Under those employment agreements, each of David Bistricer, JJ Bistricer and Jacob Schwimmer is required to spend such time on matters relating to our company as is appropriate and Lawrence Kreider is required to spend all of his working time on matters relating to our company. See “Management—Employment Agreements.”

 

· We entered into indemnification agreements with our directors and executive officers providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions brought, or threatened to be brought, against such persons in their capacities with us and our subsidiaries.

 

· We entered into the tax protection agreement and the services agreements described above.

 

· David Bistricer and entities controlled by Sam Levinson were released from and otherwise indemnified for liabilities arising under certain guarantees and indemnities with respect to approximately $721.1 million of mortgage loans on our properties, which were assumed by us upon closing of the formation transactions in respect of obligations arising after the closing of the private offering. The guarantees and indemnities with respect to all of the indebtedness are, in most instances, limited to losses incurred by the applicable lender arising from acts such as fraud, misappropriation of funds, intentional breach, bankruptcy and certain environmental matters. In connection with our assumption of these mortgage loans, we have sought to have the guarantors and indemnitors released from these guarantees and indemnities and to have our operating partnership assume any such guarantee and indemnity obligations as replacement guarantor or indemnitor. To the extent lenders did not consent to the release of these guarantors and indemnitors, and they remain guarantors or indemnitors on assumed indebtedness following the private offering, our operating partnership entered into indemnification agreements with the guarantors and indemnitors pursuant to which our operating partnership is obligated to indemnify such guarantors and indemnitors for any amounts paid by them under guarantees and indemnities with respect to the assumed indebtedness. We believe that since we control the properties, it is appropriate, and consistent with market practice, for Mr. Bistricer and entities controlled by Mr. Levinson to be indemnified by our operating partnership to the extent the lenders did not consent to the release of these guarantors and indemnitors. In addition, in connection with future mortgage loans that we would enter into in connection with future property acquisitions or refinancing of our properties, we intend to enter into any necessary guarantees directly and neither Mr. Bistricer and entities controlled by Mr. Levinson nor any of our other directors, executive officers or stockholders would be expected to enter into such guarantees.

 

· We entered into a continuing investors registration rights agreement with certain persons receiving shares of our common stock and class B LLC units in the formation transactions, including certain members of our senior management team and the other continuing investors. The continuing investors registration rights agreement provides for the registration of such shares of common stock and shares of common stock that are issuable upon the exchange of class B LLC units.

 

 

 - 13 -

 

 

 

Our Structure

 

The following diagram depicts our ownership structure following the formation transactions, the private offering and the recent Aspen acquisition and prior to the completion of this offering.

 

(1) Purchasers of shares of our common stock in the private offering (including the selling stockholders) currently own 84.6% of our outstanding common stock. Continuing investors currently own the remaining 15.4% of our outstanding common stock. Immediately following this offering, the purchasers in the private offering (excluding continuing investors) and the public stockholders will collectively own % of our outstanding common stock (     % if the underwriters exercise their option to purchase additional shares in full).

 

Continuing investors own 74.4% of our common stock on a fully diluted basis. Immediately following this offering, the continuing investors will own % of our common stock on a fully diluted basis (     % if the underwriters exercise their option to purchase additional shares in full).

 

Continuing investors currently own shares of our special voting stock giving them one vote per share on all matters on which our stockholders vote (other than certain matters relating to special election meetings, as described in this prospectus) for each class B LLC unit held by them, subject to certain adjustments and restrictions, meaning that such continuing investors currently generally have 74.4% of the voting power in our company. Immediately following this offering, the continuing investors generally will have     % of the voting power in the company (     % if the underwriters exercise their option to purchase additional shares in full).

 

For additional information, see “Security Ownership of Certain Beneficial Owners and Management.”

 

(2) We also have 132 shares of series A preferred stock issued and outstanding.

 

(3) The operating partnership’s interests in the predecessor entities entitle the operating partnership to receive approximately 31.3% of the aggregate distributions from our predecessor entities.

 

(4) Indirectly held through Aspen 2016 LLC, of which Clipper Realty L.P. is the sole member.

 

 

 - 14 -

 

 

 

Private Offering of Series A Preferred Stock

 

On January 28, 2016, we completed an offering of 132 shares of 12.5% Series A Cumulative Non-Voting Preferred Stock in a private offering pursuant to Regulation D under the Securities Act. Each share of series A preferred stock was sold for $1,000 and our net proceeds from this private offering were $109,500, which will be used for general corporate purposes. We sold the series A preferred stock in order to assist us in qualifying as a REIT by satisfying the 100 holder requirement under the REIT rules.

 

Summary Risk Factors

 

An investment in our common stock involves various risks, and prospective investors are urged to carefully consider the matters discussed under “Risk Factors” prior to making an investment in our common stock. The following is a list of some of these risks.

 

· Unfavorable market and economic conditions in the United States, globally, and in the New York metropolitan area could adversely affect occupancy levels, rental rates, rent collections, operating expenses and the overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

 

· All of our properties are located in New York City and adverse economic or regulatory developments in this area could negatively affect our results of operations, financial condition and ability to make distributions to our stockholders.

 

· We may be unable to renew leases or lease currently vacant space or vacating space on favorable terms or at all as leases expire, which could adversely affect our financial condition, results of operations and cash flow.

 

· Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities, which may adversely affect us, including our profitability, and impede our growth.

 

· We may from time to time be subject to litigation, which could have an adverse effect on our financial condition, results of operations, cash flow and the market value of our common stock.

 

· Present or future rent stabilization regulations may limit our ability to raise rents above specified maximum amounts and could give rise to claims by tenants that their rents exceed such specified maximum amounts.

 

· We depend on key personnel, including David Bistricer, our Co-Chairman and Chief Executive Officer, and the loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business and diminish our investment opportunities, which could negatively affect our financial condition, results of operations, cash flow and the market value of our common stock.

 

· Our continuing investors (who include David Bistricer, our Co-Chairman and Chief Executive Officer, Sam Levinson, our Co-Chairman and the Head of our Investment Committee and Jacob Schwimmer, our Chief Property Management Officer) generally have the ability to exercise 74.4% of the voting power in our company prior to this offering, which means the continuing investors are able to significantly influence the composition of our board of directors, the approval of actions requiring stockholder approval, and our management, business plan and policies.

 

· Our stockholders’ ability to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

 

· We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

· Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock.

 

· REIT distribution requirements could adversely affect our liquidity and ability to execute our business plan.

 

Investment Policy

 

We will generally target wholly-owned multi-family and commercial properties located in the New York metropolitan area; however, we may also make majority or minority investments alongside partners.

 

Clipper Equity owns interests in and controls and manages entities that own interests in multi-family and commercial properties in the New York metropolitan area. Each of David Bistricer, our Co-Chairman and Chief Executive Officer, and JJ Bistricer, our Chief Operating Officer, is an officer of Clipper Equity and will continue to be involved in such capacity with Clipper Equity. Each of Sam Levinson, our Co-Chairman and the Head of our Investment Committee, and Jacob Schwimmer, our Chief Property Management Officer, have ownership interests in Clipper Equity and will continue to be involved in such capacity with Clipper Equity.

 

 

 - 15 -

 

 

 

We have adopted an Investment Policy that provides that our directors and officers, including officers involved with Clipper Equity, will not invest in any multi-family or commercial property (other than excluded assets) located in the metropolitan New York City area, unless the investment opportunity is first offered to our company and our board of directors (or an independent committee of our board of directors) determines that our company will not pursue the investment opportunity. Our officers and directors, including each of David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, can pursue investment opportunities related to excluded assets which include (i) for-sale condominium or cooperative conversion or development projects, (ii) projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, or (iii) land acquisitions, without first offering them to our company. Our charter provides that we renounce any interest or expectancy in, or right to be offered or to participate in, any business opportunity identified in any investment policy (including the Investment Policy) or agreement with any of our directors or officers unless the policy or agreement contemplates that the director or officer must present, communicate or offer such business opportunity to us. See “Certain Provisions of Maryland Law and Clipper Realty’s Charter and Bylaws—Competing Interests and Activities of our Directors and Officers.”

 

Our Tax Status

 

We have elected to be treated and to qualify as a REIT for U.S. federal income tax purposes beginning with our first taxable year ended December 31, 2015. We have been organized and operate in conformity with the requirements for qualification and taxation as a REIT under the Code, and our manner of operation has enabled us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2015 and thereafter. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our taxable income to our stockholders, computed without regard to the dividends paid deduction and excluding our net capital gain, plus 90% of our net income after tax from foreclosure property (if any), minus the sum of various items of excess non-cash income.

 

In any year in which we qualify as a REIT, we generally will not be subject to U.S. federal income tax on that portion of our taxable income or capital gain that is distributed to stockholders. If we lose our REIT status, and the statutory relief provisions of the Code do not apply, we will be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular U.S. corporate tax rates. Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property and on taxable income that we do not distribute to our stockholders. In addition, Clipper TRS will be subject to U.S. federal, state and local income tax on its taxable income. See “Material U.S. Federal Income Tax Consequences.”

 

Restrictions on Ownership of Our Capital Stock

 

Due to limitations on the concentration of ownership of REIT stock imposed by the Code, among other reasons, our charter generally prohibits any person from actually, beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock. We refer to these restrictions as the “ownership limit.” Our charter permits our board of directors, in its sole and absolute discretion, to exempt a person, prospectively or retroactively, from the ownership limit if, among other conditions, the person’s ownership of our stock in excess of the ownership limit could not cause us to fail to qualify as a REIT. Our charter contains certain other limits on beneficial and constructive ownership and transfer of our stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Distribution Policy

 

To qualify as a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. See “Material U.S. Federal Income Tax Consequences.” Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes. Accordingly, we generally expect to distribute a significant percentage of our available cash to holders of our common stock.

 

 

 - 16 -

 

 

 

On December 4, 2015, we paid a cash dividend of $0.043333 per share (totaling $494,976) and on each of March 11, June 3 and September 2, 2016, we paid a cash dividend of $0.065 per share (each totaling $742,469). Any future distributions we make will be at the discretion of our board of directors and will depend on a number of factors, including prohibitions or restrictions under financing agreements or applicable law and other factors described below. See “Distribution Policy.”

 

We cannot assure you that our board of directors will not change our distribution policy in the future. Any distributions we pay in the future will depend upon our actual results of operations, liquidity, cash flows, financial condition, economic conditions, debt service requirements and other factors that could differ materially from our current expectations. Our actual results of operations, liquidity, cash flows and financial condition will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our ability to pay dividends and make other distributions to our stockholders, see “Risk Factors.”

 

Registration Rights Agreement and Selling Stockholders

 

Pursuant to the registration rights agreement entered into in connection with the private offering, as amended, we are required, among other things, to use our commercially reasonable efforts to cause a shelf registration statement registering for resale the registrable shares (as defined in the registration rights agreement) that are not sold by the selling stockholders in this offering, to be declared effective by the SEC as soon as practicable (but in no event later than the earlier of (i) October 31, 2016 and (ii) 60 days after the closing of this offering; provided that if this offering occurs within the 60 days prior to October 31, 2016, such date shall be 60 days after the closing of the initial public offering of our common stock). See “Description of Capital Stock—Registration Rights.”

 

Pursuant to, and subject to the terms and conditions of, the registration rights agreement, persons who purchased shares of our common stock in the private offering and their transferees have the right to sell their shares of our common stock in this offering, subject to customary terms and conditions including underwriter cutback rights. We are including        shares of our common stock in this offering to be sold by the selling stockholders identified in this prospectus under “Selling Stockholders.” We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, among other things:

 

· we are exempt from the auditor attestation requirement in the assessment of our internal control over financial reporting;

 

· we are permitted to provide less extensive disclosure about our executive compensation arrangements;

 

 

 - 17 -

 

 

 

· we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

· we have elected to use an extended transition period for complying with new or revised accounting standards.

 

We may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as an “emerging growth company.” We will, in general, qualify as an “emerging growth company” until the earliest of:

 

· the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement;

 

· the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more;

 

· the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

 

· the date on which we are deemed to be a “large accelerated filer,” which will occur after we first meet the following conditions as of the end of our fiscal year: (1) we have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) we have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) we have filed at least one annual report pursuant to the Exchange Act.

 

Company Information

 

As of August 31, 2016, we had approximately 177 employees. Our principal executive offices are located at 4611 12 th Avenue, Brooklyn, New York 11219. Our telephone number is (718) 438-2804. Our website address is www.clipperrealty.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus.

 

 

 - 18 -

 

 

 

THE OFFERING

 

Common stock offered by us           shares
     
Common stock offered by the selling stockholders           shares
     
Common stock outstanding immediately after this offering           shares (1)
     
Offering price   $        per share of common stock
     
Use of proceeds  

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, will be approximately $        million, based on the mid-point of the price range set forth on the front cover page of this prospectus ($        million if the underwriters exercise their option to purchase additional shares in full). We intend to use all or a portion of the net proceeds of this offering, together with cash on hand, which was $104 million at June 30, 2016 to (i) repay up to $100 million outstanding under a mezzanine note, which matures on November 9, 2016 and includes the option to prepay the balance in whole, but not in part, without penalty, (ii) fund approximately $31 million of certain capital improvements to reposition and modernize our properties, and (iii) fund acquisitions of properties consistent with our strategy of acquiring multi-family or commercial properties in the New York metropolitan area. We have not identified any particular properties to acquire using the net proceeds of this offering. Pending application of the net proceeds, we will invest the net proceeds in short-term, interest-bearing securities that are consistent with our election to be taxed as a REIT for U.S. federal income tax purposes. Such investments may include obligations of the Government National Mortgage Association, other government agency securities, certificates of deposit, and interest-bearing bank deposits.

 

We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.

 

See “Use of Proceeds.”

 

 

(1) Excludes (i) an aggregate of 26,317,396 shares of our common stock that we may issue in exchange for class B LLC units outstanding, (ii) an aggregate of 380,744 shares of our common stock underlying LTIP units we have granted to our executive officers and certain of our employees pursuant to our 2015 Omnibus Plan, (iii) an aggregate of 120,742 shares of our common stock underlying LTIP units we have granted to our non-employee directors pursuant to our 2015 Director Plan, (iv) 619,256 shares of our common stock reserved for future issuance under our 2015 Omnibus Plan, and (v) 229,258 of our common stock reserved for future issuance under our 2015 Director Plan.

 

 

 - 19 -

 

 

 

Proposed NYSE symbol   “CLPR”
     
Ownership and transfer restrictions   To assist us in qualifying as a REIT, among other purposes, our charter generally limits beneficial ownership by any person to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”
     
Risk factors   Investing in our common stock involves a high degree of risk. For a discussion of factors you should consider in making an investment, see “Risk Factors” beginning on page 25.

 

 

 - 20 -

 

 

 

Summary Selected Historical and Pro Forma Financial Data

 

Clipper Realty Inc. (the “Company” or “We”) was incorporated under the laws of the state of Maryland on July 7, 2015. On August 3, 2015, we completed certain formation transactions and the sale of shares of our common stock in a private offering. We contributed the net proceeds of the private offering to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership. The Operating Partnership in turn contributed such net proceeds to the limited liability companies (“LLCs”) that comprise the Predecessor, as described below, in exchange for class A LLC units in such LLCs and became the managing member of each LLC. The owners of the LLCs exchanged their interests for class B LLC units and an equal number of shares of our non-economic, special voting stock of the Company. The class B LLC units (together with the shares of our special voting stock) are convertible into shares of our common stock and are entitled to distributions pursuant to the limited liability company agreements of the LLCs.

 

The Predecessor was a combination of the four LLCs, including one formed in 2014 in connection with the acquisition of the Tribeca House properties on December 15, 2014. The Predecessor did not represent a legal entity. The LLCs that comprised the Predecessor and the Company at formation were under common control.

 

As more fully described elsewhere in this prospectus, on June 27, 2016, we acquired the Aspen property. As a result, as of June 30, 2016, our properties included the following five properties:

 

· Tribeca House properties in Manhattan, comprising two buildings, one with 21 stories and one with 12 stories, containing residential and retail space with an aggregate of approximately 480,000 square feet of residential rental GLA and 77,236 of rental retail and parking GLA;

 

· Flatbush Gardens in Brooklyn, a 59-building multi-family housing complex with 2,496 rentable units;

 

· 141 Livingston Street in Brooklyn, a 15-story office building with approximately 216,073 square feet of GLA;

 

· 250 Livingston Street in Brooklyn, a 12-story office and residential building with approximately 294,378 square feet of GLA; and

 

· the Aspen property located at 1955 1 st Avenue, New York, NY, a 7 story residential and retail rental building with 186,602 square feet of GLA.

 

Following completion of the private offering and the formation transactions, the operations of the Company have been carried on primarily through the Operating Partnership. The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLCs that comprise the Predecessor.

 

The Company has elected to be treated, commencing with its 2015 tax year, and intends to continue to qualify as, a REIT for U.S. federal income tax purposes. The following table shows the summary selected consolidated historical and pro forma financial data for the Predecessor and the Company for the periods indicated. You should read the summary selected historical and pro forma financial data in conjunction with the more detailed information contained in the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies,” real estate assets held for investment are carried at historical cost.

 

The Company’s and the Predecessor’s historical consolidated and combined balance sheet data as of December 31, 2015 and 2014 and consolidated and combined statements of operations data for the years ended December 31, 2015 and 2014 have been derived from historical financial statements audited by our independent auditors, whose report with respect thereto is included elsewhere in this prospectus. The Company’s and the Predecessor’s consolidated and combined balance sheet data as of June 30, 2016 and 2015 and consolidated and combined statements of operations data for the six months ended June 30, 2016 and 2015 have been derived from unaudited financial statements. The unaudited consolidated and combined financial statements have been prepared on a basis consistent with the annual audited consolidated and combined financial statements. In the opinion of management, the unaudited financial data reflect all adjustments, consisting of only normal and recurring adjustments considered necessary for a fair presentation of the operating results for those interim periods. The operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

 

 - 21 -

 

 

 

The summary selected pro forma consolidated and combined results of operations data for the six months ended June 30, 2016 and the year ended December 31, 2015 give effect to this offering, the formation transactions and the private offering of August 3, 2015, the acquisition of the Aspen property and additional borrowings and repayments as if each had occurred at the beginning of the respective periods for the operating data and as of the stated date for the balance sheet data. The pro forma data is not necessarily indicative of what our actual financial position and results of operations would have been as of June 30, 2016 and December 31, 2015 or for the six months ended June 30, 2016 and the year ended December 31, 2015, nor does it purport to represent our future financial position or results of operations.

 

    (Dollars, share and Class B LLC units
in thousands)
 
    Six months ended June 30,     Years ended December 31,  
Consolidated Statement of Operations   Pro Forma
2016
    2016     2015     Pro Forma
2015
    2015     2014  
Residential rental income   $     $ 31,738     $ 30,255     $     $ 61,358     $ 31,938  
Commercial rental income             8,959       8,553               17,256       12,382  
Tenant recoveries             1,883       1,788               3,477       2,415  
Garage and other income             1,351       1,208               2,513       1,037  
Total revenues             43,931       41,804               84,604       47,772  
Operating Expenses                                                
Property operating expenses             12,684       11,450               23,283       19,673  
Real estate taxes and insurance             8,140       6,800               14,926       6,560  
General and administrative             3,922       1,859               5,296       2,358  
Acquisition costs             407                     75       326  
Depreciation and amortization             6,638       6,163               12,521       4,472  
Total operating expenses             31,791       26,272               56,101       33,389  
Income from operations             12,140       15,532               28,503       14,383  
Interest expense, net             (18,863 )     (18,481 )             (36,703 )     (9,145 )
Net (loss) income             (6,723 )   $ (2,949 )             (8,200 )   $ 5,238  
                                                 
Net income attributable to Predecessor and non-controlling interests             4,688                       6,835          
Dividends attributable to preferred shares             (7 )                              
Net loss available to common stockholders   $     $ (2,042 )           $     $ (1,365 )        
Basic and diluted loss per share   $     $ (0.18 )           $     $ (0.12 )        
Weighted average per share / Class B LLC unit information:                                                
Common shares outstanding             11,423                       11,423          
Class B LLC units outstanding             26,317                       26,317          
            37,740                       37,740          
Cash flow data                                                
Operating activities           $ 4,991     $ 10,060             $ 9,440     $ 7,472  
Investing activities             (111,384 )     (4,885 )             (9,025 )     (226,822 )
Financing activities           $ 85,120     $ 1,296             $ 115,760     $ 224,707  
Non-GAAP measures                                                
FFO (1)   $     $ (85 )   $ 3,214     $     $ 4,321     $ 9,710  
AFFO (1)             3,854       4,870               9,247       8,266  
Adjusted EBITDA (2)   $     $ 20,027     $ 21,514     $     $ 41,531     $ 18,482  
Balance sheet data                                                
Investment in real estate, net   $     $ 820,665             $     $ 726,107     $ 728,744  
Cash and cash equivalents             104,059                       125,332       9,157  
Restricted cash             9,885                       9,962       5,876  
Total assets             966,162                       881,118       766,856  
Notes payable, net of unamortized debt costs             806,930                       713,440       708,228  
Total liabilities             830,671                       734,741       729,659  
Stockholders’ equity             41,008                       44,303        
Total equity   $     $ 135,491             $     $ 146,377     $ 37,197  
Property related data (unaudited)                                                
Residential property rentable square feet                                                
Flatbush Gardens             1,734                       1,734       1,734  
% occupied             96.5 %                     96.2 %     94.4 %
Tribeca House properties             479                       479       479  
% occupied             88.9 %                     83.5 %     94.5 %
250 Livingston Street             36                       36       36  
% occupied             89.2 %                     94.4 %     90.0 %
Commercial and retail property rentable square feet                                                
141 Livingston Street (2015 data remeasured)             208                       216       159  
% occupied             100 %                     100.0 %     100.0 %
250 Livingston Street (2015 data remeasured)             353                       353       353  
% occupied             100 %                     99.7 %     99.7 %
Tribeca House properties             77                       77       77  
% occupied             100 %                     95.9 %     95.9 %

 

 

(1) FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with GAAP), excluding gains (losses) from sales of property (and impairment adjustments), plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

 

AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight line rent adjustments to revenue from long-term leases and amortization of costs incurred in originating debt.

 

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider AFFO to be useful in determining funds available for payment of distributions. FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

 

FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO and AFFO.

 

 

 - 22 -

 

 

 

The following table sets forth a reconciliation of FFO and AFFO for the periods presented to net (loss) income before allocation to non-controlling interests, as computed in accordance with GAAP (amounts in thousands):

 

    Six months ended June 30,     Years ended December 31,  
    Pro Forma
2016
    2016     2015     Pro Forma
2015
    2015     2014  
FFO                                                
Net (loss) income before allocation to non-   $       $ (6,723 )   $ (2,949 )   $       $ (8,200 )   $ 5,238  
Real estate depreciation and amortization             6,638       6,163               12,521       4,472  
FFO   $       $ (85 )   $ 3,214     $       $ 4,321     $ 9,710  
                                                 
AFFO                                                
FFO   $       $ (85 )   $ 3,214     $       $ 4,321     $ 9,710  
                                                 
Real estate tax intangible amortization             668       664               1,328       238  
Amortization of below-market leases             (919 )     (857 )             (1,714 )     (1,450 )
Straight-line rent adjustment             (19 )     12               109       513  
Amortization of debt origination costs             3,095       2,997               6,036       704  
Interest rate cap mark-to-market             9       446               522       49  
Amortization of LTIP awards             1,112                     709        
Acquisition costs             407                     75       326  
Recurring capital spending             (414 )     (1,606 )             (2,139 )     (1,824 )
AFFO   $       $ 3,854     $ 4,870     $       $ 9,247     $ 8,266  

 

 

 - 23 -

 

 

 

(2) We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net (loss) income before allocation to non-controlling interests plus real estate depreciation and amortization, amortization of identifiable intangibles, interest expense, net, acquisition costs and stock based compensation. Other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to other REITs. We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use Adjusted EBITDA to evaluate our performance because Adjusted EBITDA allows us to evaluate the operating performance of our company by measuring the core operations of property performance and administrative expenses available for debt service and capturing trends in rental housing and property operating expenses. However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. For a further discussion about our use of Adjusted EBITDA as a non-GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Adjusted earnings before interest, income taxes, depreciation, amortization and stock based compensation.”

 

The following table reconciles Adjusted EBITDA to net (loss) income before allocation to non-controlling interests (amounts in thousands):

 

    Six months ended June 30,     Years ended December 31,  
    Pro Forma
2016
    2016     2015     Pro Forma
2015
    2015     2014  
Adjusted EBITDA                                                
Net (loss) income before allocation to non–controlling interest   $     $ (6,723 )   $ (2,949 )   $     $ (8,200 )   $ 5,238  
Depreciation and amortization             6,638       6,163               12,521       4,472  
Amortization of real estate tax intangible             668       664               1,328       238  
Amortization of below-market leases             (919 )     (857 )             (1,714 )     (1,450 )
Straight-line rent adjustment             (19 )     12               109       513  
Amortization of LTIP awards             1,112                     709        
Interest expense, net             18,863       18,481               36,703       9,145  
Acquisition costs             407                     75       326  
Adjusted EBITDA   $     $ 20,027     $ 21,514     $     $ 41,531     $ 18,482  

 

 

 - 24 -

 

 

RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the following material risks, as well as the other information contained in this prospectus, before making an investment in our company. If any of the following risks actually occur, our business, prospects, financial condition, results of operations and/or cash flow could be materially and adversely affected. In such an event, the market value of our common stock could decline and you could lose part or all of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section of this prospectus entitled “Cautionary Note Concerning Forward-Looking Statements.”

 

Risks Related to Real Estate

 

Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets where our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses, and the overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our results of operations, financial condition, cash flow and our ability to make distributions to our stockholders.

 

Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions in the United States and/or globally may significantly affect our occupancy levels, rental rates, rent collections, operating expenses, the market value of our assets and our ability to strategically acquire, dispose, recapitalize or refinance our properties on economically favorable terms or at all. Our ability to lease our properties at favorable rates may be adversely affected by increases in supply of commercial, retail and/or residential space in our markets and is dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and increased unemployment levels, recession, stock market volatility and uncertainty about the future. Some of our major expenses, including mortgage payments and real estate taxes, generally do not decline when related rents decline. We expect that any declines in our occupancy levels, rental revenues and/or the values of our buildings would cause us to have less cash available to pay our indebtedness, fund necessary capital expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the market value of our common stock. Our business may be affected by volatility and illiquidity in the financial and credit markets, a general global economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole. Our business may also be adversely affected by local economic conditions, as all of our revenues are currently derived from properties located in New York City, with all of our current portfolio being in Manhattan and Brooklyn.

 

Factors that may affect our occupancy levels, our rental revenues, our income from operations, our funds from operations (“FFO”) and adjusted FFO (“AFFO”), our earnings before interest, income tax, depreciation, amortization (“EBITDA”), our cash flow and/or the value of our properties include the following, among others:

 

· downturns in global, national, regional and local economic and demographic conditions;

 

· declines in the financial condition of our tenants, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or other reasons, and declines in the financial condition of buyers and sellers of properties;

 

· declines in local, state and/or federal government budgets and/or increases in local, state and/or federal government budget deficits, which among other things could have an adverse effect on the financial condition of our only commercial tenant, the City of New York, and may result in tenant defaults under leases and/or cause such tenant to seek alternative office space arrangements;

 

· the inability or unwillingness of our tenants to pay rent increases, or our inability to collect rents and other amounts due from our tenants;

 

 - 25 -

 

 

· significant job losses in the industries in which our commercial and/or retail tenants operate, and/or from which our residential tenants derive their incomes, which may decrease demand for our commercial, retail and/or residential space, causing market rental rates and property values to be affected negatively;

 

· an oversupply of, or a reduced demand for, commercial and/or retail space and/or apartment homes;

 

· declines in household formation;

 

· favorable residential mortgage rates;

 

· changes in market rental rates in our markets and/or the attractiveness of our properties to tenants, particularly as our buildings continue to age, and our ability to fund repair and maintenance costs;

 

· competition from other available commercial and/or retail lessors and other available apartments and housing alternatives, and from other real estate investors with significant capital, such as other real estate operating companies, other REITs and institutional investment funds;

 

· economic conditions that could cause an increase in our operating expenses, such as increases in property taxes (particularly as a result of increased local, state and national government budget deficits and debt and potentially reduced federal aid to state and local governments), utilities, insurance, compensation of on-site personnel and routine maintenance;

 

· opposition from local community or political groups with respect to the development and/or operations at a property;

 

· investigation, removal or remediation of hazardous materials or toxic substances at a property;

 

· changes in, and changes in enforcement of, laws, regulations and governmental policies, including without limitation, health, safety, environmental and zoning laws;

 

· rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs; and

 

· changes in rental housing subsidies provided by the government and/or other government programs that favor single-family rental housing or owner-occupied housing over multi-family rental housing.

 

All of our properties are located in New York City, and adverse economic or regulatory developments in New York City or parts thereof, including the boroughs of Brooklyn and Manhattan, could negatively affect our results of operations, financial condition, cash flow, and ability to make distributions to our stockholders.

 

All of our properties are located in New York City, with all of our current portfolio being in the boroughs of Manhattan and Brooklyn. As a result, our business is dependent on the condition of the economy in New York City and the views of potential tenants regarding living and working in New York City, which may expose us to greater economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in New York City (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, terror attacks, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation). Such adverse developments could materially reduce the value of our real estate portfolio and our rental revenues, and thus adversely affect our ability to meet our debt obligations and to make distributions to our stockholders.

 

 - 26 -

 

 

We depend on a single government tenant in our office buildings, which could cause an adverse effect on us, including our results of operations and cash flow, if the City of New York were to suffer financial difficulty.

 

Our rental revenue depends on entering into leases with and collecting rents from tenants. As of August 1, 2016, Kings County Court, the Human Resources Administration, and the Department of Environmental Protection, all of which are agencies of the City of New York, leased an aggregate of 472,653 rentable square feet of commercial space at our commercial office properties at 141 Livingston Street and 250 Livingston Street, representing approximately 17% of the total rentable square feet in our portfolio and 17% of our total portfolio’s annualized rent. General and regional economic conditions may adversely affect the City of New York and potential tenants in our markets. The City of New York may experience a material business downturn or suffer negative effects from declines in local, state and/or federal government budgets and/or increases in local, state and/or federal government budget debt and deficits, which could potentially result in a failure to make timely rental payments and/or a default under its leases. In many cases, through tenant improvement allowances and other concessions, we have made substantial upfront investments in the applicable leases that we may not be able to recover. In the event of a tenant default, we may experience delays in enforcing our rights and may also incur substantial costs to protect our investments.

 

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties and may delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums altogether. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages that is limited in amount and which may only be paid to the extent that funds are available and in the same percentage as is paid to all other holders of unsecured claims. If any of our significant tenants were to become bankrupt or insolvent, suffer a downturn in their business or a reduction in funds available to them, default under their leases, fail to renew their leases or renew on terms less favorable to us than their current terms, our results of operations and cash flow could be adversely affected.

 

The leases for the Human Resources Administration and the Department of Environmental Protection, which comprise 56% of the rentable square feet rented by the City of New York, will be expiring at the end of 2016 and 2020. Although we have entered into a term sheet with the City of New York for the renewal of the lease expiring at the end of 2016, there is no assurance that we will reach agreement with the City of New York on the extension or renewal of the leases for all or a portion of their office space.

 

Our portfolio’s rent is generated from five properties.

 

As of August 1, 2016, our portfolio consisted of five properties, our Tribeca House properties, the Flatbush Gardens complex, the 141 Livingston Street property, the 250 Livingston Street property, and the Aspen property, which accounted for 37.6%, 39.5%, 12.5%, 10.1%, and 0.4%, respectively, of our portfolio’s rent in the second quarter of 2016. Our results of operations and cash available for distribution to our stockholders would be adversely affected if any of these properties were materially damaged or destroyed.

 

We may be unable to renew leases or lease currently vacant space or vacating space on favorable terms or at all as leases expire, which could adversely affect our financial condition, results of operations and cash flow.

 

As of August 1, 2016, we had approximately 97,347 rentable square feet of vacant residential space (excluding leases signed but not yet commenced) and leases representing approximately 66.9% of the square footage of residential space at properties in our portfolio will expire in the twelve months between August 2016 and July 2017 (including month-to-month leases). As of August 1, 2016, we had no vacant commercial and retail space. One lease representing approximately 15% of the square footage of commercial and retail space at properties in our portfolio will expire in 2016 (excluding month-to-month parking leases). We cannot assure you that expiring leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above the current average net effective rental rates. If the rental rates for our commercial and/or residential space decrease, our existing commercial tenants do not renew their leases or we do not re-lease a significant portion of our available and soon-to-be-available commercial and/or residential space, our financial condition, results of operations, cash flow, the market value of our common stock and our ability to satisfy our debt obligations and to make distributions to our stockholders would be adversely affected.

 

 - 27 -

 

 

The actual rents we receive for the properties in our portfolio may be less than market rents, and we may experience a decline in realized rental rates, which could adversely affect our financial condition, results of operations and cash flow. Short-term leases with respect to our residential tenants expose us to the effects of declining market rents.

 

Throughout this prospectus, we make certain comparisons between our in-place rents and estimates of market rents for the commercial, retail and residential space in our portfolio used for budgeting purposes. As a result of potential factors, including competitive pricing pressure in our markets, a general economic downturn and the desirability of our properties compared to other properties in our markets, we may be unable to realize market rents across the properties in our portfolio. In addition, depending on market rental rates at any given time as compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases. A majority of our apartment leases are for a term of one year. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues for residential space in our properties are affected by declines in market rents more quickly than if those leases were for longer terms. If we are unable to obtain sufficient rental rates across our portfolio, then our ability to generate cash flow growth will be negatively affected.

 

We may engage in development, redevelopment or repositioning activities, which could expose us to different risks that could adversely affect us, including our financial condition, cash flow and results of operations.

 

We may engage in development, redevelopment or repositioning activities with respect to our properties as we believe market conditions dictate. For example, we plan to spend approximately $18 million to complete a comprehensive renovation and modernization program at our Flatbush Gardens property through the end of 2017, which will include improvements to the common areas of the complex and upgrades to individual apartments. In addition, our lease at 141 Livingston Street requires us to refurbish the air-conditioning system and perform other upgrades at an estimated cost of approximately $5.2 million. Additionally, we intend to spend a total of approximately $2.6 million through 2017 to make other improvements at our 141 Livingston Street property. We are also reviewing the regulatory, architectural and financial issues regarding building approximately 500,000 additional square feet by adding four floors above certain of our 59 buildings at Flatbush Gardens. Further development at Flatbush Gardens will require a significant capital investment.

  

If we engage in these activities, we will be subject to certain risks, which could adversely affect us, including our financial condition, cash flow and results of operations. These risks include, without limitation,

 

· the availability and pricing of financing on favorable terms or at all;

 

· the availability and timely receipt of zoning and other regulatory approvals;

 

· the potential for the fluctuation of occupancy rates and rents at development and redeveloped properties, which may result in our investment not being profitable;

 

· start up, development, repositioning and redevelopment costs may be higher than anticipated;

 

· cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions or material shortages); and

 

· changes in the pricing and availability of buyers and sellers of such properties.

 

These risks could result in substantial unanticipated delays or expenses and could prevent the initiation or the completion of development and redevelopment activities, any of which could have an adverse effect on our financial condition, results of operations, cash flow, the market value of our common stock and our ability to satisfy our debt obligations and to make distributions to our stockholders.

 

 - 28 -

 

 

We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract tenants, generate positive cash flows or to make real estate properties suitable for sale, which could adversely affect us, including our financial condition, results of operations and cash flow.

 

In the event that there are adverse economic conditions in the real estate market and demand for commercial, retail and/or residential space decreases with respect to our current vacant space and as leases at our properties expire, we may be required to increase tenant improvement allowances or concessions to tenants, accommodate increased requests for renovations, build-to-suit remodeling (with respect to our commercial and retail space) and other improvements or provide additional services to our tenants, all of which could negatively affect our cash flow. If the necessary capital is unavailable, we may be unable to make these potentially-significant capital expenditures. This could result in non-renewals by tenants upon expiration of their leases and our vacant space remaining untenanted, which could adversely affect our financial condition, results of operations, cash flow and the market value of our common stock.

 

Our dependence on rental revenue may adversely affect us, including our profitability, our ability to meet our debt obligations and our ability to make distributions to our stockholders.

 

Our income is derived from rental revenue from real property. See “Our Business and Properties—Overview.” As a result, our performance depends on our ability to collect rent from tenants. Our income and funds for distribution would be adversely affected if a significant number of our tenants, or any of our major tenants,

 

· delay lease commencements,

 

· decline to extend or renew leases upon expiration,

 

· fail to make rental payments when due, or

 

· declare bankruptcy.

 

Any of these actions could result in the termination of such tenants’ leases with us and the loss of rental revenue attributable to the terminated leases. In these events, we cannot assure you that such tenants will renew those leases or that we will be able to re-lease spaces on economically advantageous terms or at all. The loss of rental revenues from our tenants and our inability to replace such tenants may adversely affect us, including our profitability, our ability to meet our debt and other financial obligations and our ability to make distributions to our stockholders.

 

Real estate investments are relatively illiquid and may limit our flexibility.

 

Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions. Our inability to sell our properties on favorable terms or at all could have an adverse effect on our sources of working capital and our ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find acceptable. The Code also imposes restrictions on REITs, which are not applicable to other types of real estate companies, on the disposal of properties. These potential difficulties in selling real estate in our markets may limit our ability to change, or reduce our exposure to, the properties in our portfolio promptly in response to changes in economic or other conditions.

 

Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities, which may adversely affect us, including our profitability, and impede our growth.

 

We compete with numerous commercial developers, real estate companies and other owners and operators of real estate for properties for acquisition and pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private equity funds, sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire existing properties and to develop new properties. Our markets are each generally characterized by high barriers-to-entry to construction and limited land on which to build new commercial, retail and residential space, which contributes to the competition we face to acquire existing properties and to develop new properties in these markets. This competition could increase prices for properties of the type we may pursue and adversely affect our profitability and impede our growth.

 

 - 29 -

 

 

Competition may impede our ability to attract or retain tenants or re-lease space, which could adversely affect our results of operations and cash flow.

 

The leasing of real estate in our markets is highly competitive. The principal means of competition are rent charged, location, services provided and the nature and condition of the premises to be leased. The number of competitive properties in our markets, which may be newer or better located than our properties, could have an adverse effect on our ability to lease space at our properties and on the effective rents that we are able to charge. If other lessors and developers of similar spaces in our markets offer leases at prices comparable to or less than the prices we offer, we may be unable to attract or retain tenants or re-lease space in our properties, which could adversely affect our results of operations and cash flow.

 

We are subject to potential losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.

 

Our properties are located in areas that could be subject to, among other things, flood and windstorm losses. Insurance coverage for flood and windstorms can be costly because of limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. In addition, our properties may be subject to a heightened risk of terrorist attacks. We carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties with limits and on terms we consider commercially reasonable. We cannot assure you, however, that our insurance coverage will be sufficient or that any uninsured loss or liability will not have an adverse effect on our business and our financial condition and results of operations.

 

We are subject to risks from natural disasters such as severe weather.

 

Natural disasters and severe weather such as hurricanes or floods may result in significant damage to our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe or destructive weather event (such as a hurricane) affecting New York City may have a significant negative effect on our financial condition, results of operations and cash flows. As a result, our operating and financial results may vary significantly from one period to the next. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather. We also are exposed to risks associated with inclement winter weather, including increased need for maintenance and repair of our buildings.

 

Climate change may adversely affect our business.

 

To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for our properties located in the areas affected by these conditions. Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of operations would be adversely affected. In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties in order to comply with such regulations.

 

 - 30 -

 

 

Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.

 

All of our properties are located in New York City, which has been and may in the future be the target of actual or threatened terrorist attacks. As a result, some tenants in these markets may choose to relocate their businesses or homes to other markets or buildings within New York City that may be perceived to be less likely to be affected by future terrorist activity. This could result in an overall decrease in the demand for commercial, retail and/or residential space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “—We are subject to potential losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.”

 

We may become subject to liability relating to environmental and health and safety matters, which could have an adverse effect on us, including our financial condition and results of operations.

 

Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or release of hazardous substances (such as lead, asbestos and polychlorinated biphenyls), waste, petroleum products and other miscellaneous products (including but not limited to natural products such as methane and radon gas) at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of our properties may be affected by contamination arising from current or prior uses of the property or from adjacent properties used for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our properties may adversely affect our ability to attract and/or retain tenants and our ability to develop or sell or borrow against those properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which that property may be used or how businesses may be operated on that property. See “Our Business and Properties—Regulation—Environmental and Related Matters.”

 

In addition, our properties are subject to various federal, state and local environmental and health and safety laws and regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise adversely affect our operations and/or cash flow, or those of our tenants, which could in turn have an adverse effect on us.

 

Certain of our properties have only temporary certificates of occupancy or are awaiting a certificate of occupancy which, if not granted, would require us to stop using the property.

 

As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material (“ACM”). Environmental and health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.

 

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In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.

 

We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make distributions to our stockholders or that such costs, liabilities, or other remedial measures will not have an adverse effect on our financial condition, results of operations and cash flows.

 

We may incur significant costs complying with the Americans with Disabilities Act of 1990 (“ADA”) and similar laws (including but not limited to the Fair Housing Amendments Act of 1988 (“FHAA”) and the Rehabilitation Act of 1973), which could adversely affect us, including our future results of operations and cash flows.

 

Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The FHAA requires apartment communities first occupied after March 13, 1991, to comply with design and construction requirements for disabled access. For projects receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. We have not conducted a recent audit or investigation of all of our properties to determine our compliance with these or other federal, state or local laws. If one or more of our properties were not in compliance with such laws, then we could be required to incur additional costs to bring the property into compliance. We cannot predict the ultimate amount of the cost of compliance with such laws. Noncompliance with these laws could also result in the imposition of fines or an award of damages to private litigants. Substantial costs incurred to comply with such laws, as well as fines or damages resulting from actual or alleged noncompliance with such laws, could adversely affect us, including our future results of operations and cash flows.

 

Multi-family residential properties are subject to rent stabilization regulations, which limit our ability to raise rents above specified maximum amounts and could give rise to claims by tenants that their rents exceed such specified maximum amounts.

 

Numerous municipalities, including New York City where our multi-family residential properties are located, impose rent control or rent stabilization on apartment buildings. The rent stabilization regulations applicable to our multi-family residential properties set maximum rates for annual rent increases, entitle our tenants to receive required services from us and entitle our tenants to have their leases renewed. The rent stabilization regulations applicable to our multi-family residential properties permit luxury deregulation of rent-stabilized apartments, generally providing that apartments that became vacant before June 24, 2011 with a legal regulated rent of $2,000 or more per month are made permanently exempt from rent stabilization. That amount was increased to $2,500 or more per month where an apartment becomes vacant on or after June 24, 2011. In 2015, New York City’s Mayor de Blasio released a series of proposals that, if enacted, would alter the rent stabilization guidelines and make it harder for property owners, such as us, to implement luxury deregulation of rent-stabilized apartments, including eliminating vacancy decontrol and eliminating vacancy allowance. These proposals were not enacted when the New York State legislature extended the current rent stabilization guidelines in June 2015, although subsequently the New York City Rent Guidelines Board determined that the maximum rent for expiring leases would be frozen for the next year. Although Mayor de Blasio’s proposals were not enacted for 2016, there can be no assurances that they will not be pursued in the future.

 

The limitations established by present or future rent stabilization regulations may impair our ability to maintain rents at market levels. For example, our Flatbush Gardens property is subject to rent stabilization and currently in-place rents are generally about 18% below the maximum rent that could be charged under rent stabilization. However, we have been able to consistently increase rents as a result of our comprehensive renovation and repositioning strategy, allowing us to realize an increase of approximately 22% in rent per square foot on new leases in 2016 and a 14.5% increase in rent per square foot on new leases in 2015, compared to expiring leases. If our current and planned renovation and modernization program at Flatbush Gardens is successful, certain apartments may reach the maximum rents permitted under rent stabilization, which could happen even sooner if rent increases continue to be frozen in subsequent years. Therefore our future ability to attain market rents would be limited until such apartments are eligible for luxury deregulation, which generally requires both a legal maximum rent of $2,500 or more per month and a vacancy (although we can apply to destabilize an apartment where the legal maximum rent is $2,500 or more per month without a vacancy if the tenant’s income exceeds certain levels). However, if Mayor de Blasio’s rent stabilization proposals are enacted in future years, luxury deregulation may no longer be available.

 

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In addition, we are subject to claims from tenants that the rent charged by us exceeds the amount permitted by rent stabilization. Although we believe that all of our rents are compliant with applicable rent stabilization regulation, tenants have in the past made claims that their rents exceed the maximum rent that could be charged under rent stabilization. These claims include claims that the annual increases in the maximum rent have in the past been inapplicable as a result of a failure to provide essential services by us or the prior owners. The number of these claims may increase as our rents approach the maximum rent that could be charged under rent stabilization. Tenants could also claim that our determination that luxury deregulation was applicable to their apartment was incorrect and seek a reduction in rent and/or return of rents paid in excess of the maximum legal rent. Finally, a tenant in an apartment eligible for tax benefits, such as Section 421-g of the Real Property Tax Law, could claim that rent stabilization applies to the tenant’s apartment while those tax benefits are available, even if the apartment is eligible for luxury deregulation.

 

The application of rent stabilization to apartments in our multi-family residential properties could limit the amount of rent we are able to collect, which could have a material adverse effect on our adjusted EBITDA and our ability to fully take advantage of the investments that we are making in our properties. In addition, there can be no assurances that changes to rent stabilization laws, such as those proposed by New York City’s Mayor de Blasio, will not have a similar or greater negative impact on our ability to collect rents.

 

As we increase rents and improve our properties, we could become the target of public scrutiny and investigations similar to the public scrutiny and investigations that other apartment landlords in Brooklyn and other neighborhoods in the New York metropolitan area have experienced, which could lead to negative publicity and require that we expend significant resources to defend ourselves, all of which could adversely affect our operating results and our ability to pay distributions to our stockholders.

 

Other apartment landlords in gentrifying neighborhoods in Brooklyn and other parts of the New York metropolitan area have come under public scrutiny, and in a few cases have been the subject of civil and criminal investigations, for their alleged treatment of tenants who cannot afford the rent increases that often result from neighborhood gentrification and landlord improvements to properties. It is possible that we or members of our management team could come under similar public scrutiny or become the target of similar investigations regardless of whether we have done anything wrong, which could lead to negative publicity and require that we expend significant resources to defend ourselves, all of which could adversely affect our operating results and our ability to pay distributions to our stockholders.

 

We may be unable to identify and successfully complete acquisitions and, even if acquisitions are identified and completed, we may fail to successfully operate acquired properties, which could adversely affect us and impede our growth.

 

Our ability to identify and acquire properties on favorable terms and successfully develop, redevelop and/or operate them may be exposed to significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including completion of due diligence investigations and other conditions that are not within our control, which may not be satisfied. In this event, we may be unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is unavailable at reasonable rates, we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all. We may spend more than budgeted to make necessary improvements or renovations to acquired properties and may not be able to obtain adequate insurance coverage for new properties. Further, acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures. We may also be unable to integrate new acquisitions into our existing operations quickly and efficiently, and as a result, our results of operations and financial condition could be adversely affected. Any delay or failure on our part to identify, negotiate, finance and consummate such acquisitions in a timely manner and on favorable terms, or operate acquired properties to meet our financial expectations, could impede our growth and have an adverse effect on us, including our financial condition, results of operations, cash flow and the market value of our common stock.

 

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Should we decide at some point in the future to expand into new markets, we may not be successful, which could adversely affect our financial condition, results of operations, cash flow and the market value of our common stock.

 

If opportunities arise, we may explore acquisitions of properties in new markets. Each of the risks applicable to our ability to acquire and integrate successfully and operate properties in our current markets is also applicable in new markets. In addition, we will not possess the same level of familiarity with the dynamics and market conditions of the new markets we may enter, which could adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or achieve our desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect our financial condition, results of operations, cash flow, the market value of our common stock and ability to satisfy our debt obligations and to make distributions to our stockholders.

 

We may acquire properties or portfolios of properties through tax-deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

 

In the future we may acquire properties or portfolios of properties through tax-deferred contribution transactions in exchange for partnership interests in our operating partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

 

We may experience a decline in the fair value of our assets, which may have a material impact on our financial condition, liquidity and results of operations and adversely impact the market value of our common stock.

 

A decline in the fair market value of our assets may require us to recognize an other-than-temporary impairment against such assets under GAAP if we were to determine that we do not have the ability and intent to hold any assets in unrealized loss positions to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. In such event, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges will reflect non-cash losses at the time of recognition. Subsequent disposition or sale of such assets could further affect our future losses or gains, as they will be based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale, which may adversely affect our financial condition, liquidity and results of operations.

 

From time to time, we may enter into joint venture relationships or other arrangements regarding the joint ownership of property. Our investments in and through such arrangements could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners. Risks associated with joint venture arrangements may include but are not limited to the following:

 

· our joint venture partners might experience financial distress, become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture;

 

· we may be responsible to our partners for indemnifiable losses;

 

· our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

 

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· we may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;

 

· our joint venture partners may take actions that we oppose;

 

· our ability to sell or transfer our interest in a joint venture to a third party without prior consent of our joint venture partners may be restricted;

 

· we may disagree with our joint venture partners about decisions affecting a property or a joint venture, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved;

 

· we may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments; and

 

· in the event that we obtain a minority position in a joint venture, we may not have significant influence or control over such joint venture or the performance of our investment therein.

 

If there is a transfer of a controlling interest in any of our properties (or in the entities through which we hold our properties), including as a result of the private offering, this offering, issuances of our common stock in exchange for class B LLC units pursuant to the exchange right granted to holders of class B LLC units, sales of class B LLC units by the holders thereof or the issuance of LLC interests to our operating partnership in connection with the private offering or a subsequent offering of our stock, or as a result of any of those transfers being aggregated, we may be obligated to pay New York City and New York State transfer tax based on the fair market value of the New York City and/or New York State real property transferred.

 

Subject to certain exceptions, New York City and New York State impose a tax on the transfer of New York City and/or New York State real property or the transfer of a controlling interest in New York City and/or New York State real property, generally at a current combined rate of 3.025% of the fair market value of the New York City and/or New York State real property. A direct or indirect transfer of a 50% or greater interest in any of our properties (or in the entities that own our properties) generally would constitute a transfer of a controlling interest in real property. Certain aggregation rules apply in determining whether a transfer of a controlling interest has occurred. For example, transfers made within a three year period generally are presumed to be aggregated. Therefore, a transfer of a controlling interest could occur as a result of the combination of one or more of the private offering, this offering, other offerings of common stock by us resulting of an increase in our investment in the entities that own our properties, issuances of our common stock to our continuing investors in exchange for class B LLC units pursuant to the exchange right granted to holders of class B LLC units, sales of class B LLC units by the holders thereof, the issuance of LLC interests to our operating partnership in connection with the private offering or a subsequent offering of our stock, or as a result of any combination of such transfers being aggregated. In addition to any transfer tax that may be imposed upon us, we have agreed with our continuing investors to pay any such transfer taxes imposed upon a continuing investor as a result of the private offering and the related formation transactions (including subsequent issuances of additional LLC units or interests, issuances of OP units by the operating partnership or issuances of our common stock by the Company), issuances of our common stock in exchange for class B LLC units, dispositions of property by any LLC subsidiary, the issuance of LLC interests to our operating partnership in connection with this or a subsequent offering of our stock, or as a result of any combination of such transfers being aggregated. If a transfer of a controlling interest in an entity owning our properties occurs, New York City and/or New York State transfer tax could be payable based on the fair market value of the New York City and/or New York State property at the time of each such transfer (including any transfers that are treated as a part of the transfer of the controlling interest that occur prior to the transfer that caused the 50% threshold to be met). For example, if exchanges of class B LLC units resulted in our ownership of the entities that own our properties increasing to greater than 50%, we could be subject to New York City and New York State transfer tax at a current combined rate of 3.025% of the fair market value of such New York City and/or New York State properties. In addition, we may or may not be eligible to take advantage of the 50% reduction to the New York City and New York State transfer tax rates that could apply with respect to transfers of real property to certain REITs.

 

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Risks Related to Our Business and Operations

 

Capital and credit market conditions may adversely affect our access to various sources of capital or financing and/or the cost of capital, which could affect our business activities, dividends, earnings and common stock price, among other things.

 

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use third-party financing to fund acquisitions of properties and to refinance indebtedness as it matures. As of June 30, 2016, we had no corporate debt and $814.9 million in property-level debt. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our acquisition, development and redevelopment activities and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flow could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. If economic conditions deteriorate, the ability of lenders to fulfill their obligations under working capital or other credit facilities that we may have in the future may be adversely affected.

 

The form, timing and amount of dividend distributions in future periods may vary and be affected by economic and other considerations.

 

The form, timing and amount of dividend distributions will be authorized at the discretion of our board of directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements applicable to REITs under the Code and other factors as our board of directors may consider relevant. See “Distribution Policy.”

 

We may from time to time be subject to litigation that could have an adverse effect on our financial condition, results of operations, cash flow and the market value of our common stock.

 

We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse effect on our financial position and results of operations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely affect our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely affect our ability to attract officers and directors.

 

We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may have limited or no recourse against the sellers.

 

Assets and entities that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of tenants, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions or that only survive for a limited period, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.

 

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As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial condition, results of operations and cash flow. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require us to incur losses or other expenses as well.

 

We depend on key personnel, including David Bistricer, our Chief Executive Officer, Lawrence Kreider, our Chief Financial Officer, JJ Bistricer, our Chief Operating Officer, and Jacob Schwimmer, our Chief Property Management Officer, and the loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners and existing and prospective industry participants, which could negatively affect our financial condition, results of operations, cash flow and the market value of our common stock.

 

There is substantial competition for qualified personnel in the real estate industry and the loss of our key personnel could have an adverse effect on us. Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly David Bistricer, our Chief Executive Officer, who has extensive market knowledge and relationships and exercises substantial influence over our acquisition, development, redevelopment, financing, operational and disposition activities. Among the reasons that David Bistricer is important to our success is that he has a reputation that attracts business and investment opportunities and assists us in negotiations with financing sources and industry personnel. If we lose his services, our business and investment opportunities and our relationships with such financing sources and industry personnel would diminish.

 

Our other senior executives, Lawrence Kreider, our Chief Financial Officer, JJ Bistricer, our Chief Operating Officer, and Jacob Schwimmer, our Chief Property Management Officer, also have extensive experience and strong reputations in the real estate industry, which aid us in identifying or attracting investment opportunities and negotiating with sellers of properties. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners and industry participants, which could negatively affect our financial condition, results of operations, cash flow and the market value of our common stock.

 

Breaches of our data security could adversely affect our business, including our financial performance and reputation.

 

We collect and retain certain personal information provided by our tenants and employees. While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, we can provide no assurance that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and/or loss of this information may result in legal liability and costs (including damages and penalties) that could adversely affect our business, including our financial performance and reputation.

 

Our subsidiaries may be prohibited from making distributions and other payments to us.

 

All of our properties are owned indirectly by subsidiaries, in particular our LLC subsidiaries, and substantially all of our operations are conducted by our operating partnership. As a result, we depend on distributions and other payments from our operating partnership and subsidiaries in order to satisfy our financial obligations and make payments to our investors. The ability of our subsidiaries to make such distributions and other payments depends on their earnings and cash flow and may be subject to statutory or contractual limitations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Property-Level Debt.” As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in, or other lien on, their assets and to any of such subsidiaries’ debt or other obligations that are senior to our claims.

 

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Risks Related to Our Organization and Structure

 

Our continuing investors hold shares of our special voting stock that entitle them to vote together with holders of our common stock on an as-exchanged basis, based on their ownership of class B LLC units in our predecessor entities, and are generally able to significantly influence the composition of our board of directors, our management and the conduct of our business.

 

Our continuing investors hold shares of our special voting stock, which generally allows them to vote together as a single class with holders of our common stock on all matters (other than matters considered at a special election meeting, the removal or reelection of directors initially elected at a special election meeting, the expansion of the size of the board of directors and amendments to certain provisions of our charter and bylaws relating to any special election meeting or the vote required to amend such provisions) brought before our common stockholders, including the election of directors, on an as-exchanged basis, as if our continuing investors had exchanged their class B LLC units in our predecessor entities and shares of our special voting stock for shares of our common stock. In addition, several continuing investors own shares of our common stock. See “Security Ownership of Certain Beneficial Owners and Management.” As a result, our continuing investors are generally entitled to exercise 74.4% of the voting power in our company (     % immediately following this offering, or     % if the underwriters exercise their option to purchase additional shares in full). In particular, immediately following this offering, David Bistricer will be entitled to exercise              % of the voting power in our company, Jacob Schwimmer will be entitled to exercise          % of the voting power in our company and Sam Levinson will be entitled to exercise                % of the voting power in our company. Even though none of our continuing investors is, by himself or together with his affiliates, entitled to exercise a majority of the total voting power in our company, for so long as any continuing investor continues to be entitled to exercise a significant percentage of our voting power, our continuing investors are generally able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval, and have significant influence with respect to our management, business plans and policies, including appointing and removing our officers, issuing additional shares of our common stock and other equity securities, paying dividends, incurring additional debt, making acquisitions, selling properties or other assets, acquiring or merging with other companies and undertaking other extraordinary transactions. In any of these matters, any of our continuing investors may have interests that differ or conflict with the interests of our other stockholders, and they may exercise their voting power in a manner that is not consistent with the interests of other stockholders. For so long as our continuing investors continue to own shares of our stock entitling them to exercise a significant percentage of our voting power, the concentration of voting power in our continuing investors may discourage unsolicited acquisition proposals and may delay, defer or prevent any change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.

 

The ability of stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

 

Certain provisions in our charter and bylaws may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

 

· Our continuing investors hold shares of our special voting stock and shares of our common stock that generally entitle them to exercise 74.4% of the voting power in our company (    % immediately following this offering, or     % if the underwriters exercise their option to purchase additional shares in full), including in connection with a merger or other acquisition of our company or a change in the composition of our board of directors. As a result, our continuing investors as a group or individually could delay, defer or prevent any change of control of our company and, as a result, adversely affect our stockholders’ ability to realize a premium for their shares of common stock.

 

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· Our charter authorizes our board of directors to, without common stockholder approval, amend our charter to increase or decrease the aggregate number of our authorized shares of stock or the authorized number of shares of any class or series of our stock, authorize us to issue additional shares of our common stock or preferred stock and classify or reclassify unissued shares of our common stock or preferred stock and thereafter authorize us to issue such classified or reclassified shares of stock. We believe these charter provisions provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional authorized shares of our common stock, will be available for issuance without further action by our common stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does not currently intend to do so, it could authorize us to issue a class or series of stock that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or that our common stockholders otherwise believe to be in their best interests.

 

· In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last half of any taxable year (beginning with our second taxable year as a REIT). In order to help us qualify as a REIT, among other reasons, our charter generally prohibits any person or entity from owning or being deemed to own by virtue of the applicable constructive ownership provisions, more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock. We refer to these restrictions as the “ownership limit.” The ownership limit may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of our common stock.

 

· The provisions in our charter regarding the removal of directors and the advance notice provisions of our bylaws, among others, could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.

 

In addition, certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including the Maryland business combination and control share provisions. See “Certain Provisions of Maryland Law and Clipper Realty’s Charter and Bylaws.”

 

· The “business combination” provisions of the MGCL, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then-outstanding voting shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then-outstanding voting shares) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special appraisal rights and supermajority stockholder approval requirements on these combinations. As permitted by the MGCL, our board of directors has adopted a resolution exempting any business combinations between us and any other person or entity from the business combination provisions of the MGCL, if such business combination is approved by our board of directors, including a majority of our directors who are not affiliated or associated with the interested stockholder.

 

· The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (or the direct or indirect acquisition of ownership or control of control shares) have no voting rights unless approved by a supermajority vote our stockholders excluding the acquirer of control shares, our officers and our directors who are also our employees. As permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition provisions of the MGCL any and all acquisitions by any person of shares of our stock.

 

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· Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board. Such takeover defenses may have the effect of deterring a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-current market price.

 

Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.

 

Our board of directors may change our policies without stockholder approval.

 

Our policies, including any policies with respect to investments, leverage, financing, growth, debt and capitalization, will be determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our board of directors will also establish the amount of any dividends or other distributions that we may pay to our stockholders. Our board of directors or the committees or officers to which such decisions are delegated have the ability to amend or revise these and our other policies at any time without stockholder approval. For example, we have established a policy for our target leverage ratio in a range of 45% to 55%. Under the policy, our leverage ratio may be greater than or less than the target range from time to time and our board of directors may amend our target leverage ratio range at any time without stockholder approval. Accordingly, while not intending to do so, we may adopt policies that may have an adverse effect on our financial condition, results of operations our ability to pay dividends or make other distributions to our stockholders and the market value of our common stock.

 

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that you do not believe are in your best interests.

 

Maryland law generally provides that a director has no liability in that capacity if he or she satisfies his or her duties to us. As permitted by the MGCL, our charter eliminates the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Under current Maryland law and our charter, our directors and officers do not have any liability to us or our stockholders for money damages, except for liability resulting from:

 

· actual receipt of an improper benefit or profit in money, property or services; or

 

· a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

 

In addition, our charter authorizes us to agree to indemnify our present and former directors and officers for liability and expenses arising from actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in any proceeding to which he or she is made, or threatened to be made, a party or witness by reason of his or her service to us in those and other capacities. We are obligated to pay or reimburse the defense costs incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. Indemnification agreements that we have entered into with our directors and executive officers also require us to indemnify such directors and executive officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited.

 

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Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of OP units and of LLC units in our predecessor entities, which may impede business decisions that could benefit our stockholders.

 

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any of its partners or our predecessor entities and their members, on the other. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, and our operating partnership, as managing member of our predecessor entities, have fiduciary duties and obligations to our operating partnership and its limited partners and our predecessor entities and their members under Delaware and New York law, the partnership agreement of our operating partnership in connection with the management of our operating partnership, and the limited liability company agreements of our predecessor entities in connection with the management of those entities. Our fiduciary duties and obligations as the general partner of our operating partnership and managing member of our predecessor entities may come into conflict with the duties of our directors and officers to our company. We have adopted policies that are designed to eliminate or minimize certain potential conflicts of interest, and the members of our predecessor entities have agreed that, in the event of a conflict in the duties owed by us to our stockholders and the fiduciary duties owed by our operating partnership, in its capacity as managing member of our predecessor entities, to such members, we may give priority to the separate interests of our company or our stockholders, including with respect to tax consequences to limited partners, LLC members, assignees or our stockholders. Nevertheless, the duties and obligations of the general partner of our operating partnership and the duties and obligations of the managing member of our predecessor entities may come into conflict with the duties of our directors and officers to our company and our stockholders.

 

Our charter contains a provision that expressly permits certain of our directors and officers to compete with us.

 

Our directors and officers have outside business interests and may compete with us for investments in properties and for tenants. There is no assurance that any conflicts of interest created by such competition will be resolved in our favor. Our charter provides that we renounce any interest or expectancy in, or right to be offered or to participate in, any business opportunity identified in any investment policy or agreement with any of our directors or officers unless the policy or agreement contemplates that the director or officer must present, communicate or offer such business opportunity to us. We have adopted an Investment Policy that provides that our directors and officers, including David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, are not required to present certain identified investment opportunities to us, including assets located outside the New York metropolitan area, for-sale condominium or cooperative conversions, development projects, projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, and land acquisitions. As a result, except to the extent that our officers and directors must present certain identified business opportunities to us, our officers and directors have no duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we or our subsidiaries engage or propose to engage or to refrain from otherwise competing with us. These individuals also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. These provisions may limit our ability to pursue business or investment opportunities that we might otherwise have had the opportunity to pursue, which could have an adverse effect on our financial condition, our results of operations, our cash flow, the market value of our common stock and our ability to meet our debt obligations and to make distributions to our stockholders.

 

The consideration given by us in exchange for our interests in the predecessor entities in connection with the formation transactions may have exceeded their fair market value.

 

We did not obtain any third-party appraisals of the properties in which we have invested in connection with the formation transactions. As a result, the value that forms the basis for the consideration given by us for our interest in the predecessor entities may have exceeded the fair market value of those properties owned by such entities.

 

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We may have assumed unknown liabilities in connection with the formation transactions, which, if significant, could adversely affect our business.

 

As part of the formation transactions, we acquired indirect interests in the properties and assets of our predecessor entities, subject to existing liabilities, some of which may have been unknown at the time the private offering was consummated. As part of the formation transactions, each of the predecessor entities made limited representations, warranties and covenants to us regarding the predecessor entities and their assets. Because many liabilities, including tax liabilities, may not have been identified, we may have no recourse for such liabilities. Any unknown or unquantifiable liabilities to which the properties and assets previously owned by our predecessor entities are subject could adversely affect the value of those properties and as a result adversely affect us. See “—Risks Related to Real Estate —We may become subject to liability relating to environmental and health and safety matters, which could have an adverse effect on us, including our financial condition and results of operations” as to the possibility of undisclosed environmental conditions potentially affecting the value of the properties in our portfolio.

 

The terms of the formation transactions may not have been as favorable to us as if all of the terms were negotiated at arm’s length.

 

Certain of our directors and executive officers, including David Bistricer, our Co-Chairman and Chief Executive Officer and Sam Levinson, our Co-Chairman and the head of our Investment Committee, own interests, directly or indirectly, in our predecessor entities that own properties included in the Company’s initial portfolio of properties and as such had interests in the formation transactions. As a result, the terms of the formation transactions may not have been as favorable to us as if all of the terms were negotiated at arm’s length.

 

We may pursue less vigorous enforcement of terms of employment agreements with certain of our executive officers which could negatively impact our stockholders.

 

Upon completion of the private offering, certain of our executive officers, including David Bistricer, Lawrence Kreider, JJ Bistricer and Jacob Schwimmer, entered into employment agreements with us. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationships with members of our senior management or our board of directors and their affiliates, with possible negative impact on stockholders. Moreover, these agreements were not negotiated at arm’s length and in the course of structuring the formation transactions, certain of our executive officers had the ability to influence the types and level of benefits that they receive from us under these agreements.

 

David Bistricer, our Co-Chairman and Chief Executive Officer, and Sam Levinson, our Co-Chairman and the Head of the Investment Committee, have outside business interests that will take their time and attention away from us, which could materially and adversely affect us. In addition, notwithstanding the Investment Policy, members of our senior management may in certain circumstances engage in activities that compete with our activities or in which their business interests and ours may be in conflict.

 

Our Co-Chairman and Chief Executive Officer, David Bistricer, our Co-Chairman and the Head of the Investment Committee, Sam Levinson, and other members of our senior management team continue to own interests in properties and businesses that were not contributed to us in the formation transactions. For instance, each of David Bistricer, our Co-Chairman and Chief Executive Officer, and JJ Bistricer, our Chief Operating Officer, is an officer of Clipper Equity and each of Sam Levinson, our Co-Chairman and the Head of our Investment Committee, and Jacob Schwimmer, our Chief Property Management Officer, has ownership interests in Clipper Equity. Clipper Equity owns interests in and controls and manages entities that own interests in multi-family and commercial properties in the New York metropolitan area.

 

We have adopted an Investment Policy that provides that our directors and officers, including David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, are not required to present certain identified investment opportunities to us, including assets located outside the New York metropolitan area, for-sale condominium or cooperative conversions, development projects, projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, and land acquisitions. As a result, except to the extent that our officers and directors must present certain identified business opportunities to us, our officers and directors have no duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we or our subsidiaries engage or propose to engage or to refrain from otherwise competing with us, and therefore may compete with us for investments in properties and for tenants. These individuals also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

 

We and members of our senior management may also determine to enter into joint ventures or co-investment relationships with respect to one or more properties. As a result of the foregoing, there may at times be a conflict between the interests of members of our senior management and our business interests. Further, although David Bistricer, JJ Bistricer and Jacob Schwimmer will devote such portion of their business time and attention to our business as is appropriate and will be compensated on that basis, under their employment agreements, they will also devote substantial time to other business and investment activities.

 

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We may experience conflicts of interest with certain of our directors and officers and significant stockholders as a result of their tax positions.

 

We have entered into a tax protection agreement with our continuing investors pursuant to which we have agreed to indemnify the continuing investors against certain tax liabilities incurred during the 8-year period following the private offering (or with respect to item (iv) below, certain tax liabilities resulting from certain transfers occurring during the 8-year period following the private offering) if those tax liabilities result from (i) the sale, transfer, conveyance or other taxable disposition of any of the properties of our LLC subsidiaries, (ii) any of Renaissance, Berkshire or Gunki LLC failing to maintain a level of indebtedness allocable for U.S. federal income tax purposes to any of the continuing investors such that any of the continuing investors is allocated less than a specified minimum indebtedness in each such LLC subsidiary (in order to comply with this requirement, (1) Renaissance needs to maintain approximately $101.3 million of indebtedness, (2) Berkshire needs to maintain approximately $125.8 million of indebtedness and (3) Gunki needs to maintain approximately $34.4 million of indebtedness), (iii) in a case that such level of indebtedness cannot be maintained, failing to make available to such a continuing investor the opportunity to execute a guarantee of indebtedness of the LLC subsidiary meeting certain requirements that would enable the continuing investor to continue to defer certain tax liabilities, or (iv) the imposition of New York City or New York State real estate transfer tax liability upon a continuing investor as a result of the formation transactions, private offering, this offering and/or certain subsequent transactions (including subsequent issuances of additional LLC units or interests, issuances of OP units by the operating partnership, issuances of common stock by Clipper Realty, issuances of common stock in exchange for class B LLC units or dispositions of property by any LLC subsidiary), or as a result of any of those transfers being aggregated. We estimate that had all of their assets subject to the tax protection agreement been sold in a taxable transaction immediately after the private offering, the amount of our LLC subsidiaries’ indemnification obligations (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $364.9 million. In addition, we estimate that if New York City or New York State real estate transfer taxes had been imposed on our continuing investors, the maximum amount of our LLC subsidiaries’ indemnification obligations pursuant to the tax protection agreement in respect of New York City or New York State real estate transfer tax liability (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $74.9 million (although the amount may be significantly less). We do not presently intend to sell or take any other action that would result in a tax protection payment with respect to the properties covered by the tax protection agreement.

 

In addition, David Bistricer and Sam Levinson may be subject to tax on a disproportionately large amount of the built-in gain that would be realized upon the sale or refinancing of certain properties. David Bistricer and Sam Levinson may therefore influence us to not sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest, as they may wish to avoid realization of their share of the built-in gains in those properties. Alternatively, to avoid realizing such built-in gains they may have to agree to additional reimbursements or guarantees involving additional financial risk.

 

Our tax protection agreement could limit our ability to sell or otherwise dispose of certain properties including through condominium or cooperative conversions.

 

In connection with the formation transactions, we entered into a tax protection agreement pursuant to which we agreed to indemnify the continuing investors against certain tax liabilities incurred during the 8-year period following the private offering (or with respect to certain transfers occurring during the 8-year period following the private offering) if those tax liabilities result from the sale, transfer, conveyance or other taxable disposition of any of the properties of our LLC subsidiaries. Therefore, although it may be in our stockholders’ best interests that we sell one of these properties or convert all or a portion of the property into a condominium or cooperative and sell condominium or cooperative units, it may be economically prohibitive for us to do so because of these obligations.

 

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Deficiencies in our internal control over financial reporting could adversely affect our ability to present accurately our financial statements and could materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.

 

Effective internal control is necessary for us to accurately report our financial results. There can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. In connection with the audit of our Predecessor’s historical financial statements, our registered independent public accounting firm identified certain significant deficiencies in our internal control over financial reporting and we are taking steps to remediate them. As we grow our business, our internal control will become more complex, and we may require significantly more resources to ensure our internal control remains effective. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations that could require a restatement, failing to meet our reporting obligations and causing investors to lose confidence in our reported financial information. These events could materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.

 

Risks Related to Our Indebtedness and Financing

 

We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

As of June 30, 2016, we had approximately $814.9 million of total indebtedness, all of which was property-level debt.

 

Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities, or meet the REIT distribution requirements imposed by the Code. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

· require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on, indebtedness, thereby reducing the funds available for other purposes;

 

· make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;

 

· force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of the 100% tax on income from prohibited transactions, discussed below in “Material U.S. Federal Income Tax Consequences”) or in violation of certain covenants to which we may be subject;

 

· subject us to increased sensitivity to interest rate increases;

 

· make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;

 

· limit our ability to withstand competitive pressures;

 

· limit our ability to refinance our indebtedness at maturity or result in refinancing terms that are less favorable than the terms of our original indebtedness;

 

· reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or

 

· place us at a competitive disadvantage to competitors that have relatively less debt than we have.

 

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If any one of these events were to occur, our financial condition, results of operations, cash flow and the market value of our common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hurt our ability to meet the REIT distribution requirements imposed by the Code.

 

Our tax protection agreement requires our operating partnership to maintain certain debt levels that otherwise would not be required to operate our business.

 

Under our tax protection agreement, we undertake that our LLC subsidiaries will maintain a certain level of indebtedness and, in the case that level of indebtedness cannot be maintained, we are required to provide our continuing investors the opportunity to guarantee debt. If we fail to maintain such debt levels, or fail to make such opportunities available, we will be required to deliver to each applicable continuing investor a cash payment intended to approximate the continuing investor’s tax liability resulting from our failure and the tax liabilities incurred as a result of such tax protection payment. We agreed to these provisions in order to assist our continuing investors in deferring the recognition of taxable gain as a result of and after the formation transactions. These obligations require us to maintain more or different indebtedness than we would otherwise require for our business.

 

We may be unable to refinance current or future indebtedness on favorable terms, if at all.

 

We may not be able to refinance existing debt on terms as favorable as the terms of existing indebtedness, or at all, including as a result of increases in interest rates or a decline in the value of our portfolio or portions thereof. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds from other capital transactions, such as new equity capital, our operating cash flow will not be sufficient in all years to repay all maturing debt. As a result, certain of our other debt may cross default, we may be forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Property-Level Debt.” We also may be forced to limit distributions and may be unable to meet the REIT distribution requirements imposed by the Code. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations and could adversely affect our ability to make distributions to our stockholders.

 

We may not have sufficient cash flow to meet the required payments of principal and interest on our debt or to pay distributions on our common stock at expected levels.

 

In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our shares at expected levels. In this regard, we note that in order for us to qualify as a REIT, we are required to make annual distributions generally equal to at least 90% of our taxable income, computed without regard to the dividends paid deduction and excluding net capital gain. In addition, as a REIT, we will be subject to U.S. federal income tax to the extent that we distribute less than 100% of our taxable income (including capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified by the Code. These requirements and considerations may limit the amount of our cash flow available to meet required principal and interest payments.

 

If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender resulting in the loss of income and value to us, including adverse tax consequences related to such a transfer.

 

Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

 

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by property may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hurt our ability to meet the distribution requirements applicable to REITs under the Code.

 

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Our debt agreements include restrictive covenants and default provisions which could limit our flexibility, our ability to make distributions and require us to repay the indebtedness prior to its maturity.

 

The mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. As of June 30, 2016, we had $814.9 million of combined property mortgages and other secured debt. Additionally, our debt agreements contain customary covenants that, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make capital expenditures. These debt agreements, in some cases, also subject us to guarantor and liquidity covenants. Some of our debt agreements contain certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain mandatory prepayments upon disposition of underlying collateral. In addition, early repayment of certain mortgages may be subject to prepayment penalties.

 

Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and increase the cost of issuing new debt.

 

As of June 30, 2016, approximately $460.0 million of our outstanding consolidated debt was subject to instruments which bear interest at variable rates, and we may also borrow additional money at variable interest rates in the future. Unless we have made arrangements that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect cash flow and our ability to service our indebtedness and make distributions to our stockholders, which could adversely affect the market price of our common stock. Based on our aggregate variable rate debt outstanding as of June 30, 2016, an increase of 100 basis points in interest rates would result in a hypothetical increase of approximately $4.6 million in interest expense on an annual basis. The amount of this change includes the benefit of swaps and caps we currently have in place.

 

Hedging activity may expose us to risks, including the risks that a counterparty will not perform and that the hedge will not yield the economic benefits we anticipate, which could adversely affect us.

 

We may, in a manner consistent with our qualification as a REIT, seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligations under the hedging agreement. Generally, failure to hedge effectively against interest rate changes may adversely affect our results of operations.

 

When a hedging agreement is required under the terms of a mortgage loan, it is often a condition that the hedge counterparty maintains a specified credit rating. With the current volatility in the financial markets, there is an increased risk that hedge counterparties could have their credit rating downgraded to a level that would not be acceptable under the loan provisions. If we were unable to renegotiate the credit rating condition with the lender or find an alternative counterparty with an acceptable credit rating, we could be in default under the loan and the lender could seize that property through foreclosure, which could adversely affect us.

 

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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

 

The REIT provisions of the Code limit our ability to hedge our liabilities. Generally, income from a hedging transaction we enter into either to manage risk of interest rate changes with respect to borrowings incurred or to be incurred to acquire or carry real estate assets, or to manage the risk of currency fluctuations with respect to any item of income or gain (or any property which generates such income or gain) that constitutes “qualifying income” for purposes of the 75% or 95% gross income tests applicable to REITs, does not constitute “gross income” for purposes of the 75% or 95% gross income tests, provided that we properly identify the hedging transaction pursuant to the applicable sections of the Code and Treasury regulations. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both gross income tests. As a result of these rules, we may need to limit our use of otherwise advantageous hedging techniques or implement those hedges through a TRS. The use of a TRS could increase the cost of our hedging activities (because our TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose us to greater risks than we would otherwise want to bear. In addition, net losses in any of our TRSs will generally not provide any tax benefit except for being carried forward for use against future taxable income in the TRSs.

 

A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes, which could reduce the basis of a stockholder’s investment in shares of our common stock and may trigger taxable gain.

 

A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a portion of our distributions will be treated as a return of capital for U.S. federal income tax purposes if the aggregate amount of our distributions for a year exceeds our current and accumulated earnings and profits for that year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. See “Material U.S. Federal Income Tax Consequences.”

 

Risks Related to Our Status as a REIT

 

Although provisions of the Code generally relevant to an investment in shares of our common stock are described in “Material U.S. Federal Income Tax Consequences,” you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

 

Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock.

 

We elected to qualify to be treated as a REIT commencing with our first taxable year ended December 31, 2015. The Code generally requires that a REIT distribute at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital gains) to stockholders annually, and a REIT must pay tax at regular corporate rates to the extent that the REIT distributes less than 100% of its taxable income (including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions the REIT makes in a calendar year are less than the sum of 85% of the REIT’s ordinary income, 95% of the REIT’s capital gain net income and 100% of the REIT’s undistributed income from prior years. To avoid entity-level U.S. federal income and excise taxes, we anticipate distributing at least 100% of our taxable income.

 

We believe that we are organized, have operated and will continue to operate in a manner that will allow us to qualify as a REIT commencing with our first taxable year ended December 31, 2015. However, we cannot assure you that we are organized, have operated and will continue to operate as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there may only be limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. We have not requested and do not intend to request a ruling from the Internal Revenue Service (“IRS”) that we qualify as a REIT. Moreover, in order to qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding stock and the amount of our distributions. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT gross income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our gross income and assets on an ongoing basis. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for U.S. federal income tax purposes or the U.S. federal income tax consequences of such qualification. Accordingly, it is possible that we may not meet the requirements for qualification as a REIT.

 

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If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions, we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we would be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and adversely affect the value of our common stock.

 

If our special voting stock and the class B LLC units are treated as a single stock interest in the Company, we could fail to qualify as a REIT.

 

We believe that the special voting stock and class B LLC units will be treated as separate interests in the Company and its predecessor entities, respectively. However, no assurance can be given that the IRS will not argue, or that a court would not find or hold, that the special voting stock and the class B LLC units should be treated as a single stock interest in the Company for U.S. federal income tax purposes. If the special voting stock and class B LLC units were treated as a single stock interest in the Company, it is possible that more than 50% in value of the outstanding stock of the Company could be treated as held by five or fewer individuals. In such a case, we could be treated as “closely held” and we could therefore fail to qualify as a REIT. Such failure would have significant adverse consequences. See “—Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock” above.

 

We may owe certain taxes notwithstanding our qualification as a REIT.

 

Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on taxable income that we do not distribute to our stockholders, on net income from certain “prohibited transactions,” and on income from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. In addition, we may provide services that are not customarily provided by a landlord, hold properties for sale and engage in other activities through TRSs (as defined under “Material U.S. Federal Income Tax Consequences—Taxation of the Company as a REIT—Requirements for Qualification—Taxable REIT Subsidiaries”) and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates.

 

Dividends payable by REITs generally do not qualify for reduced tax rates.

 

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates generally is 20% (plus a 3.8% Medicare tax discussed below under “Material U.S. Federal Income Tax Consequences”). Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% (plus 3.8% Medicare tax) maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

 

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Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our investments.

 

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment performance.

 

As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total securities can be represented by securities of one or more TRSs (25% for taxable years ending on or before December 31, 2017), and no more than 25% of the value of our total assets may consist of “nonqualified” debt instruments issued by publicly offered REITs. After meeting these requirements at the close of a calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.

 

If we are found to have held, acquired or developed property primarily for sale to customers in the ordinary course of business, we may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S. federal income tax).

 

Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances. We intend to hold, and, to the extent within our control, to have any joint venture to which our operating partnership is a partner hold, properties for investment with a view to long-term appreciation, to engage in the business of acquiring, owning, operating and developing the properties, and to make sales of our properties and other properties acquired subsequent to the date hereof as are consistent with our investment objectives. Based upon our investment objectives, we believe that overall, our properties should not be considered property held primarily for sale to customers in the ordinary course of business. However, it may not always be practical for us to comply with one of the safe harbors, and, therefore, we may be subject to the 100% penalty tax on the gain from dispositions of property if we otherwise are deemed to have held the property primarily for sale to customers in the ordinary course of business.

 

The potential application of the prohibited transactions tax could cause us to forego potential dispositions of other property or to forego other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other opportunities through a TRS, which would generally result in corporate income taxes being incurred. For example, we anticipate that we would have to conduct any condominium or cooperative conversion of our Tribeca House properties and 141 Livingston Street property through a TRS.

 

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REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business plan.

 

In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of differences in timing between our cash flow, the receipt of income for GAAP purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of “taxable stock dividends” or (v) use cash reserves, in order to comply with the REIT distribution requirements. As a result, compliance with the REIT distribution requirements could adversely affect the market value of our common stock. The inability of our cash flow to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities. In addition, if we are compelled to liquidate our assets to repay obligations to our lenders or make distributions to our stockholders, we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as property held primarily for sale to customers in the ordinary course of business.

 

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

 

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our stockholders.

 

Our ability to provide certain services to our tenants may be limited by the REIT rules, or may have to be provided through a TRS.

 

As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at a disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject to corporate income taxes. Clipper TRS will provide certain services at our properties.

 

Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our qualification as a REIT, there are limits on our ability to own TRSs, and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

 

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of securities of one or more TRSs (25% for taxable years ending on or before December 31, 2017). In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are treated as not being conducted on an arm’s-length basis.

 

Clipper TRS and any other TRSs that we form will pay U.S. federal, state and local income tax on the TRSs’ taxable income, and the TRSs’ after-tax net income will be available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification. Although we will monitor the aggregate value of the securities of such TRSs and intend to conduct our affairs so that such securities will represent less than 20% of the value of our total assets, there can be no assurance that we will be able to comply with the TRS limitation in all market conditions.

 

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Possible legislative, regulatory or other actions could adversely affect our stockholders and us.

 

The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders’, tax liability or require changes in the manner in which we operate in order to minimize increases in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income and/or be subject to additional restrictions. These increased tax costs could, among other things, adversely affect our financial condition, the results of operations and the amount of cash available for the payment of dividends. Stockholders are urged to consult with their own tax advisors with respect to the impact that recent legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their investment in our shares.

 

Our property taxes could increase due to property tax rate changes or reassessment, which could impact our cash flow.

 

Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. In particular, our portfolio of properties may be reassessed as a result of this offering. In particular, our portfolio of properties may be reassessed as a result of this offering. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. If the property taxes we pay increase, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

A trading market for our common stock may never develop or be sustained.

 

Although we intend to apply to list our common stock on the NYSE, even if such application is approved, an active trading market for our common stock may not develop on that exchange or elsewhere, or, if developed, that market may not be sustained. Accordingly, if an active trading market for our common stock does not develop or is not sustained, the liquidity of our common stock, your ability to sell your shares of common stock when desired and the prices that you may obtain for your shares of common stock will be adversely affected.

 

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

 

Even if an active trading market develops for our common stock, the market price of our common stock may be highly volatile and subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. The initial public offering price of our common stock will be determined by negotiation between us and the representatives of the underwriters based on a number of factors and may not be indicative of prices that will prevail in the open market following completion of this offering. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future.

 

Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock. Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:

 

· actual or anticipated variations in our quarterly or annual operating results;

 

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· increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

· changes in market valuations of similar companies;

 

· adverse market reaction to any increased indebtedness we incur in the future;

 

· additions or departures of key personnel;

 

· actions by stockholders;

 

· speculation in the press or investment community;

 

· general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets;

 

· our operating performance and the performance of other similar companies;

 

· negative publicity regarding us specifically or our business lines generally;

 

· changes in accounting principles; and

 

· passage of legislation or other regulatory developments that adversely affect us or our industry.

 

Broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

The initial public offering price per share of common stock in this offering may not accurately reflect the value of your investment.

 

Immediately prior to this offering, there was no market for our common stock. The initial public offering price per share of common stock offered in this offering was determined by negotiations between us and the representatives of the underwriters. Factors considered in determining the price of our common stock may include:

 

· the history and prospects of companies whose principal business is commercial and multi-family real estate ownership;

 

· prior offerings of those companies;

 

· our capital structure;

 

· an assessment of our management and its experience;

 

· general conditions of the securities markets at the time of this offering; and

 

· other factors we deem relevant.

 

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There are restrictions on ownership and transfer of our common stock.

 

To assist us in qualifying as a REIT, among other purposes, our charter generally limits beneficial ownership by any person to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our stock. See “Description of Capital Stock— Restrictions on Ownership and Transfer.” As a result, an investor that purchases shares of our common stock in this offering may not be able to readily resell such common stock.

 

Investors in this offering will suffer immediate and substantial dilution.

 

The initial public offering price of our common stock will be substantially higher than the as adjusted net tangible book value per share issued and outstanding immediately after this offering. Our net tangible book value as of     , 2016 was approximately $      , or approximately $      per share based on the shares of common stock issued and outstanding as of such date. After giving effect to our sale of common stock in this offering at the initial public offering price of $      per share (the midpoint of the initial public offering price range set forth on the front cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of     , 2016 would have been $      , or $      per share. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $      in the net tangible book value per share, based upon the initial public offering price of $      per share. Investors that purchase common stock in this offering will have purchased      % of the shares issued and outstanding immediately after the offering, but will have paid      % of the total consideration for those shares.

 

Future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.

 

Our board of directors is authorized, without approval of our common stockholders, to cause us to issue additional shares of our stock or to raise capital through the issuance of preferred stock, options, warrants and other rights on terms and for consideration as our board of directors in its sole discretion may determine.

 

Pursuant to the registration rights agreement entered into in connection with the private offering, as amended, we are required, among other things, to use our commercially reasonable efforts to cause a shelf registration statement registering for resale the registrable shares (as defined in the registration rights agreement) that are not sold by the selling stockholders in this offering, to be declared effective by the SEC as soon as practicable (but in no event later than the earlier of (i) October 31, 2016 and (ii) 60 days after the closing of this offering; provided that if this offering occurs within the 60 days prior to October 31, 2016, such date shall be 60 days after the closing of the initial public offering of our common stock). See “Description of Capital Stock—Registration Rights.” Once we register the registrable shares, they can be freely sold in the public market, subject to any applicable lock-up agreements. See “Shares Eligible for Future Sale.”

 

In connection with this offering, we intend to file a registration statement on Form S-8 to register 1,350,000 shares of our common stock for issuance to our employees, consultants and non-employee directors pursuant to the Clipper Realty Inc. 2015 Omnibus Incentive Plan and the Clipper Realty Inc. 2015 Non-Employee Director Plan. We may increase the number of shares registered for this purpose from time to time. Once we register these shares, they generally will be able to be sold to the public market upon issuance.

 

Sales of substantial amounts of our common stock could dilute your ownership and could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the value of our common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect the market price of our common stock.

 

In addition, our operating partnership may issue additional OP units and our LLC subsidiaries may issue additional LLC units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership or LLC subsidiaries, as applicable, and would have a dilutive effect on the amount of distributions made to us by our operating partnership and, if applicable, to our operating partnership by our LLC subsidiaries and, therefore, the amount of distributions we can make to our stockholders. Any such issuances, or the perception of such issuances, could materially and adversely affect the market price of our common stock.

 

Future offerings of debt securities or preferred stock, which would rank senior to our common stock upon our bankruptcy liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

 

In the future, we may attempt to raise additional capital by making offerings of debt securities or additional offerings of equity securities, including preferred stock. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

 

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We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

 

We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, an extended transition period for complying with new or revised accounting standards and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1 billion, or (c) in which we are deemed to be a large accelerated filer, which means, among other things, the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

 

As a public company, we will incur additional costs and face increased demands on our management.

 

As a public company with shares listed on a U.S. exchange, we will need to comply with an extensive body of regulations that did not apply to us previously, including provisions of the Sarbanes-Oxley Act, regulations of the SEC and requirements of the NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, particularly after we are no longer an emerging growth company. In addition, these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance coverage. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including those discussed under “Risk Factors” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

 

· market and economic conditions affecting occupancy levels, rental rates, the overall market value of our properties, our access to capital and the cost of capital and our ability to refinance indebtedness;

 

· economic or regulatory developments in New York City;

 

· the single government tenant in our commercial buildings may suffer financial difficulty;

 

· our ability to control operating costs to the degree anticipated;

 

· the risk of damage to our properties, including from severe weather, natural disasters, climate change, and terrorist attacks;

 

· risks related to financing, cost overruns, and fluctuations in occupancy rates and rents resulting from development or redevelopment activities and the risk that we may not be able to pursue or complete development or redevelopment activities or that such development or redevelopment activities will be profitable;

 

· concessions or significant capital expenditures that may be required to attract and retain tenants;

 

· the relative illiquidity of real estate investments;

 

· competition affecting our ability to engage in investment and development opportunities or attract or retain tenants;

 

· unknown or contingent liabilities in properties acquired in formative and future transactions;

 

· changes in rent stabilization regulations or claims by tenants in rent-stabilized units that their rents exceed specified maximum amounts under current regulations;

 

· the possible effects of departure of key personnel in our management team on our investment opportunities and relationships with lenders and prospective business partners;

 

· conflicts of interest faced by members of management relating to the acquisition of assets and the development of properties, which may not be resolved in our favor;

 

· a transfer of a controlling interest in any of our properties may obligate us to pay transfer tax based on the fair market value of the real property transferred;

 

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· a trading market for our common stock may never develop or be sustained;

 

  · the market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders;

 

  · the initial public offering price per share of common stock in this offering may not accurately reflect the value of your investment;

 

  · investors in this offering will suffer immediate and substantial dilution;

 

  · future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution;

 

  · failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to holders of our stock;

 

  · our common stock may be less attractive to investors given that we have reduced disclosure and governance requirements as an “emerging growth company”; and

 

  · as a public company, we will incur additional costs and face increased demands on our management.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of the shares of our common stock offered by us will be approximately $          million, based on an assumed initial public offering price of $          per share, the midpoint of the price range set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $          million, after deducting underwriting discounts and commissions and expenses.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $          per share would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use all or a portion of the net proceeds of this offering, together with cash on hand, which was $104 million at June 30, 2016, to (i) repay up to $100 million outstanding under a mezzanine note, which bears interest at one-month LIBOR plus 7.38% , matures on November 9, 2016 with the option to extend the maturity date for up to three one-year terms and includes the option to prepay the balance in whole, but not in part, without penalty, (ii) fund approximately $31 million of certain capital improvements to reposition and modernize our properties, and (iii) fund acquisitions of properties consistent with our strategy of acquiring multi-family or commercial properties in the New York metropolitan area. We have not identified any particular properties to acquire using the net proceeds of this offering. Pending application of the net proceeds, we will invest the net proceeds in short-term, interest-bearing securities that are consistent with our election to be taxed as a REIT for U.S. federal income tax purposes. Such investments may include obligations of the Government National Mortgage Association, other government agency securities, certificates of deposit, and interest-bearing bank deposits.

 

We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. However, we have agreed to pay all expenses relating to the registration of the shares sold by the selling stockholders, other than any brokers’ or underwriters’ discounts and commissions.

 

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DISTRIBUTION POLICY

 

There is no guarantee that we will make quarterly cash distributions to holders of our common stock. We may make distributions only when, as and if authorized by our board of directors from funds legally available for distribution. Our cash distribution policy may be changed at any time and is subject to certain restrictions, including the following:

 

  · we may lack sufficient cash to pay distributions on shares of our common stock for a number of reasons, including as a result of increases in our operating or general and administrative expenses, principal and interest payments on our debt, working capital requirements or cash needs;

 

  · our ability to make cash distributions to holders of our common stock depends on the performance of our subsidiaries and their ability to distribute cash to us and on the performance of our properties and tenants; and

 

  · the ability of our subsidiaries to make distributions to us may be restricted by, among other things, covenants in the instruments governing current or future debt of these subsidiaries.

 

As described below, U.S. federal income tax law requires that we distribute annually at least 90% of our taxable income (without regard to the dividends paid deduction and excluding net capital gains). As a result, we expect to generally distribute a significant percentage of our available cash to holders of our common stock. Therefore, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities to fund our acquisitions and capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. To the extent we issue additional shares of common stock, our operating partnership issues OP units or our existing or new LLC subsidiaries issue LLC units in connection with any acquisitions or other transactions, the payment of distributions on those additional securities may increase the risk that we will be unable to maintain or increase our distributions to stockholders.

 

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On December 4, 2015, we paid a cash dividend of $0.043333 per share (totaling $494,976) and on March 11, June 3 and September 2, 2016, we paid a cash dividend of $0.065 per share (each totaling $742,469). Any future distributions we make will be at the discretion of our board of directors and will depend on a number of factors, including prohibitions or restrictions under financing agreements, our charter or applicable law and other factors described below.

 

We cannot assure you that our board of directors will not change our distribution policy in the future. Any distributions we pay in the future will depend upon our actual results of operations, liquidity, cash flows, financial condition, economic conditions, debt service requirements and other factors that could differ materially from our current expectations. Our actual results of operations, liquidity, cash flows and financial condition will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our ability to pay dividends and make other distributions to our stockholders, see “Risk Factors.”

 

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital gains) and that it pay U.S. federal income tax at regular corporate rates to the extent that it distributes annually less than 100% of its taxable income (including capital gains). In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, see “Material U.S. Federal Income Tax Consequences.” We anticipate that our cash available for distribution will be sufficient to enable us to meet the annual distribution requirements applicable to REITs and to avoid or minimize the imposition of U.S. federal income and excise taxes. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements or to avoid or minimize the imposition of tax, and we may need to borrow funds or dispose of assets to make such distributions.

 

It is possible that, at least initially, our distributions will exceed our then current and accumulated earnings and profits as determined for U.S. federal income tax purposes. Therefore, a portion of our distributions may represent a return of capital for U.S. federal income tax purposes. That portion of our distributions in excess of our current and accumulated earnings and profits will not be taxable to a taxable U.S. stockholder under current U.S. federal income tax law to the extent that portion of our distributions does not exceed the stockholder’s adjusted tax basis in the stockholder’s common stock, but instead will reduce the adjusted basis of the common stock. As a result, the gain recognized on a subsequent sale of that common stock or upon our liquidation will be increased (or a loss decreased) accordingly. To the extent those distributions exceed a taxable U.S. stockholder’s adjusted tax basis in his or her shares of common stock, they generally will be treated as a capital gain realized from the taxable disposition of those shares. The percentage of our stockholder distributions that exceeds our current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Material U.S. Federal Income Tax Consequences.”

 

 - 59 -

 

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2016, on an actual basis and on an as adjusted basis to give effect to the sale by us of          shares of our common stock in this offering at an initial public offering price of $          per share, which is the midpoint of the price range set forth on the front cover page of this prospectus, less underwriting discounts and commissions and other estimated offering expenses payable by us.

 

You should read the following table in conjunction with the more detailed information contained in the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus. As disclosed therein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies,” real estate assets held for investment are carried at historical cost.

 

Clipper Realty Inc.

Actual and As Adjusted

As of June 30, 2016

(unaudited, in thousands)

 

    June 30, 2016  
    Historical     As Adjusted  
             
Notes payable, net of unamortized loan costs   $ 806,930     $  
Stockholders’ equity     41,008          
Non-controlling interests     94,483          
Total capitalization   $ 942,421     $  

 

 - 60 -

 

 

DILUTION

 

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price in this offering per share of our common stock and the net tangible book value per share of our common stock upon consummation of this offering. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the number of shares of common stock outstanding, assuming all class B LLC units are exchanged for shares of common stock.

 

Our net tangible book value as of         , 2016 was approximately $         , or approximately $         per share based on the             shares of common stock and            class B LLC units issued and outstanding as of such date. After giving effect to our sale of common stock in this offering at the initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of           would have been $        , or $         per share (assuming no exercise of the underwriters’ option to purchase additional shares of common stock). This represents an immediate dilution of $              per share to investors purchasing common stock in this offering.

 

The following table illustrates this dilution per share assuming the underwriters do not exercise their option to purchase additional shares of common stock:

 

Assumed initial public offering price per share           $    
Net tangible book value per share as of            , 2016, before giving effect to this offering   $            
Increase in net tangible book offering per share attributable to this offering                
Net tangible book value per share, after this offering                
Dilution in net tangible book value per share to investors purchasing shares in this offering           $    

 

A $           increase (decrease) in the assumed initial public offering price of $           per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) our net tangible book value by $          , the net tangible book value per share after this offering by $         per share and the dilution to investors in this offering by $          per share, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes, as of              the differences between the number of shares of common stock purchased from us, the total price and the average price per share paid by existing stockholders and by the new investors in this offering, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $            per share (the midpoint of the price range set forth on the cover page of this prospectus).

 

    Shares of Common Stock Purchased     Total Consideration     Average Price Per Share of  
    Number     Percent     Amount     Percent     Common Stock  
Existing stockholders               %   $           %   $    
Investors in this offering                                        
Total             100.0 %             100.0 %        

 

If the underwriters’ option to purchase additional shares of common stock is fully exercised, the net tangible book value per share after this offering as of              would be approximately $            per share and the dilution to investors in this offering per share after this offering would be $                 per share.

 

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SELECTED HISTORICAL FINANCIAL DATA

 

Clipper Realty Inc. was incorporated under the laws of the state of Maryland on July 7, 2015. On August 3, 2015, we completed certain formation transactions and the sale of shares of our common stock in a private offering. We contributed the net proceeds of the private offering to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership. The Operating Partnership in turn contributed such net proceeds to the limited liability companies that comprise the Predecessor, as described below, in exchange for class A LLC units in such LLCs and became the managing member of each LLC. The owners of the LLCs exchanged their interests for class B LLC units and an equal number of shares of our non-economic, special, voting stock. The class B LLC units (together with the shares of our special voting stock) are convertible into shares of our common stock and are entitled to distributions pursuant to the limited liability company agreements of the LLCs.

 

The Predecessor was a combination of the four LLCs, including one formed in 2014 in connection with the acquisition of the Tribeca House properties on December 15, 2014. The Predecessor did not represent a legal entity. The LLCs that comprised the Predecessor and the Company at formation were under common control.

As more fully described elsewhere in this prospectus, on June 27, 2016, we acquired the Aspen property. As a result, as of June 30, 2016, our properties included the following five properties:

 

· Tribeca House properties in Manhattan, comprising two buildings, one with 21 stories and one with 12 stories, containing residential and retail space with an aggregate of approximately 480,000 square feet of residential rental GLA and 77,236 of rental retail and parking GLA;

 

  · Flatbush Gardens in Brooklyn, a 59-building multi-family housing complex with 2,496 rentable units;

 

  · 141 Livingston Street in Brooklyn, a 15-story office building with approximately 216,073 square feet of GLA;

 

  · 250 Livingston Street in Brooklyn, a 12-story office and residential building with approximately 294,378 square feet of GLA; and

 

  · the Aspen property located at 1955 1 st Avenue, New York, NY, a 7-story residential and retail rental building with 186,602 square feet of GLA.

 

Following completion of the private offering and the formation transactions, the operations of the Company have been carried on primarily through the Operating Partnership. The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLCs that comprise the Predecessor.

 

The Company has elected to be treated, commencing with its 2015 tax year, and intends to continue to qualify as, a REIT for U.S. federal income tax purposes. The following table shows selected consolidated financial data for the Predecessor and the Company for the periods indicated. You should read the selected historical financial data in conjunction with the more detailed information contained in the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Significant Accounting Policies,” real estate assets held for investment are carried at historical cost.

 

The Company’s and the Predecessor’s historical consolidated and combined balance sheet data as of December 31, 2015 and 2014 and consolidated and combined statements of operations data for the years ended December 31, 2015 and 2014 have been derived from historical financial statements audited by our independent auditors, whose report with respect thereto is included elsewhere in this prospectus. The Company’s and the Predecessor’s consolidated and combined balance sheet data as of June 30, 2016 and 2015 and consolidated and combined statements of operations data for the six months ended June 30, 2016 and 2015 have been derived from unaudited financial statements. The unaudited consolidated and combined financial statements have been prepared on a basis consistent with the annual audited consolidated and combined financial statements. In the opinion of management, the unaudited financial data reflect all adjustments, consisting of only normal and recurring adjustments considered necessary for a fair presentation of the operating results for those interim periods. The operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

 - 62 -

 

 

    (Dollars, share and Class B LLC units
in thousands)
 
    Six months ended June 30,     Year ended December 31,  
    2016     2015     2015     2014  
Consolidated Statement of Operations                                
Residential rental revenue   $ 31,738     $ 30,255     $ 61,358     $ 31,938  
Commercial rental revenue     8,959       8,553       17,256       12,382  
Tenant recoveries     1,883       1,788       3,477       2,415  
Garage and other income     1,351       1,208       2,513       1,037  
Total revenues     43,931       41,804       84,604       47,772  
Operating Expenses                                
Property operating expenses     12,684       11,450       23,283       19,673  
Real estate taxes and insurance     8,140       6,800       14,926       6,560  
General and administrative     3,922       1,859       5,296       2,358  
Acquisition costs     407             75       326  
Depreciation and amortization     6,638       6,163       12,521       4,472  
Total operating expenses     31,791       26,272       56,101       33,389  
Income from operations     12,140       15,532       28,503       14,383  
Interest expense, net     (18,863 )     (18,481 )     (36,703 )     (9,145 )
Net (loss) income     (6,723 )   $ (2,949 )     (8,200 )   $ 5,238  
                                 
Net income attributable to Predecessor and non-controlling interests     4,688               6,835          
Dividends attributable to preferred shares     (7 )                      
Net loss available to common  stockholders   $ (2,042 )           $ (1,365 )        
Basic and diluted loss per share   $ (0.18 )           $ (0.12 )        
Weighted average per share / Class B LLC unit information:                                
Common shares outstanding     11,423               11,423          
Class B LLC units outstanding     26,317               26,317          
      37,740               37,740          
Cash flow data                                
Operating activities   $ 4,991     $ 10,060     $ 9,440     $ 7,472  
Investing activities     (111,384 )     (4,885 )     (9,025 )     (226,822 )
Financing activities     85,120     $ 1,296     $ 115,760     $ 224,707  
Non-GAAP measures                                
FFO (1)   $ (85 )   $ 3,214     $ 4,321     $ 9,710  
AFFO (1)     3,854       4,870       9,247       8,266  
Adjusted EBITDA (2)   $ 20,027     $ 21,514     $ 41,531     $ 18,482  
Balance sheet data                                
Investment in real estate, net   $ 820,665             $ 726,107     $ 728,744  
Cash and cash equivalents     104,059               125,332       9,157  
Restricted cash     9,885               9,962       5,876  
Total assets     966,162               881,118       766,856  
Notes payable, net of unamortized debt costs     806,930               713,440       708,228  
Total liabilities     830,671               734,741       729,659  
Stockholders’ equity     41,008               44,303        
Total equity   $ 135,491             $ 146,377     $ 37,197  
Property related data (unaudited)                                
Residential property rentable square feet                                
Flatbush Gardens     1,734               1,734       1,734  
% occupied     96.5 %             96.2 %     94.4 %
Tribeca House properties     479               479       479  
% occupied     88.9 %             83.5 %     94.5 %
250 Livingston Street     36               36       36  
% occupied     89.2 %             94.4 %     90.0 %
Commercial and retail property rentable square feet                                
141 Livingston Street (2015 data remeasured)     208               216       159  
% occupied     100 %             100.0 %     100.0 %
250 Livingston Street (2015 data remeasured)     353               353       353  
% occupied     100 %             99.7 %     99.7 %
Tribeca House properties     77               77       77  
% occupied     100 %             95.9 %     95.9 %

 

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(1) FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculation of FFO.  For a further discussion about our use of FFO as a non-GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Funds from Operations and Adjusted Funds from Operations.”

 

The following table sets forth a reconciliation of FFO for the periods presented to net loss before allocation to non-controlling interests, as computed in accordance with GAAP (amounts in thousands):

 

    Six months ended June 30,     Years ended December 31,  
    2016     2015     2015     2014  
FFO                                
Net (loss) income before allocation to non-controlling interests   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
Real estate depreciation and amortization     6,638       6,163       12,521       4,472  
FFO   $ (85 )   $ 3,214     $ 4,321     $ 9,710  
                                 
AFFO                                
FFO   $ (85 )   $ 3,214     $ 4,321     $ 9,710  
                                 
Real estate tax intangible amortization     668       664       1,328       238  
Amortization of below-market leases     (919 )     (857 )     (1,714 )     (1,450 )
Straight-line rent adjustment     (19 )     12       109       513  
Amortization of debt origination costs     3,095       2,997       6,036       704  
Interest rate cap mark-to-market     9       446       522       49  
Amortization of LTIP awards     1,112             709        
Acquisition costs     407             75       326  
Recurring capital spending     (414 )     (1,606 )     (2,139 )     (1,824 )
AFFO   $ 3,854     $ 4,870     $ 9,247     $ 8,266  

 

(2) We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net (loss) income before allocation to non-controlling interests plus real estate depreciation and amortization, amortization of identifiable intangibles, interest expense, net, acquisition costs and stock based compensation. Other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to other REITs.  We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use Adjusted EBITDA to evaluate our performance because Adjusted EBITDA allows us to evaluate the operating performance of our company by measuring the core operations of property performance and administrative expenses available for debt service and capturing trends in rental housing and property operating expenses. However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. For a further discussion about our use of Adjusted EBITDA as a non-GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Adjusted earnings before interest, income taxes, depreciation, amortization and stock based compensation.”

 

 - 64 -

 

  

The following table reconciles Adjusted EBITDA to net (loss) income before allocation to non-controlling interests (amounts in thousands):

 

    Six months ended June 30,     Years ended December 31,  
    2016     2015     2015     2014  
Adjusted EBITDA                                
Net (loss) income before allocation to non-controlling interests   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
Depreciation and amortization     6,638       6,163       12,521       4,472  
Amortization of real estate tax intangible     668       664       1,328       238  
Amortization of below-market leases     (919 )     (857 )     (1,714 )     (1,450 )
Straight-line rent adjustment     (19 )     12       109       513  
Amortization of LTIP awards     1,112             709        
Interest expense, net     18,863       18,481       36,703       9,145  
Acquisition costs     407             75       326  
Adjusted EBITDA   $ 20,027     $ 21,514     $ 41,531     $ 18,482  

 

 - 65 -

 

 

PRO FORMA FINANCIAL INFORMATION

 

The following unaudited pro forma condensed consolidated and combined financial information of Clipper Realty Inc. as of and for the six months ended June 30, 2016 and for the year ended December 31, 2015 has been derived from the historical financial statements of the Company and our Predecessor included in this prospectus.

 

Our pro forma condensed consolidated/combined statements of operations reflect, for the six months ended June 30, 2016 and for the year ended December 31, 2015, adjustments to our historical financial data to give effect to this offering, the formation transactions and the private offering of August 3, 2015, the acquisition of the Aspen property and additional borrowings and repayments as if each had occurred at the beginning of the respective periods.

 

We have based our unaudited pro forma adjustments upon available information and assumptions that we consider reasonable. Our unaudited pro forma condensed combined financial information is not necessarily indicative of what our actual financial position or results of operations would have been as of and for the six months ended June 30, 2016 and for the year ended December 31, 2015, nor does it purport to represent our future financial position or results of operations.

 

You should read our unaudited pro forma condensed consolidated and combined financial information, together with the notes thereto, in conjunction with the more detailed information contained in our consolidated and combined audited historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus. As disclosed herein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Significant Accounting Policies,” real estate assets held for investment are carried at historical cost.

 

 - 66 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2016
(in thousands)

 

    Historical     Offering     Debt
Repayment
    Pro Forma  
Assets                                
Investment in real estate                                
Land and improvements   $ 434,097                 $  
Building and improvements     425,792                          
Tenant improvements     2,938                          
Furniture, fixtures and equipment     8,707                          
Total Investment in real estate     871,534                          
Accumulated depreciation     (50,869 )                        
Investment in real estate, net     820,665                          
                                 
Cash and cash equivalents     104,059       (1)     (2)        
                                 
                                 
Restricted cash     9,885                          
Accounts receivable     3,261                          
Deferred rent receivable     3,900                          
Deferred costs and intangible assets, net     15,549                          
Prepaid expense and other assets     8,843                          
                                 
Total assets   $ 966,162     $     $     $  
                                 
Liabilities and Stockholders’ Equity                                
Mortgage notes payable   $ 806,930             $ (2)        
Accounts payable and accrued liabilities     6,097                          
Security deposits     6,924                          
Below-market leases     7,718                          
Other Liabilities     3,002                          
                                 
Total liabilities     830,671                          
                                 
Stockholders’ equity                                
Preferred stock                              
Common stock and additional paid in capital     46,395                          
Accumulated deficit     (5,387 )             (2)        
Total stockholders’ equity     41,008                          
Non-controlling interests     94,483                          
Total equity     135,491       (1)                
                                 
Total liabilities and stockholders’ equity   $ 966,162     $     $     $  

 

(1) Issuance of              shares of our common stock at $           per share for $        of gross proceeds, net of initial purchaser’s discount and placement fee and offering-related costs of $        .

 

(2) Repayment of $          of indebtedness from the net proceeds of the offering, net of unamortized debt issuance costs of $        .

 - 67 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the six months ended June 30, 2016
(in thousands)

 

    Historical     Aspen
Acquisition (1)
    Refinancing
and Preferred
Stock
    Subtotal     Offering     Debt
Repayment
    Pro Forma  
    (Unaudited)                                      
Revenues                                                        
Residential rental income   $ 31,738     $ 2,488         $ 34,234             $  
              8 (2)                                        
Commercial rental income     8,959       599               9,561                          
              2 (2)                                        
Tenant recoveries     1,883       19               1,902                          
Garage and other income     1,351       44               1,395                          
Total revenues     43,931       3,160             47,092                          
                                                         
Operating Expenses                                                        
Property operating expenses     12,684       774             13,461                          
Real estate taxes and insurance     8,140       106             8,489                          
              243 (2)                                        
General and administrative     3,922                     3,919                          
Acquisition costs     407       (407 )                                    
Depreciation and amortization     6,638       1,449             8,087                          
Total operating expenses     31,791       2,165             33,956                          
                                                         
Income from operations     12,140       995             13,135                          
                                                         
Interest expense     (18,863 )     (1,420 )(3)     526 (4)     (19,757 )               (7)         
                                                         
Net (loss) income before allocation to non-controlling interests     (6,723 )     (425 )     526       (6,622 )                        
Net loss attributable to non-controlling interests     4,688       297       (367 )(5)     4,618       (8)                
Dividends attributable to preferred shares     (7 )             (1 )(6)     (8 )                        
                                                         
Net (loss) income attributable to common stockholders   $ (2,042 )   $ (128 )   $ 158     $ (2,012 )   $     $     $  
Basic and fully diluted (loss) per     (0.18 )                     (0.18 )                        
Weighted average per share / OP unit information:                                                        
Common shares outstanding     11,423                       11,423       (8)                
OP units outstanding     26,317                       26,317                          
    37,740                       37,740                          

 

 - 68 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the six months ended June 30, 2016 

(in thousands)

 

Notes:

(1) Represents pro forma results of the Aspen acquisition as if made at the beginning of 2016.

 

(2) Represents pro forma amortization of preliminary allocation of purchase price to identifiable assets and liabilities as follows:

 

    Balance     Depreciation and
Amortization
    Included in:
Building   $ 42,226     $ 483     Depreciation and amortization
Site improvements     91       25     Depreciation and amortization
Tenant improvements     26       2     Depreciation and amortization
Furniture, fixtures and equipment     304       38     Depreciation and amortization
Above market leases – retail     448       22     Commercial rental income
Below market leases – retail     (493 )     (24 )   Commercial rental income
Below market leases – residential     (297 )     (8 )   Residential rental income
Leases in place – residential     826       826     Depreciation and amortization
Leases in place – retail     276       12     Depreciation and amortization
Lease origination costs     800       63     Depreciation and amortization
Real estate tax abatements     9,223       243     Real estate taxes and insurance

 

(3) Interest and debt cost amortization on mortgage debt incurred in the acquisition of Aspen:

 

    Rate     Balance     Expense  
Mortgage debt     3.68 %   $ 70,000     $ 1,288  
Estimated cost of debt fees, appraisal, recording, professional, taxes             (3,221 )     134  
            $ 66,779   $ 1,422  
              Less 4 days recorded       (2 )
                      1,420  

 

(4) Interest and debt cost amortization adjustments due to refinancing the $55 million mortgage loan secured by the 141 Livingston Street property with a $79.5 million mortgage loan in May 2016

 

    Rate     Balance     Expense  
New mortgage debt     3.88 %   $ 79,500     $ 1,104  
Amortization of debt costs             (1,350 )     41  
Retired mortgage debt     Libor + 3.25 %     (55,000 )     (720 )
Amortization of debt costs             951       (951 )
            $ 24,101     $ (526 )

 

(5) Represents the reallocation of net (loss) income as a result of the issuance of common stock.

 

(6) Represents dividends on $132,000 of preferred shares in January 2016 as if it occurred at the beginning of 2015.

 

(7) Interest and debt cost amortization on debt repaid with proceeds of the private offering as follows:

 

    Rate     Balance     Expense  
Mezzanine loan           $       $    
Amortization of debt costs                        
Interest rate caps                        
                         
          $       $    

 

(8) Represents the effect of          shares of our common stock issued in the offering, as if it occurred at the beginning of the year.

 

 - 69 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2015
(in thousands)

 

    Historical     Aspen
Acquisition
(1)
    Private
Offering
    Refinancing
and
Preferred
Stock
    Subtotal     Offering     Debt
Repayment
    Pro Forma  
Revenues                                                                
Residential rental income   $ 61,358     $ 5,107                     $ 66,481             $  
              16 (2)                                                
Commercial rental income     17,256       1,228                       18,489                          
              5 (2)                                                
Tenant recoveries     3,477       37                       3,514                          
Garage and other income     2,513       88                       2,601              
Total revenues     84,604       6,481                   91,085              
                                                                 
Operating Expenses                                     -                          
Property operating expenses     23,283       1,572                       24,855                          
Real estate taxes and insurance     14,926       234                       15,645                          
              485 (2)                                                
General and administrative     5,296             1,324 (4)             6,870                          
                      250 (5)                                        
Acquisition costs     75       (75 )                     -                          
Depreciation and amortization     12,521       2,073 (2)                     14,594              
Total operating expenses     56,101       4,289       1,574             61,964              
                                                                 
Income from operations     28,503       2,192       (1,574 )           29,121                          
                                                                 
Interest expense     (36,703 )     (2,844 )(3)           493 (6)     (39,054 )       (9)    
Net (loss) income before allocation to non-controlling interests     (8,200 )     (652 )     (1,574 )     493       (9,933 )                        
                                                                 
Net loss attributable to predecessor     3,690               (3,690 )(7)                                      
                                                                 
Net income attributable to non-controlling interests     3,145       454       3,326 (7)             6,926     (10)                
Dividends attributable to preferred shares                             (17 )(8)     (17 )                        
Net (loss) income available to common stockholders   $ (1,365 )   $ (198 )   $ (1,938 )   $ 477     $ (3,024 )   $     $     $  
                                                                 
Basic and fully diluted (loss) per share   $ (0.12 )                           $ (0.27 )                   $  
                                                                 
Weighted average per share / OP Unit information:                                                                
Common shares outstanding     11,423                               11,423     (10)                
OP units outstanding     26,317                               26,317                          
    37,740                               37,740                  

 

 - 70 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2015
(in thousands)

 

Notes:

(1) Represents pro forma results of the Aspen acquisition as if made at the beginning of 2015

(2) Represents pro forma amortization of preliminary allocation of purchase price to identifiable assets and liabilities as follows:

  

    Amortization
Period in
Years
    Balance     Depreciation and
Amortization
    Included in:
Building     43.7     $ 42,226     $ 966     Depreciation and amortization
Site improvements     1.8       91       51     Depreciation and amortization
Tenant improvements     6.3       26       4     Depreciation and amortization
Furniture, fixtures and equipment     4.0       304       76     Depreciation and amortization
Above market leases – retail     10.0       448       45     Commercial rental income
Below market leases – retail     10.0       (493 )     (50 )   Commercial rental income
Below market leases – residential     18.5       (297 )     (16 )   Residential rental income
Leases in place – residential     0.2       826       826     Depreciation and amortization
Leases in place – retail     12.0       276       23     Depreciation and amortization
Lease origination costs     6.3       800       127     Depreciation and amortization
Real estate tax abatements     19.0       9,223       485     Real estate taxes and insurance

 

(3) Interest and debt cost amortization on mortgage debt incurred in the acquisition of Aspen:

 

    Rate     Balance     Expense  
Mortgage debt     3.68 %   $ 70,000     $ 2,576  
Estimated cost of debt for fees, appraisal, recording, professional, taxes             (3,221 )     268  
            $ 66,779     $ 2,844  

 

 - 71 -

 

 

Clipper Realty Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2015
(in thousands)

 

(4) Represents full-year effect on compensation expense from the issuance of $5,557 of LTIP units in the private offering on August 3, 2015 and restricted stock units to management, certain other employees and Sam Levinson, a non-employee director, that vest over three years, and the issuance of LTIP units to the other non-employee directors that vest over one year.

(5) Net increases in expenses after giving effect to the formation transaction. We expect to incur incremental general and administrative expenses following the private offering and us becoming a public company with shares listed on a U.S. exchange, including expenses associated with annual and quarterly reporting, tax return preparation and distribution expenses, compliance expenses, director and officer compensation expenses, independent auditor fees, legal fees, registrar and transfer agent fees, director and officer liability insurance expenses, annual and quarterly SEC reporting, Sarbanes-Oxley Act compliance expenses, expenses associated with listing on the NYSE and investor relation expenses.

(6) Interest and debt cost amortization adjustments due to refinancing the $55 million mortgage loan secured by the 141 Livingston Street property with a $79.5 million mortgage loan in May 2016.

 

    Rate     Balance     Expense  
New mortgage debt     3.88 %   $ 79,500     $ 3,080  
              (1,350 )     113  
Retired mortgage debt     Libor + 3.25 %     (55,000 )     (1,927 )
              2,735       (1,759 )
            $ 25,885     $ (493 )

 

(7) Represents the effects of the private offering and formation transactions, including the issuance of our common stock and OP units as if they occurred at the beginning of 2015.

(8) Represents dividends on $132,000 of preferred shares issued in January 2016 as if issued at the beginning of 2015.

(9) Interest and debt cost amortization on debt repaid with proceeds of the private offering as follows:

 

    Rate     Balance     Expense  
Mezzanine loan           $       $    
Amortization of debt costs                        
Interest rate cap mark-to-market                        
            $       $    

 

(10) Represents the effect of               shares of our common stock issued in the offering, as if issued at the beginning of the year.

 

 - 72 -

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the more detailed information set forth under the caption “Selected Historical Financial Data,” and in our financial statements and the related notes thereto appearing elsewhere in this prospectus. The financial statements for periods and as of dates prior to the formation transactions represent consolidated historical financials of the Predecessor.

 

Overview of Our Company

 

We are a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multi-family residential and commercial properties in the New York metropolitan area, with an initial portfolio in Manhattan and Brooklyn. The Company was formed to continue and expand the commercial real estate business of the Predecessor. Our primary focus is to continue to own, manage and operate our initial portfolio and to acquire and reposition additional multi-family residential and commercial properties in the New York metropolitan area. The Company has been organized and operates in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax law and elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.

 

Clipper Realty was incorporated on July 7, 2015. On August 3, 2015, we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately $130.2 million. In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a REIT for U.S. federal income tax purposes.

 

The Company owns:

 

· two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan;

 

  · one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings;

 

  · two primarily commercial properties in Downtown Brooklyn (one of which includes 36 residential apartment units); and

 

  · one residential/retail rental property at 1955 1 st Avenue in Manhattan.

 

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.

 

The Tribeca House properties , purchased in December 2014, consist of two nearly adjacent properties in the Tribeca neighborhood of Manhattan. The Company manages the two related properties as a single unit and the residents of both properties share all services and amenities. They comprise approximately 480,000 square feet of leasable area with 505 residential apartment units and approximately 77,200 square feet of retail space (comprising approximately 53,000 square feet of street-level and mezzanine-level retail space and an externally managed garage).

 

· The residential apartment units, featuring ceilings as high as 11 feet and extensive amenities, are approximately 93% occupied at an average rental rate of approximately $66 per square foot, up from $61 per square foot at acquisition. The retail space, which includes a premium fitness club, is fully occupied at an average rental rate of approximately $48 per square foot, up from approximately $43 per square foot at acquisition.

 

  · The Company’s primary goals for the residential portion of the Tribeca House properties are to improve service levels and quality of finishes in the buildings commensurate with those expected by residents in the Tribeca neighborhood. We believe that accomplishing this, as well as managing the re-leasing process more efficiently than the prior owner, will position us to achieve comparable rents in excess of $80 per square foot in the Tribeca neighborhood as of August 24, 2016, according to StreetEasy listings.

 

 - 73 -

 

 

  · We believe that our average rental rate of approximately $48 per square foot under in-place leases for the retail portion of the Tribeca House properties is significantly below market for comparable retail properties, based on current leasing activity in the surrounding Tribeca submarket. For example, on July 1, 2015, we signed a lease for a 3,186 square foot street-level retail unit at our Tribeca House properties providing for a rental rate of $140 per square foot, which is a 237% increase over the average rental rate under our existing retail leases. Similarly, according to a report by REBNY, the average asking retail rental rate in downtown Manhattan, which includes the Tribeca neighborhood, was $143 per square foot as of April 2016. Accordingly, we believe we will be able to significantly increase retail rental revenue from our Tribeca House properties as in-place leases (which have a current average lease term of 9.5 years) expire over time and are re-leased at higher market rates.

 

  · In addition, we have the opportunity to monetize apartment units through conversion to for-sale condominium or cooperative units, which we believe would have a potential market value in excess of $2,100 per square foot based on StreetEasy listings for comparable buildings in the Tribeca neighborhood as of September 26, 2016. This value compares favorably to the December 2014 purchase price of approximately $998 per rentable square foot. Any sales of condominium or cooperative units would be conducted by a TRS, which would be subject to U.S. federal, state and local income tax on any gain from, and transfer tax from, the sale of the units.

 

The Flatbush Gardens property complex , purchased in September 2005, extends over 21.4 acres and consists of 59 primarily six-story buildings containing a total of approximately 1.7 million rentable square feet and 2,496 residential apartment units, and space for approximately 240 vehicles in parking structures.

 

  · The property is approximately 97% occupied at an average rental rate of approximately $21 per square foot. The property is subject to rent stabilization, a form of New York City rent regulation that limits the amount of legally allowable rent increases. Current in-place rents are, on average, 18% lower than the legal maximum rent that may be charged pursuant to rent regulation. We believe this provides an opportunity to increase rents with increasing market rates before being limited by rent regulation.

 

  · Since acquisition in 2005, our management team has undertaken a renovation and repositioning strategy that has included upgrades to both the exterior and interior of the buildings. These have included replacements or upgrades to building systems and components, including elevators, basements, boilers, roofs, parapets, facades, sidewalks and landscaping, as well as a refurbishing of apartment interiors on turnover of residents. As a result of our effort in managing the complex, including these upgrades, we have reduced outstanding New York City violations from over 8,000 at the time of the acquisition to approximately 359 currently, and substantially improved resident safety. In addition, our management team proactively attempts to remedy potential violations that are reported by residents. We have been able to consistently increase rents as a result of these efforts, as well as external market factors. Average rent per square foot increased from $18.88 (94.4% occupancy) at December 31, 2013 to $19.69 (95.6% occupancy) at December 31, 2014 to $20.63 (97.0% occupancy) at December 31, 2015 and $21.14 at August 1, 2016 (96.8% occupancy). Since acquisition in 2005, the average rent per square foot has risen from approximately $13.25 to approximately $21.14, a 60% increase.

 

  · We estimate that approximately $18 million will be required to complete a comprehensive renovation and modernization program through the end of 2017, which may include enhanced landscaping on a renovated terrace area; restored, renovated, upgraded or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; façade restorations; installation of revenue generating laundry and storage areas in restored basement areas; and modernization of building-wide systems including security cameras and lighting. These improvements are designed to increase the overall value and attractiveness of the Flatbush Gardens complex and contribute to tenant repositioning efforts, which seek to increase occupancy, raise rental rates, increase aggregate rental revenue and improve tenant credit quality. We believe we will be able to continue to increase rents as leases expire and units are re-leased.

 

 - 74 -

 

 

  · Flatbush Gardens is currently not built to its maximum floor-area ratio and thus, subject to various regulations and approvals, may have expansion potential.  In this regard, we are reviewing the regulatory, architectural and financial issues regarding building approximately 500,000 additional square feet by adding four floors above certain of our 59 buildings at Flatbush Gardens.  However, there can be no assurance that we will be able to pursue this FAR expansion project or that if we are able to expand Flatbush Gardens, that the expanded buildings will provide a return to recover our investment.

 

The 141 Livingston Street property in the Downtown Brooklyn neighborhood, purchased in 2002 along with the below-mentioned 250 Livingston Street property, is a 15-story, 206,084 square foot GLA office building.

 

  · In December 2015, the property’s main commercial tenant, the City of New York, executed a new 10-year lease at $40.00 per square foot, with effect as of June 2014. Under the lease, the tenant has an option to terminate the lease after five years; however, if it decides to continue to occupy the building at that time, the annual rent will increase by 25%, or $2.1 million, to $50.00 per square foot beginning the sixth year of the lease.
     
  · The lease requires us to refurbish the building’s air-conditioning system and perform other upgrades, which we estimate will cost a total of approximately $5.2 million. Additionally, we intend to spend a total of approximately $2.6 million through 2017 to make other improvements, including elevator replacement, boiler and roof replacement and building systems upgrades.

 

The 250 Livingston Street property , purchased in 2002 along with the 141 Livingston Street property, is a 12-story commercial and residential building. It has 266,569 square feet GLA of office space and 36 residential apartment units totaling 26,815 square feet.

 

  · The leasable office space recently has been remeasured according to REBNY standards to approximately 353,000 square feet, an increase of approximately 33%.

 

  · The property’s sole commercial tenant, the City of New York, has leases expiring at the end of 2016 (with respect to approximately 30% of total office space) and 2020 (with respect to the remaining approximately 70% of office space), with current lease rates that are approximately 50% of the rate recently negotiated at the 141 Livingston Street property with the same tenant. We have agreed upon a term sheet with the City of New York for renewal of the lease expiring at the end of 2016 at $40.00 per square foot for increased square feet measured according to REBNY standards that would increase annual rent by approximately $2.6 million.  The lease on this portion of the building would terminate with the lease expiring in 2020.  However, there can be no assurance that we will reach agreement with the City of New York on the extension or renewal of the leases for all or a portion of their office space.

 

  · To more fully optimize available space, from 2003 through 2013, we converted the top four floors of the building into 36 apartment units, which are 89% occupied at an average rental rate of approximately $54 per square foot.

 

The Aspen property , purchased on June 27, 2016, is located at 1955 1 st Avenue, New York, NY in Manhattan. The property is a seven-story building which comprises 186,602 square feet, 232 residential rental units, three retail units and a parking garage.

 

· The residential units are subject to regulations established by the HDC under which there are no rental restrictions on approximately 55% of the units and low and middle income restrictions on approximately 45% of the units. The residential apartment units are approximately 98% occupied at an average rental rate of approximately $33 per square foot. The retail space is fully occupied at an average rental rate of approximately $42.60 per square foot.
     
· While the building is relatively new, the Company believes there is an opportunity to increase rents by improving certain of the finishes of the property. We believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property.

 

As of August 31, 2016, we had approximately 177 employees who provide property management, maintenance, landscaping, construction management and accounting services.

 

How We Derive Our Revenue

 

Our revenue consists primarily of rents received from our residential, commercial and, to a lesser extent, retail properties.

 

 - 75 -

 

 

Trends

 

During 2015 and the first six months of 2016, the Company’s properties generally experienced increasing demand. At the Company’s commercial property at 141 Livingston Street, in the Downtown Brooklyn neighborhood, the Company entered into a new lease in December 2015, effective as of June 2014, that provides for a 94% increase in rent per square foot and a 29% increase in rentable square feet through a remeasurement. At the Company’s nearby commercial property, also rented to the City of New York, the Company entered into a term sheet for the renewal of a lease expiring in December 2016 and another lease expires in August 2020. At the Company’s Flatbush Gardens residential apartment complex, the Company increased average rent per square foot from $18.88 at December 31, 2013 to $19.69 at December 31, 2014, $20.63 at December 31, 2015 and $21.14 at August 1, 2016. The Company purchased the Tribeca House properties in December 2014, and although operating the property for a short period of time, has increased average rent from $63.00 per square foot to $66.41 per square foot. No retail properties in these buildings have been subject to renewal.

 

Throughout 2014, 2015 and the first half of 2016, we have continued to benefit from lower interest rates. Our average interest rate as of June 30, 2016 is approximately 4.3% per annum. Short term interest rates continue to be at historically low levels and, as a result, we expect a continuation of favorable interest rates in the near term with rates rising as the economy improves.

 

Factors that May Influence Future Results of Operations

 

We derive approximately 75% of our revenues from rents received from residents in our apartment rental properties and the remainder from commercial and retail rental customers. We believe we have expertise in operating, renovating and repositioning our properties. As we grow we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents. This is likely to result in an increase in our operating and general and administrative expenses.

 

A majority of the leases at our apartment communities are for approximately one-year terms, which generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases. This may offset the potential adverse effect of inflation or deflation on rental revenue, although residents may leave without penalty at the end of their lease terms for any reason. Our ability to seek increased rents at our Flatbush Gardens property is limited, however, as a result of the rent stabilization laws and regulation of New York City. These generally limit the increase in rents we can charge at our Flatbush Gardens property upon lease renewal for approximately 47% of our tenants, effective October 1, 2016, to 0% for a one-year lease and 2% for a two-year lease. They also limit the maximum rent we can charge at our Flatbush Gardens property on new leases although, on average, the maximum rent is approximately 30% above our actual average rental rates for such leases. At our Aspen property, the residential units are subject to regulation established by the HDC under which there are no rental restrictions on approximately 55% of the units and low and middle income restrictions on approximately 45% of the units. There are no such rent stabilization restrictions at the Tribeca House properties and the 250 Livingston Street property.

 

We also incur costs on turnover of residents when one resident moves out and we prepare the apartment for a new resident. The costs include the costs of repainting and repairing apartment units, replacing obsolete or damaged appliances and re-leasing the units. While we budget for turnover and the costs associated therewith, our turnover cost may be affected by certain factors we cannot control. Excessive turnover and failure to properly manage turnover cost may adversely affect our operations and could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

 

We seek earnings growth primarily through increasing rents and occupancy at existing properties, and acquiring additional apartment communities in markets complementing our existing portfolio locations. Our apartment and commercial properties are concentrated in four neighborhoods within the boroughs of Manhattan and Brooklyn in New York City which makes us susceptible to adverse developments in these markets. As a result, we are particularly affected by the local economic conditions in these markets, including, but not limited to, changes in supply of or demand for apartment units in our markets, competition for real property investments in our markets, changes in government rules, regulations and fiscal policies, including those governing real estate usage and tax, and any environmental risks related to the presence of hazardous or toxic substances or materials at or in the vicinity of our properties, which could negatively affect our overall performance.

 

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We may be unable to accurately predict future changes in national, regional or local economic, demographic or real estate market conditions. For example, continued volatility and uncertainty in the global, national, regional and local economies could make it more difficult for us to lease apartment, commercial and retail space and may require us to lease our apartment, commercial and retail space at lower rental rates than projected and may lead to an increase in resident defaults. In addition, these conditions may also lead to a decline in the value of our properties and make it more difficult for us to dispose of these properties at competitive prices. These conditions, or others we cannot predict, could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

 

In connection with the purchase of the Tribeca House and Aspen properties and the private offering, we have incurred substantial, one-time general and administrative expenses. Upon us becoming a public company with shares listed on a U.S. exchange, we will incur increased general and administrative expenses, including legal, accounting and other expenses related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act, and the requirements of the national securities exchange on which our stock is listed.

 

Significant Accounting Policies

 

The accompanying consolidated and combined financial statements include the accounts and operations of the Company and its Predecessor. The entities that comprised the Predecessor have been combined on the basis that, for the periods presented, such entities were under common control.

 

Basis of Consolidation and Combination

 

The consolidated and combined financial statements of the Company and its Predecessor included elsewhere herein are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The effect of all significant intercompany balances and transactions has been eliminated. The consolidated and combined financial statements include the accounts of all entities in which the Company and its Predecessor has a controlling interest. All significant intercompany transactions and balances are eliminated in consolidation/combination.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed and the useful lives of long-lived assets. Actual results could materially differ from these estimates.

 

Investment in Real Estate

 

Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.

 

Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Predecessor allocates the purchase price to the assets acquired and liabilities assumed based on their fair values. In estimating fair value of tangible and intangible assets acquired, the Predecessor assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

 - 77 -

 

 

The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Predecessor’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commission, legal and other related expenses.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset.

 

For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held for sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held for sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for sale properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held for sale.

 

If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).

 

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Building and improvements 30 – 40 years
Tenant improvements Shorter of useful life or lease term
Furniture, fixtures and equipment 3 – 15 years

 

Capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.

 

Tenant and Other Receivables and Allowance for Doubtful Accounts

 

Tenant and other receivables are comprised of amounts due for monthly rents and other charges. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods.

 

 - 78 -

 

 

Deferred Costs

 

Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the combined financial statements. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.

 

Revenue Recognition

 

Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered into by residents for an apartment unit are generally for a one-year term, renewable upon consent of both parties on an annual or monthly basis. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

 

Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs.

 

Internal Controls and Procedures

 

We have had limited accounting personnel and systems to adequately execute accounting processes and limited other supervisory resources with which to address internal controls over financial reporting. As such, our internal controls may not be sufficient to ensure that (1) all transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP and (2) the design and execution of our controls has consistently resulted in effective review of our financial statements and supervision by individuals with financial reporting oversight roles.

 

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act, and are, therefore, not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following the first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we may need to implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff.

 

Further, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting for as long as we are an emerging growth company under the JOBS Act. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

 

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Historical Results of Operations

 

Our focus throughout the years ended December 31, 2015 and 2014 and the six months ended June 30, 2016 was to manage our properties to optimize revenue and control costs at each property while continuing to renovate and reposition certain properties. The discussions below will identify the specific properties contributing to the changes in the results of operations. The discussion will focus on the properties the Company held for the full period in each comparison. Results of the Tribeca House properties for the years ended December 31, 2015 and in 2014, for the 17-day period of ownership, and the Aspen property for the 4-day period of ownership during the six months ended June 30, 2016, are separately identified in the tables that follow.

 

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Income Statement for the Years Ended December 31, 2015 and 2014 (in thousands)

 

    Year ended December 31, 2015     Year ended December 31, 2014              
    2015     Less: Tribeca House
FY 2015
    2015
Excluding
Tribeca House
    2014     Less: Tribeca House
15 days
    2014
Excluding
Tribeca House
    Other
Changes
    %  
Revenues                                                                
Residential rental revenue   $ 61,358     $ 27,469     $ 33,889     $ 31,938     $ 1,381     $ 30,557     $ 3,332       10.9 %
Commercial rental revenue     17,256       3,170       14,086       12,382       159       12,223       1,863       15.2 %
Tenant recoveries     3,477       310       3,167       2,415             2,415       752       31.1 %
Garage and other income     2,513       1,589       924       1,037       59       978       (54 )     -5.5 %
Total revenues     84,604       32,538       52,066       47,772       1,599       46,173       5,893       12.8 %
Operating Expenses                                                                
Property operating expenses     23,283       4,613       18,670       19,673       406       19,267       (597 )     -3.1 %
Real estate taxes and insurance     14,926       8,086       6,560       6,560       338       6,222       618       9.9 %
General and administrative     5,296       1,063       4,233       2,358       66       2,292       1,941       84.7 %
Acquisition costs     75             75       326       211       115       (40 )     -34.6 %
Depreciation and amortization     12,521       8,059       4,462       4,472       363       4,109       352       8.6 %
Total operating expenses     56,101       21,821       34,280       33,389       1,384       32,005       2,274       7.1 %
Income from operations     28,503       10,717       17,786       14,383       215       14,168       3,619       25.5 %
Interest expense, net     (36,703 )     (24,945 )     (11,758 )     (9,145 )     (1,078 )     (8,067 )     (3,692 )     45.8 %
Net (loss) income   $ (8,200 )   $ (14,228 )   $ 6,028     $ 5,238     $ (863 )   $ 6,101     $ (73 )     -1.2 %

 

Revenue . Residential rental revenue, excluding the Tribeca House properties, increased from $30,557 in 2014 to $33,889 in 2015 due to higher revenues on new leases, higher occupancy and routine annual increases on renewed rentals primarily at the Flatbush Gardens property complex. Base rent per square foot increased at the Flatbush Gardens property from $19.69 (95.6% occupancy) at December 31, 2014 to $20.63 (97.0% occupancy) at December 31, 2015. Routine annual rent increases on renewed leases at Flatbush Gardens were approximately 1%.

 

Commercial rental revenue, excluding the Tribeca House properties, increased from $12,223 in 2014 to $14,086 in 2015 primarily due to the new lease with the City of New York at our 141 Livingston Street property. The lease, executed in December 2015 and effective June 1, 2014, included an 82% increase in base rent per square foot and a 37% increase in rentable space through a remeasurement over the previous agreement with the City of New York. The lease has a 10 year term with a termination option by the City of New York at the end of the fifth year.

 

Tenant recoveries, excluding the Tribeca House properties, increased from $2,415 in 2014 to $3,167 in 2015 primarily due to terms in the above-mentioned new lease related to the 141 Livingston Street property.

 

Garage and other income, excluding the Tribeca House properties, was $978 in 2014 and $924 in 2015, primarily at the Flatbush Gardens property.

 

Property Operations Expense . Property operating expenses, excluding the Tribeca House properties, include property-level costs including compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses decreased from $19,267 in 2014 to $18,670 in 2015 primarily due to lower utilities expense at all of the properties.

 

Real estate taxes and insurance expenses, excluding the Tribeca House properties, increased from $6,222 in 2014 to $6,560 in 2015.

 

General and Administrative Expense . General and administrative expense, excluding the Tribeca House properties, increased from $2,292 in 2014 to $4,233 in 2015 primarily due to incremental legal, insurance and accounting costs incurred in 2014 and 2015 for the formation transactions and the private offering, including accounting and auditing fees.

 

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Depreciation and Amortization . Depreciation and amortization expense, excluding the Tribeca House properties, decreased from $4,109 in 2014 to $4,462 in 2015 due to fully depreciated assets, partially offset by additions.

 

Interest Expense, net . Interest expense, net, excluding the Tribeca House properties, increased from $8,067 in 2014 to $11,758 in 2015 due to higher outstanding borrowings on new loans obtained in September and December of 2014 secured by the Flatbush Gardens and 141 Livingston Street properties. Interest expense includes amortization of loan costs and change in fair value of interest rate cap of $753 and $2,317 in 2014 and 2015, respectively.

 

Tribeca House properties . Tribeca House properties net loss of $14,228 in 2015 included $8,059 of depreciation and amortization expense and $24,945 of interest charges of which $4,241 was amortization of debt issuance costs and interest rate cap mark-to-market.

 

 - 82 -

 

 

Net Income . As a result of the foregoing, net income, excluding the Tribeca House properties, decreased from $6,101 in 2014 to $6,028 in 2015.

 

Income Statement for the Six Months Ended June 30, 2016 (in thousands)

 

    2016     Less:  Aspen
for 4 days
    2016
 excluding
Aspen
    2015     Increase
(decrease)
    %  
Revenues                                                
Residential rental revenue   $ 31,738     $ 66     $ 31,672     $ 30,255     $ 1,417       4.7 %
Commercial rental revenue     8,959       15       8,944       8,553       391       4.6 %
Tenant recoveries     1,883             1,883       1,788       95       5.3 %
Garage and other income     1,351             1,351       1,208       143       11.8 %
Total revenues     43,931       81       43,850       41,804       2,046       4.9 %
Operating Expenses                                                
Property operating expenses     12,684       9       12,675       11,450       1,225       10.7 %
Real estate taxes and insurance     8,140       11       8,129       6,800       1,329       19.5 %
General and administrative     3,922       3       3,919       1,859       2,061       110.9 %
Acquisition costs     407       407       -             -       n/a  
Depreciation and amortization     6,638       19       6,619       6,163       457       7.5 %
Total operating expenses     31,791       448       31,342       26,272       5,071       19.3 %
Income from operations     12,140       (368 )     12,508       15,532       (3,025 )     -19.5 %
Interest expense, net     (18,863 )     (2 )     (18,861 )     (18,481 )     (379 )     1.9 %
Net income   $ (6,723 )   $ (370 )   $ (6,353 )   $ (2,949 )   $ (3,404 )     114.8 %

 

Revenue . Residential rental revenue, excluding Aspen, increased from $30,255 for the six months ended June 30, 2015 to $31,672 for the six months ended June 30, 2016 due to higher revenues on new leases and routine annual increases on renewed rentals primarily at the Flatbush Gardens property complex. Base rent per square foot increased at the Flatbush Gardens property from $20.07 (97.6% occupancy) at June 30, 2015 to $20.83 (96.5% occupancy) at June 30, 2016. Routine annual rent increases on renewed leases at Flatbush Gardens were approximately 1%.

 

Commercial rental revenue, excluding Aspen, increased from $8,553 for the six months ended June 30, 2015 to $8,944 for the six months ended June 30, 2016 primarily due to the commencement of the new retail lease at our Tribeca House property. The lease, executed in July 2015 and effective February 11, 2016, has a 15-year term and calls for base rent per square foot of approximately $140.

 

Tenant recoveries, excluding Aspen, increased from $ 1,788 for the six months ended June 30, 2015 to $1,883 for the six months ended June 30, 2016 primarily due to terms in one of the retail leases at our Tribeca House property which called for no escalation payments until July 2015.

 

Garage and other income, excluding Aspen, increased from $ 1,208 for the six months ended June 30, 2015 to $1,351 for the six months ended June 30, 2016 , primarily due to increased storage fees at our Tribeca House property and damage fees collected at our 250 Livingston Street property.

 

Property Operations Expense . Property operating expenses, excluding Aspen, include property-level costs including compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses increased from $11,450 for the six months ended June 30, 2015 to $12,675 for the six months ended June 30, 2016 primarily due to higher collection costs at Flatbush Gardens and higher commissions at Tribeca House.

 

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Real estate taxes and insurance expenses, excluding Aspen, increased from $6,800 for the six months ended June 30, 2015 to $8,129 for the six months ended June 30, 2016 primarily due to increased taxes at our Tribeca House property.

 

General and Administrative Expense . General and administrative expense, excluding Aspen, increased from $1,859 for the six months ended June 30, 2015 to $3,919 for the six months ended June 30, 2016 primarily due to executive compensation effected by the REIT formation transactions in August of 2015, which includes non-cash LTIP amortization of $1,112.

 

Depreciation and Amortization . Depreciation and amortization expense, excluding Aspen, increased from $6,163 for the six months ended June 30, 2015 to $6,619 for the six months ended June 30, 2016, due to additions to fixed assets.

 

Interest Expense, Net . Interest expense, net, excluding Aspen, increased from $18,481 for the six months ended June 30, 2015 to $18,861 for the six months ended June 30, 2016 primarily due to higher outstanding borrowings on a refinance which closed in May of 2016 on the 141 Livingston Street property, and a higher LIBOR rate on the Tribeca House property loans. Interest expense includes amortization of loan costs and change in fair value of interest rate cap of $3,101 and $3,443 for the six months ended June 30, 2016 and 2015, respectively.

 

Net Loss . As a result of the foregoing, net loss, excluding Aspen, increased from ($2,949) for the six months ended June 30, 2015 to ($6,353) for the six months ended June 30, 2016.

 

Liquidity and Capital Resources

 

We estimate that the net proceeds to us from the sale of the shares of our common stock offered by us will be approximately $              million, based on an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $            million, after deducting underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds as set forth in “Use of Proceeds.”

 

As of June 30, 2016, we had $814.9 million of mortgage indebtedness secured by our properties and $104 million of cash of which approximately $31.0 million is expected to be used for capital projects. Additionally, apart from regularly scheduled amortization, we also have $460.0 million of debt maturing in November 2016 subject to three one-year extension options, $35.4 million of debt maturing in May 2023, $170.0 million of debt maturing in October 2024, $70.0 million maturing in July 2028 and $79.5 million maturing in June 2028. We intend to use cash on hand and the net proceeds of this offering, among other uses, to pay off up to $100 million of the debt that is maturing in November 2016 and to extend the remaining portion of each debt. No assurance can be given that we will be able to refinance any of these loans on favorable terms or at all.

 

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As a REIT, we are required to distribute at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgages and unsecured indebtedness, proceeds from additional equity issuances and cash generated from the sale of property.

 

Short-Term and Long-Term Liquidity Needs

 

Our short-term liquidity needs will primarily be to fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses and distributions to stockholders and unit holders. We generally expect to meet our short-term liquidity requirements through proceeds of the private offering and net cash provided by operations, and we believe we will have sufficient resources to meet our short-term liquidity requirements. We believe that net cash provided by operations will be adequate to meet the REIT operating requirements in both the short and the long-term.

 

Our principal long-term liquidity needs will primarily be to fund major renovation and upgrading projects, debt payments and retirements at maturity and additional property acquisitions. We do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate meeting our long-term liquidity requirements by using cash as an interim measure and funds from public and private equity offerings and long-term secured and unsecured debt offerings.

 

We believe that as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements. These sources include the incurrence of additional debt and the issuance of additional equity. However, we cannot assure you that this will be the case. Our ability to secure additional debt will depend on a number of factors, including our cash flow from operations, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about our company.

 

We believe that our current cash flows from operations, coupled with additional mortgage debt, will be sufficient to allow us to continue operations, satisfy our contractual obligations and make distributions to our stockholders and the members of our LLC subsidiaries.

 

Property-Level Debt

 

The mortgages and mezzanine notes which are collateralized by their respective properties, member’s interest in the properties and assignment of leases, and the principal amounts outstanding as of June 30, 2016 were as follows:

 

Property   Maturity   Interest Rate     Principal
Amount
Outstanding
(in thousands)
 
Flatbush Gardens   10/1/2024     3.88%     $ 150,000  
Flatbush Gardens   10/1/2024     3.88%       20,000  
250 Livingston Street   5/6/2023     4.00%       35,389  
141 Livingston Street   6/1/2028     3.88%       79,500  
Tribeca House properties   11/9/2016     Libor + 3.40%       360,000  
Tribeca House properties   11/9/2016     Libor + 7.38%       100,000  
Aspen   7/1/2028     3.68%       70,000  
                $ 814,889  

 

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Tribeca House properties

 

There is $460 million in mortgage and mezzanine debt related to the Tribeca House properties, as of June 30, 2016, in the form a mortgage note of $360 million to Deutsche Bank and a $100 million mezzanine note to SL Green Finance. Both the mortgage note and the mezzanine note mature on November 9, 2016 and give us the option to extend the maturity date up to three one-year terms. Under the mortgage note, we have the option to prepay the balance in whole, but not in part without a prepayment penalty. Under the mezzanine note, we have the option to prepay the balance in whole, but not in part. In connection with both the mortgage and mezzanine debt, David Bistricer and an entity controlled by Sam Levinson entered into guaranties of recourse obligations.

 

Flatbush Gardens

 

There is $170 million in mortgage debt secured by Flatbush Gardens, as of June 30, 2016, in the form of two mortgage notes to New York Community Bank. A $150 million mortgage note matures on October 1, 2024 and has a fixed interest rate of 3.88%. A $20 million mortgage note also matures on October 1, 2024 and has an interest rate of 3.88% through September 2019, after which the interest is Prime plus 2.75% subject to an option to fix the rate. Under both notes, we have the option to prepay all (but not less than all) of the unpaid balance of the loan prior to the maturity date, but must pay a prepayment premium of 4% if the prepayment occurs prior to September 30, 2016, 3% if it occurs from October 1, 2016 through September 30, 2017, 2% if it occurs from October 1, 2017 through September 30, 2018, and 1% if it occurs from October 1, 2018 through June 30, 2019. David Bistricer entered into guaranties of recourse obligations in connection with both notes.

 

141 Livingston Street

 

There is $79.5 million in mortgage debt secured by 141 Livingston Street, as of June 30, 2016, in the form of a mortgage note to New York Community Bank. The note bears interest at 3.875% and matures on June 1, 2028. We may prepay the debt in whole or in part, subject to a prepayment premium. David Bistricer and Sam Levinson entered into a guaranty of recourse obligations in connection with this loan for which we will indemnify them.

 

250 Livingston Street

 

There is approximately $35 million in mortgage debt secured by 250 Livingston Street, as of June 30, 2016, in the form of a mortgage note to Citigroup Global Markets Realty Corp, which has been securitized. The note requires monthly principal and interest payments of $179,000, bears interest of 4.00% and matures on May 6, 2023. We may prepay the debt within two months of May 6, 2023 in whole without having to pay a prepayment premium. David Bistricer entered into a guaranty of recourse obligations in connection with this loan for which we will indemnify him.

 

The Aspen Property

 

There is $70 million in mortgage debt secured by Aspen as of June 30, 2016 in the form of a mortgage note with Capital One Multifamily finance LLC. The note matures on July 1, 2028 and bears interest at 3.68%. The note requires interest-only payments through July 2017, monthly principal and interest payments of $321,000 from August 2017 through July 2028 based on a 30-year amortization schedule and principal and interest payments thereafter based on the remaining period of the initial 30-year amortization schedule.

 

Contractual Obligations and Commitments

 

The following table summarizes principal and interest payment requirements under terms as of June 30, 2016 of our debt:

 

    (in thousands)  
    Principal     Interest     Total  
2016     540,232       30,627       570,859  
2017     3,543       13,590       17,133  
2018     5,263       13,352       18,615  
2019     5,152       13,426       18,578  
2020     4,774       14,869       19,643  
Thereafter     255,925       69,769       325,694  
Total   $ 814,889       155,633       970,522  

 

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The Predecessor is also obligated to provide parking through 2020 under a lease with a tenant at the property on 250 Livingston Street at a cost of approximately $160,000 per year.

 

Cash Flows for the Years Ended December 31, 2015 and 2014 (in thousands)

 

    Year Ended
December 31,
 
    2015     2014  
Operating activities   $ 9,440     $ 7,472  
Investing activities   $ (9,025 )   $ (226,822 )
Financing activities   $ 115,760     $ 224,707  

 

Cash flows provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2015 and 2014 were as follows:

 

Net cash flow provided by operating activities was $9,440 in 2015 as compared to $7,472 in 2014. 2015 reflects the collection of a receivable from the City of New York in May 2015 relating to the lease at the 141 Livingston Street property that had been unpaid since June 1, 2014, partially offset by interest expense on the $360,000 mortgage payable and the $100,000 mezzanine note payable entered into in connection with the acquisition of the Tribeca House properties discussed above and increase in restricted cash balances.

 

Net cash used in investing activities was $9,025 in 2015 as compared to $226,822 in 2014. The decrease in 2015 as compared to 2014 reflects the cost of acquisition of the Tribeca House property acquired in December 2014 offset in part by higher capital costs in 2015 of apartment and building renovations at Flatbush Gardens and Tribeca House properties in December 2015.

 

Net cash provided by financing activities was $115,760 in 2015 and $224,707 in 2014. Amounts in 2015 reflect $130,199 net cash received from the sale of common stock net of costs on August 3, 2015, a contribution of $2,357 by members of the Predecessor and distributions of $15,884 to members of the Predecessor before the sale of common stock. Amounts in 2014 reflect $188,739 debt, net of costs, incurred in connection with the acquisition of the Tribeca House properties in December 2014 and $36,623 of net distributions in connection with the formation transactions and offering. Both periods included scheduled principal payments of mortgage debt.

 

Cash Flows for the Six Months Ended June 30, 2016 and 2015 (in thousands)

 

    Six Months Ended
June 30,
 
    2016     2015  
Operating activities   $ 4,991     $ 10,060  
Investing activities   $ (111,384 )   $ (4,885 )
Financing activities   $ 85,120     $ 1,296  

 

Cash flows provided by (used in) operating activities, investing activities and financing activities for the six months ended June 30, 2016 and 2015 were as follows:

 

Net cash flow provided by operating activities was $4,991 for the six months ended June 30, 2016 as compared to $10,060 for the six months ended June 30, 2015. 2015 reflects the setup of restricted cash accounts relating to the Tribeca House acquisition, the collection of a large outstanding receivable on 141, and an increase in payables, partially offset by a decrease in prepaid real estate taxes and the recording of executive compensation in 2016.

 

Net cash used in investing activities was $111,384 for the six months ended June 30, 2016 as compared to $4,885 for the six months ended June 30, 2015. The increase in 2016 as compared to 2015 reflects the cost of acquisition of the Aspen property acquired in June 2016 and higher capital costs in 2016 of apartment and building renovations at Flatbush Gardens and Tribeca House properties.

 

Net cash provided by financing activities was $85,120 for the six months ended June 30, 2016 as compared to $1,296 for the six months ended June 30, 2015. The increase in 2016 reflects $94,500 cash received from the mortgage relating to the Aspen property acquisition and the refinancing of the mortgage relating to the 141 Livingston Street property, offset by dividends of $4,969 and debt issuance costs relating to the mortgages of $3,751. Both periods included scheduled principal payments of mortgage debt.

 

Income Taxes

 

No provision has been made for income taxes since all of the Company’s operations are held in pass-through entities and accordingly the income or loss of the Company is included in the individual income tax returns of the partners or members.

 

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We elected to be treated as a REIT for U.S. federal income tax purposes, beginning with our first taxable year ended December 31, 2015. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner that will enable us to qualify and be taxed as a REIT and we intend to continue to operate so as to satisfy the requirements for qualification as a REIT for federal income tax purposes.

 

Inflation

 

Inflation in the United States has been relatively low in recent years and did not have a significant impact on the results of operations for the Company’s business for the periods shown in the consolidated historical financial statements. We do not believe that inflation currently poses a material risk to the Company. The leases at our residential rental properties which comprise approximately 75% of our revenue are short-term in nature. Our longer-term commercial and retail leases would generally allow us to recover some increased costs in the event of significant inflation.

 

Although the impact of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could increase the cost of acquiring or replacing properties in the future.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Our future income, cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to interest rate risk. To manage this risk, we purchased interest rate caps on approximately $515 million of the $814.9 million of mortgage debt outstanding as of June 30, 2016 that would provide interest protection if one month LIBOR exceeds 2.0%.

 

A one percent increase in interest rates on our $460 million of variable rate mortgage debt would decrease annual net income by approximately $4.6 million.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2016, we do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.

 

Non-GAAP Financial Measures

 

In this prospectus, we disclose and discuss funds from operations (“FFO”), adjusted funds from operations (“AFFO”), and Adjusted EBITDA, all of which meet the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K promulgated by the SEC.

 

While management and the investment community in general believes that presentation of these measures provides useful information to investors, neither FFO, AFFO nor Adjusted EBITDA should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. We believe that to understand our performance further, FFO, AFFO and Adjusted EBITDA should be compared with our reported net income or net loss and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

 

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Funds from Operations and Adjusted Funds from Operations

 

FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with GAAP), excluding gains (losses) from sales of property (and impairment adjustments), plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

 

AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight line rent adjustments to revenue from long-term leases and amortization costs incurred in originating debt.

 

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO useful in evaluating potential property acquisitions and measuring operating performance. We further consider AFFO useful in determining funds available for payment of distributions. FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

 

FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO and AFFO.

 

The following table sets forth a reconciliation of FFO and AFFO for the periods presented to net loss before allocation to non-controlling interests, as computed in accordance with GAAP (amounts in thousands):

 

    Six months ended June 30,     Years ended December 31,  
    2016     2015     2015     2014  
FFO                                
Net (loss) income before allocation to non-controlling interests   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
Real estate depreciation and amortization     6,638       6,163       12,521       4,472  
FFO   $ (85 )   $ 3,214     $ 4,321     $ 9,710  
                                 
AFFO                                
FFO   $ (85 )   $ 3,214     $ 4,321     $ 9,710  
                                 
Real estate tax intangible amortization     668       664       1,328       238  
Amortization of below-market leases     (919 )     (857 )     (1,714 )     (1,450 )
Straight-line rent adjustment     (19 )     12       109       513  
Amortization of debt origination costs     3,095       2,997       6,036       704  
Interest rate cap mark-to-market     9       446       522       49  
Amortization of LTIP awards     1,112             709        
Acquisition costs     407             75       326  
Recurring capital spending     (414 )     (1,606 )     (2,139 )     (1,824 )
AFFO   $ 3,854     $ 4,870     $ 9,247     $ 8,266  

 

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Adjusted earnings before interest, income taxes, depreciation, amortization and stock based compensation

 

We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net (loss) income before allocation to non-controlling interests plus real estate depreciation and amortization, amortization of identifiable intangibles, interest expense, net, and acquisition costs and stock based compensation. Other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to other REITs.

 

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We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use Adjusted EBITDA to evaluate our performance because Adjusted EBITDA allows us to evaluate the operating performance of our company by measuring the core operations of property performance and administrative expenses available for debt service.

 

However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. The following table reconciles Adjusted EBITDA to net (loss) income:

 

    Six Months Ended June 30,     Year Ended December 31,
Historical
 
    2016     2015     2015     2014  
Net (loss) income before allocation to non-controlling interests   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
Depreciation and amortization     6,638       6,163       12,521       4,472  
Amortization of real estate tax intangible     668       664       1,328       238  
Amortization of below-market leases     (919 )     (857 )     (1,714 )     (1,450 )
Straight-line rent adjustment     (19 )     12       109       513  
Amortization of LTIP awards     1,112             709        
Interest expense, net     18,863       18,481       36,703       9,145  
Acquisition costs     407             75       326  
Adjusted EBITDA   $ 20,027     $ 21,514     $ 41,531     $ 18,482  

 

Recent Accounting Pronouncements

 

See Note 3 of Notes to the consolidated and combined financial statements included elsewhere in this prospectus for information relating to new accounting pronouncements.

 

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OUR BUSINESS AND PROPERTIES

 

Overview

 

We are a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multi-family residential and commercial properties in the New York metropolitan area, with an initial portfolio in Manhattan and Brooklyn. The Company was formed to continue and expand the commercial real estate business of the Predecessor. Our primary focus is to continue to own, manage and operate our initial portfolio and to acquire and reposition additional multi-family residential and commercial properties in the New York metropolitan area. Clipper Realty was incorporated on July 7, 2015. On August 3, 2015, we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately $130.2 million. In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a REIT for U.S. federal income tax purposes and we have elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.

 

The Company owns:

 

· two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan, which we collectively refer to as the Tribeca House properties;

 

  · one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings, which we refer to as the Flatbush Gardens properties or complex;

 

  · two primarily commercial properties in Downtown Brooklyn (one of which includes 36 residential apartment units), which we refer to as the 141 Livingston Street property and the 250 Livingston Street property; and

 

  · one residential/retail rental property at 1955 1 st Avenue in Manhattan, which we refer to as the Aspen property.

 

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.

 

The Tribeca House properties were purchased in December 2014 and consist of two nearly adjacent properties in the Tribeca neighborhood of Manhattan, New York. They comprise approximately 480,000 square feet of leasable area with 505 residential apartment units with 11 foot ceilings and extensive amenities and approximately 77,200 square feet of retail space, including an externally managed garage. The residential units are approximately 92% occupied at approximately $66 per square foot and the retail units are fully occupied.

 

The Flatbush Gardens property complex was purchased in September 2005 and consists of 59 primarily six-story buildings, approximately 1.7 million square feet and 2,496 residential apartment units. The property is approximately 97% occupied at approximately $21 per square feet. The property is subject to rent control regulations of New York City which allow rents approximately 30% higher than existing average rents. Since the acquisition in 2005, the management team has undertaken a comprehensive renovation and repositioning strategy that has included upgrades in the exterior and interior of the buildings. The Company has been able to consistently improve rents as a result of these efforts and other factors and experienced an approximately 7% increase in rents per square foot on new leases in the first half of 2016.

 

The 141 Livingston Street property in the Downtown Brooklyn neighborhood was purchased in 2002 along with the below-mentioned 250 Livingston Street property. It is a 15-story commercial building with a gross leasable area of 206,084 square feet. The property’s main commercial tenant, the City of New York, executed a new 10-year lease in December 2015, with effect as of June 2014. Under the agreement with the City of New York, the tenant has an option to terminate the lease after five years. However, if it decides to continue to occupy the building after five years, the rent will increase by 25% beginning the sixth year of the lease. The agreement with the City of New York, as compared to the prior lease, increases rent by 82% per square foot and increases the rentable square feet by 37% as a result of a building remeasurement, resulting in an overall increase in rental revenue of approximately 149%. The lease imposes a requirement on the Company to refurbish the air-conditioning system and perform other upgrades that the Company estimates will cost a total of approximately $5.2 million. In the future we may be able to convert the property to residential units, a change made at several nearby buildings, including 110 Livingston Street. Additionally, the property includes an adjacent lot at 22 Smith Street currently used as a parking lot having approximately 5,000 square feet for which the Company has received written expressions of interest in excess of $15 million.

 

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The 250 Livingston Street property was purchased in 2002 along with the 141 Livingston Street property and consists of a 12-story commercial and residential building. It has approximately 267,000 square feet GLA of commercial space and approximately 26,800 square feet of residential space. The property’s sole office tenant, the City of New York, has leases expiring at the end of 2016 and 2020 with lease rates approximately 50% of the rate recently negotiated at the 141 Livingston Street property with the same tenant and similar space. The leasable area of the office portion recently has been remeasured according to REBNY standards to approximately 353,000 square feet, an increase of approximately 33% consistent with the remeasurement described above at the nearby 141 Livingston Street property, which features a similar class of office space. To more fully optimize available space, in 2003 through 2013, the Company converted the top four floors of the building into 36 apartment units which are presently approximately 89% occupied.

 

History

 

The Company’s Predecessor is a combination of four limited liability companies, Renaissance Equity Holdings LLC, Berkshire Equity LLC, Gunki Holdings LLC and 50/53 JV LLC, which were formed by principals of our management team from 2002 to 2014. Upon completion of the private offering and the formation transactions, we assumed responsibility for managing the predecessor LLCs.

 

The Company is led by David Bistricer, its Co-Chairman and Chief Executive Officer, who has a strong reputation within the New York metropolitan area for real estate acquisitions, management, repositioning and marketing expertise. Mr. Bistricer, together with the Company’s senior management team, has developed the Company’s strategy with a focus on broker relationships and the cultivation of the Company’s track record of execution. Mr. Bistricer has over 30 years of real estate experience specifically in expanding, renovating, repositioning and managing the Company’s current portfolio and other properties. The Company’s senior management team has an average of approximately 21 years of experience covering all aspects of real estate, including asset and property management, leasing, marketing, acquisitions, construction, development, legal and finance.

 

Our Competitive Strengths

 

We believe that the following competitive strengths distinguish our company from other owners and operators of commercial and multi-family residential properties:

 

· Diverse Portfolio of Properties in New York Metropolitan Area . Our current portfolio of commercial and multi-family residential properties in Manhattan and Brooklyn is located in one of the most prized real estate markets in the world. The combination of supply constraints, high barriers to entry, near-term and long-term prospects for job creation, vacancy absorption and rental rate growth make New York City an extremely attractive place to own real property. Our management believes that, in light of the land and construction costs, our current portfolio could not be replaced today on a cost-competitive basis. As described above, we own two primarily commercial properties in the Downtown Brooklyn neighborhood, one multi-family residential property complex in the East Flatbush neighborhood of Brooklyn, one primarily multi-family residential property group in the Tribeca neighborhood of Manhattan and one primarily multi-family residential property in a transitional neighborhood just north of the Yorkville neighborhood of Manhattan. We believe that we are one of the only REITs with a portfolio solely composed of multi-family residential, commercial and retail properties in the New York metropolitan area. Further, our multi-family residential portfolio is diversified by tenant demographics (both luxury and work-force units).

 

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  · Expertise in Repositioning and Managing Multi-family Residential Properties. Our management team has substantial expertise in renovating and repositioning multi-family residential properties. At the Flatbush Gardens property, beginning in 2006, we have engaged in a property renovation program that includes replacement or upgrades to building systems and components as well as the refurbishment of apartment interiors. As a result of our effort in managing the property, including these upgrades, we have reduced outstanding New York City violations from over 8,000 at the time of the acquisition to approximately 359 currently, and substantially improved resident safety. At the 250 Livingston Street property, from 2003 through 2013, we converted the top four floors into 36 residential apartment units (presently approximately 89% occupied) to more fully optimize available space. We believe that the post-renovation high quality of our buildings and the services we provide also attract higher income and credit-quality tenants and allow for increased cash flow.

 

  · Attractive Commercial and Residential Properties in Densely Populated Metropolitan Communities. Our commercial properties in Downtown Brooklyn are located in a premier commercial corridor that features convenient access to mass transportation, a diverse tenant base and high pedestrian traffic. The commercial portfolio consists of approximately 474,000 square feet (remeasured to approximately 560,000 square feet) leased to the City of New York.

 

Our residential properties in Tribeca are located in a neighborhood that has one of the highest average market rents in Manhattan and one of the lowest vacancy rates in Manhattan (based on a CitiHabitats market report as of July 2016 combining Tribeca with the adjacent SoHo neighborhood) as well as convenient access to mass transit. We believe that these favorable market characteristics, coupled with our plans to reposition the Tribeca House properties to provide better service levels and finishes, will allow for improved rents and financial results for the Tribeca House properties over the next two to three years.

 

Our newly acquired Aspen residential property in Manhattan is a relatively new building occupying a full city block in a transitional neighborhood located just north of the Yorkville neighborhood, which, according to StreetEasy, as of September 29, 2016, had average asking rents per square foot of approximately $48, as compared to the average existing rent in the Aspen property of approximately $33 per square foot. Additionally, according to New York City projections, the new Second Avenue subway line, the first phase of which is currently scheduled for completion in late 2016, will extend to within two blocks of the Aspen property. We believe these transitional activities and our plans to upgrade the finishes of the property will allow for improved rents and financial results for the Aspen property over the next two to three years.

 

Our residential property complex in the East Flatbush neighborhood is located in an entry-level, low-cost area that provides more reasonably priced housing than that in Manhattan and more upscale Brooklyn neighborhoods. The complex has convenient access to public transportation, including the Newkirk Avenue and Flatbush Avenue – Brooklyn College subway stations. Brooklyn College, Beth Israel Hospital and SUNY Downstate Medical Center are all within approximately one mile of the complex and a higher-priced condominium development has begun in East Flatbush. Additionally, surrounding neighborhoods are experiencing higher rents. We believe that these nearby improvements to the residential market, coupled with our ongoing renovation and repositioning strategy, will steadily allow higher rents, improved tenant credit quality and improved financial results for the Flatbush Gardens property.

 

  · Experienced and Committed Management Team with Proven Track Record over Generations. Our senior management team is highly regarded in the real estate community and has extensive relationships with a broad range of brokers, owners, tenants and lenders. We have substantial in-house expertise and resources in asset and property management, leasing, marketing, acquisitions, construction, development and financing, and have a platform that is highly scalable. Members of our senior management team have worked in the real estate industry an average of approximately 21 years, and David Bistricer and Sam Levinson, Co-Chairmen of our board of directors, have worked together for approximately 17 years. Our senior management and their immediate family members own shares of our common stock and LLC units of our predecessor entities that are exchangeable into shares of our common stock on a one-for-one basis, which will in the aggregate represent about       % of our common stock on a fully diluted basis immediately after this offering.  As a result, we believe the interests of management are aligned with those of our stockholders, creating an incentive to maximize returns for our stockholders.

 

  · Balance Sheet Well Positioned for Future Growth. We have established a target leverage ratio in the range of 45% to 55%. We define our leverage ratio as the ratio of our net debt (defined as total debt less cash) to the fair market value of our properties. We will seek to use the net proceeds of this offering, together with our cash on hand, which at June 30, 2016 was $104 million, to fund approximately $31 million of certain capital improvements to reposition and modernize our properties through 2018, repay up to $100 million of debt and  fund acquisitions of properties consistent with our strategy of acquiring multi-family or commercial properties in the New York metropolitan area. In addition, we expect to benefit from organic deleveraging through ongoing cash flow generation and increases in property values over time. As of June 30, 2016, we had total net debt outstanding, net of cash on hand, of approximately $710.8 million, before debt issuance costs, all of which is property-level debt, indicating a leverage ratio of approximately 53.7%, which is within our target range. We are not obligated to maintain any specific leverage ratio and our leverage ratio may from time to time be higher or lower than our target level, which may be changed by our board of directors.

 

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As of June 30, 2016, our debt had a weighted average interest rate of 4.3%, a weighted average maturity of 4.4 years, and 43.5% of the debt was fixed-rate indebtedness. For the six months ended June 30, 2016 and the year ended December 31, 2015, our pro forma Adjusted EBITDA was $22.3 million and $45.9 million, respectively; and pro forma net loss available to common stockholders was approximately $0.8 million and $0.4 million, respectively. We have approximately $460 million of debt maturing in 2016, subject to three one-year extensions at our option.

 

  · Strong Internal Growth Prospects. We have substantial rent growth potential within our current portfolio as a result of the strong historical and projected future rental rate growth within our submarkets, contractual fixed rental rate increases included in our leases, incremental rent potential from the lease-up of our portfolio and anticipated rent increases resulting from our ongoing property repositioning efforts. For the 141 Livingston Street property, the main commercial tenant, the City of New York, entered in December 2015 into a new 10-year lease, resulting in an overall increase in annual rental revenue of approximately 149% as compared to the prior lease. For the 250 Livingston Street property, a property featuring a similar class of office space as the nearby 141 Livingston Street property, the same tenant has leases expiring in December 2016 and August 2020. We have entered into a term sheet to renew the lease terminating in December 2016 on annual terms that would increase rent by approximately $2.6 million. Should a new lease for the lease expiring in August 2020 be entered into on the same annual terms (adjusted for the increase of rent under the 141 Livingston Street lease to $50.00 per square foot beginning the sixth year of that lease), the implied increase in annualized rent for that lease would be $8.5 million beginning in September 2020. For the residential Tribeca House properties, we believe we can achieve substantial increases in rents based on comparable rents in the Tribeca neighborhood and our intention to improve service levels and quality of finishes in the buildings commensurate with standards at comparable buildings in the neighborhood. Currently, residential rents in our Tribeca House properties average approximately $67 per square foot, whereas comparable residential rents in the Tribeca neighborhood average in excess of $80 per square foot (based on StreetEasy listings as of August 24, 2016), indicating an opportunity to increase our total 2016 rental revenue as of August 1, 2016 by approximately $7.1 million per year ($5.8 million predicated on attainment of market rents and $1.3 million on attainment of higher occupancy). As of August 1, 2016, 2.0% of the apartments in our Tribeca House properties rented below $50 per square foot, 17.6% rented between $50 and $60 per square foot, 39.6% rented between $60 and $70 per square foot, 27.4% rented between $70 and $80 per square foot, 11.3% rented between $80 and $90 per square foot, and 2.2% rented above $90 per square foot. (We also expect that real estate tax expense will increase by approximately $4.7 million as a result of cessation of certain exemptions and abatements and increased assessments.) At the newly acquired Aspen property, we believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property. For the Flatbush Gardens residential complex, we believe we can achieve steady increases in rent approximating $1 to $2 million total per year as a result of our property renovation programs and increases in market rents already experienced in surrounding neighborhoods. Average rent per square foot increased from $18.88 (94.4% occupancy) at December 31, 2013 to $19.69 (95.6% occupancy) at December 31, 2014 to $20.63 (97.0% occupancy) at December 31, 2015 and $21.14 at August 1, 2016 (96.8% occupancy). Since acquisition in 2005, the average rent per square foot has risen from approximately $13.25 to approximately $21.14, a 60% increase. As a result of the rent stabilization laws and regulations of New York City (including, in particular, a determination of the New York City Rent Guidelines Board in June 2016), effective for at least one year beginning October 1, 2016, increases for rent stabilized apartments, comprising approximately 46% of our apartments at our Flatbush Gardens property, will be limited to no increase for one-year leases and 2% for two-year leases. See “Risk Factors—Risks Related to Real Estate—Multi-family residential properties are subject to rent stabilization regulations, which limit our ability to raise rents above specified maximum amounts and could give rise to claims by tenants that their rents exceed such specified maximum amounts.”

 

Business and Growth Strategies

 

Our primary business objective is to enhance stockholder value by increasing cash flow from operations and total return to stockholders. The strategies we intend to execute to achieve this goal include:

 

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  · Increase Existing Below-Market Rents. We believe we can capitalize on the successful repositioning of our portfolio and improving market fundamentals to increase rents at several of our properties. At the 250 Livingston Street property, we have 266,569 square feet of leases with the City of New York that expire in December 2016 and August 2020, which have been remeasured according to REBNY standards to approximately 353,000 square feet and for which we believe we can achieve increases in rent similar to the increase achieved recently at nearby 141 Livingston Street, featuring a similar class of office space. We have executed a term sheet with the City of New York for the portion expiring December 31, 2016, increasing GLA from the current 79,424 square feet at $21.50 per square foot to approximately 107,000 square feet at $40.00 per square foot, which would generate additional annual revenue of approximately $2.6 million.  This lease, if executed, would terminate with the other lease expiring August 2020 presently covering 187,145 square feet at $18.49 per square foot.  Should a new lease be entered into at that time to the remeasured square feet of 245,903 and rent of $50.00 per square foot (as indicated in the lease with the City of New York at our neighboring 141 Livingston Street property), we would realize additional aggregate annual rental revenue of approximately $8.5 million. We also believe that the significant growth in Downtown Brooklyn as a residential location offers a potential alternative to convert 250 Livingston Street and/or 141 Livingston Street to residential apartments, an activity for which management has demonstrated expertise. Our management will continue to evaluate alternative strategies for these buildings to maximize risk-adjusted returns to stockholders. At the Tribeca House properties, the buildings’ average rent of $67 per square foot is significantly below the average rent for other comparable Tribeca House rentals in excess of $80 per square foot based on StreetEasy listings as of August 24, 2016. We believe we can achieve significant growth in rents over the next two to three years by improving service levels and quality of finishes in the buildings, and more efficiently managing the re-leasing process. We also believe that the average rental rate of approximately $48 per square foot under in-place leases for the retail portion of the Tribeca House properties is significantly below market, as evidenced by a lease we signed in July 2015 to rent our only then-vacant street-front retail space at the Tribeca House properties for $140 per square foot, a space that had been vacant since 2001. Two other leases comprising approximately 4,600 square feet expire in 2019. At the Flatbush Gardens complex, as a result of our renovation and repositioning strategy since 2006 and our intention to continue refurbishing the property, as well as improvements in the residential rental market in surrounding neighborhoods, we believe we can continue to improve tenant quality and increase rents, as demonstrated by the above-mentioned steady increase in aggregate rents per square foot and continued high occupancy levels. At the newly acquired Aspen property, we believe there is an opportunity to increase rents over one to three years for the units with no rental restrictions (approximately 55% of the units) from the existing $38 per square foot closer to comparable rentals in the immediate neighborhood of $48 per square foot, as measured by StreetEasy listings as of September 29, 2016 for doorman rentals eight blocks north, four blocks south and three blocks west of the Aspen property.

 

  · Disciplined Acquisition Strategy Focused on Premier Submarkets and Assets. Since 1979, David Bistricer has overseen the acquisition of multi-family residential and commercial properties, including our current portfolio, primarily in our targeted submarkets of New York City. We intend to continue our core strategy of acquiring, owning and operating multi-family residential rental and commercial properties within submarkets that have high barriers to entry, are supply-constrained, exhibit strong economic characteristics and have a pool of prospective tenants in various industries that have a strong demand for high-quality commercial space. We believe that owning assets within New York City, one of the best residential and commercial markets in the United States, will allow us to generate strong cash flow growth and attractive long-term returns. We will opportunistically pursue attractive opportunities to acquire multi-family residential and commercial properties, focusing our acquisition strategy primarily on multi-family residential properties in densely populated communities in the New York metropolitan area (primarily in Brooklyn and Manhattan) and, to a lesser extent, on commercial properties, where we will maintain a disciplined approach to ensure that our acquisitions meet our core strategy. Our strong balance sheet, access to capital and ability to offer operating partnership units in tax deferred acquisition transactions should give us significant flexibility in structuring and consummating acquisitions. We seek to acquire properties that will command premium rental rates and maintain higher occupancy levels than other properties in our markets. We are a highly active market participant that reviews numerous acquisition opportunities annually; however, we are highly selective in the properties that we ultimately acquire. We intend to strategically increase our market share in our existing submarkets and selectively enter into other submarkets in the New York City metropolitan area with similar characteristics. Our acquisition strategy will focus primarily on long-term growth and total return potential rather than short-term cash returns. We believe we can utilize our deep industry relationships and our expertise in redeveloping and repositioning both residential and commercial properties to identify acquisition opportunities where we believe we can increase occupancy and rental rates. Many of our Predecessor’s acquisitions were sourced on an off-market basis. As long-term owners and operators in our submarkets, we have a reputation among the broker community for moving expeditiously and for being a reliable counterparty.

 

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  · Proactive Asset and Property Management. We believe our proactive, service-intensive approach to asset and property management helps increase occupancy and rental rates, manage operating expenses and maximize Adjusted EBITDA. We provide our own fully integrated asset and property management platform, which includes in-house legal, marketing, accounting, finance and leasing departments for our portfolio, and our own tenant improvement construction services. The development and retention of top-performing property management personnel have been critical to our success. We utilize our comprehensive building management services and our strong commitment to tenant relationships to negotiate attractive leasing deals and to attract and retain high credit-quality tenants.

 

  · Capital Program to Reposition Assets. We believe we can reposition our properties through a capital program to achieve rent growth in an expedited fashion. Together with our cash on hand, which at June 30, 2016 was $104 million, we intend to set aside approximately $31 million from the proceeds of this offering to cover this program through 2018 (as well as to repay up to $100 million of debt and fund acquisitions of properties consistent with our strategy).

 

Our Tribeca House properties will undergo an upgrade to common areas (media/conference room, game room, children’s room, basketball court and roof) and a redesign of our lobbies at a cost of approximately $5.0 million in 2016 and 2017—all with the goal of enhancing the experience of our renters as they first enter the building and utilize the common areas. Concurrently, we intend to redesign and replace floors, kitchens, lighting and appliances on the interior of apartments as new renters move in at a cost of approximately $4.8 million in 2016 and 2017 and approximately $1.5–$2.0 million per year thereafter. We expect the improved experience in common areas will support higher rents consistent with the rent levels in the neighborhood.

 

At our Flatbush Gardens apartment complex, which consists of 2,496 apartments in 59 buildings clustered around seven courtyards spread over 21.4 acres, we expect to undertake a significant modernization program. We have undertaken and expect to continue projects to landscape and waterproof a significant terrace area and refurbish a number of lobbies, stairwells and windows for tenant enjoyment, to upgrade outdoor lighting and install a comprehensive security camera network for enhanced security and to refurbish basement areas for installation of revenue generating laundry facilities and storage units at a cost of approximately $12.4 million in 2016 and 2017. Supported by these improvements to common areas, we then may perform substantial upgrades to an increasing number of apartments (floors, windows and appliances), which may cost approximately $3.8 million for up to 125 units in 2016 and 2017 in addition to more routine refurbishments of $1.7 million to up to 335 units.

 

Our 141 Livingston Street property will have approximately $5.2 million of improvements to the elevators and air conditioning mechanics in accordance with the new lease with the City of New York described above that has increased our rent from approximately $3.3 million per annum to approximately $8.2 million per annum. In addition, we expect to spend approximately $2.6 million to modernize elevators, replace a boiler and roof and install a modern building management system. Lastly, at our 250 Livingston Street property we expect to renovate the facade and entrance and build new penthouses at a cost of approximately $3.1 million. Lastly, at our Aspen property, while the building is relatively new, the Company presently expects to spend a minimum of $1 million to improve certain finishes of the property.

 

Our Portfolio Summary

 

As of August 1, 2016 our portfolio consisted of five properties totaling approximately 2.9 million rentable square feet and was approximately 96.7% leased. These properties include the Flatbush Gardens complex, a 59-building residential complex, two properties in Downtown Brooklyn, one of which is exclusively commercial and one of which is mixed commercial and residential, the Tribeca House properties which consist of two nearly adjacent residential properties with some street level and mezzanine level retail space and an externally managed parking garage, and the Aspen property, which is a residential building with some street level retail space and an externally managed parking garage.

 

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The table below presents an overview of the Company’s portfolio as of August 1, 2016:

 

Address   Submarket   Year Built/
Renovated
  Leasable
Sq. Ft.
    # Units     Percent
Leased
    2016 Base
Rental
Revenue
(in millions)
   

Net Effective

Rent Per
Square Foot

 
Multifamily                                                
50 Murray Street   Manhattan   1964     394,238       389       91.8 %   $ 24.0     $ 67.06  
53 Park Place   Manhattan   1921     85,423       116       94.0 %   $ 5.3     $ 65.42  
Flatbush Gardens complex   Brooklyn   1950     1,734,885 (1)     2,496       96.8 %   $ 35.5     $ 21.14  
250 Livingston Street   Brooklyn   1920     26,819 (2)     36       89.2 %   $ 1.3     $ 54.35  
Aspen   Manhattan   2004     165,542       232       98.2 %   $ 5.3     $ 32.61  
              2,406,907       3,269       95.9 %   $ 71.4     $ 30.94  
                                                 
Commercial                                                
141 Livingston Street   Brooklyn   1959     206,084 (3)     1       100.0 %   $ 8.2     $ 40.00  
250 Livingston Street   Brooklyn   1920     266,569 (4)     1       100.0 %   $ 5.6     $ 20.92  
Subtotal - office             472,653       2       100.0 %   $ 13.8     $ 29.24  
                                                 
50 Murray Street (retail)   Manhattan         44,436       7       100.0 %   $ 2.3     $ 51.07  
50 Murray Street (parking)   Manhattan         24,200       1       100.0 %   $ 1.1     $ 44.06  
53 Park Place (retail)   Manhattan         8,600       1       100.0 %   $ 0.3     $ 39.19  
141 Livingston Street (parking/other)   Brooklyn         9,989 (3)     1       (5 )   $ 0.3     $ 32.68  
250 Livingston Street (retail)   Brooklyn         990       1       100.0 %   $ 0.1     $ 83.45  
250 Livingston Street (parking)   Brooklyn                               $ 0.2          
Aspen (retail)   Manhattan         21,060       3       100.0 %   $ 0.9     $ 42.60  
Aspen (parking)   Manhattan                         $ 0.3        
                                                 
Subtotal - retail             109,275       14       100.0 %   $ 5.5     $ 50.39  
                                                 
Total             2,988,835       3,285       96.7 %   $ 90.7     $ 31.40  

 

 

(1) Comprises 59 buildings
(2) Conversion of floors 9-12 into residential units occurred in 2003-2005, 2008-2009 and 2013, with renovation of residential units on the 12 th floor from 2014 to the present.
(3) Measured according to REBNY standards.
(4) Has been remeasured to 353,895 square feet according to REBNY standards.
(5) Month-to-month.

 

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The table below presents an overview of commercial and retail lease expirations for 10 years beginning 2016.

 

Year   Number of
Tenants
  Total Area
Square Feet
    Gross
Annual Rent
    % Gross Annual
Rental
 
2016   1     79,424       1,707,616       8.8 %
2017   1     33,000       1,026,092       5.3 %
2018                    
2019   3     9,838       451,000       2.3 %
2020   1     187,145       4,070,098       21.0 %
2021                    
2022   1     24,200       1,066,266       5.5 %
2023       10,812       653,470       3.4 %
2024   1     206,084       8.243,360       42.5 %
2025   1     8,627       495,621       2.6 %

 

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Descriptions of Our Properties

 

Tribeca House Properties

 

The Company purchased the 50 Murray Street and 53 Park Place buildings on December 15, 2014.

 

These buildings were built in 1964 and 1921, respectively, renovated in 2001, and comprise a total of 505 units which include studio and one- and two-bedroom apartments as well as retail space and parking. The buildings are both full service luxury rentals which include building finishes such as ceilings as high as 11 feet, stainless steel appliances and granite countertops and amenities such as a doorman, elevator, landscaped roof deck, rooftop basketball court, tenant lounge, game room, toddlers’ play room, in-house valet service and screening room. 50 Murray Street includes 389 units and 394,238 square feet and 53 Park Place includes 116 units and 85,423 square feet. Both buildings are unencumbered by rent regulation.

 

The Tribeca neighborhood has one of the highest average market rents in Manhattan and one of the lowest vacancy rates in Manhattan (based on a CitiHabitats market report as of July 2016 combining Tribeca with the adjacent SoHo neighborhood) as well as convenient access to mass transit. These conditions indicate an owner-favorable residential rental market where renters occupy their units for an extended period of time. We believe many affluent renters have been priced out of Manhattan for-sale coop and condo markets and have limited options in the residential rental market in Tribeca.

 

The properties also feature approximately 77,200 square feet of retail space, comprising approximately 53,000 square feet of street-level and mezzanine-level retail space and an externally-managed garage. Tenants in this space include Equinox, a premium fitness club, and the Amish Market, a food market. Other tenants include AT&T, Starbucks and Apple Bank. The average lease duration of retail tenants is approximately nine years.

 

The Company is in the process of undertaking a capital program for the Tribeca House properties. The program’s budget is estimated to be $15.6 million and it will be conducted in phases. The first phase will focus on improvements in the lobby at 50 Murray Street. The lobby has not been renovated since the 2001 conversion of the building from office space and needs to be updated to suit the tastes and styles of tenants in the present. We believe capital investments in select units will allow us to attract more affluent tenants that will be willing to pay higher rents in exchange for high quality finishes, appliances, remodeled kitchens and bathrooms, and improved closet space. We believe a capital plan that upgrades the common areas and individual units will bring the Tribeca House properties up to the standards of the surrounding neighborhood.

 

There is $460 million in mortgage and mezzanine debt related to the Tribeca House properties as of June 30, 2016, in the form a mortgage note of $360 million to Deutsche Bank and a $100 million mezzanine note to SL Green Finance. The mortgage note bears interest at one-month LIBOR plus 3.40%. The mezzanine note bears interest at one-month LIBOR plus 7.38%. Both the mortgage note and the mezzanine note mature on November 9, 2016 and give us the option to extend the maturity date up to three one-year terms. Under the mortgage note, we have the option to prepay the balance in whole, but not in part. Under the mezzanine note, we have the option to prepay the balance in whole, but not in part. In connection with both the mortgage and mezzanine debt, David Bistricer and an entity controlled by Sam Levinson entered into guaranties of recourse obligations.

 

Property highlights include:

 

Location · 50 Murray Street and 53 Park Place
     
Building Type · Residential
     
  · Retail

 

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Number of units · 505 units
     
Other Amenities · Doorman
     
  · Landscaped roof deck
     
  · Rooftop basketball court
     
  · Tenant lounge
     
  · Game room
     
  · Toddler’s play room
     
  · In house valet service
     
  · Screening room
     
Nearby rapid transit access · MTA Subway A, C, E, N, R, 1, 2, 3 trains
     
  · PATH train

 

Flatbush Gardens

 

Flatbush Gardens is a 59-building complex located along Foster Avenue between Nostrand and Brooklyn Avenues in the East Flatbush neighborhood of Brooklyn. The property’s 59 buildings are located on seven tax parcels. The complex was constructed around 1950 and contains 2,496 studio, one-bedroom, two-bedroom, and three-bedroom apartments and four below-grade garages. The aggregate site area is 898,940 square feet, the aggregate gross building area is 1,926,180 square feet and the gross leasable area is 1,734,885 square feet.

 

                Site Area     Net Leasable     No. of  
Address   Block     Lot     (Sq. Ft.)     Area (Sq. Ft.)     Units  
3101 Foster Avenue     4964       47       60,000       118,320       168  
1405 Brooklyn Avenue     5000       200       47,500       86,850       144  
1402 Brooklyn Avenue     4981       50       161,655       292,920       420  
1368 New York Avenue     4964       40       195,865       352,800       504  
3505 Foster Avenue     4967       40       182,300       353,520       504  
3202-24 Foster Avenue     4995       30       112,875       237,360       336  
1401 New York Avenue     4981       1       138,745       293,115       420  
Total                     898,940       1,734,885       2,496  

 

Community District 17 is a mixed-income community. Based on the 2010 Census data, Environmental Systems Research Institute (ESRI) estimates the 2011 median and average household incomes were $39,558 and $47,014, respectively. ESRI projects that over the next five years the number of households with income levels of $75,000 or greater will increase significantly and continue the gentrification of the neighborhood. East Flatbush possesses adequate linkage to the area’s shopping centers, recreational facilities, public service facilities and employment centers to make it a highly desirable residential neighborhood.

 

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We believe Flatbush Gardens represents an entry-level, low-cost option in the market and that we will increasingly draw tenants who have been priced out of other New York City sub-markets.

 

The neighborhood surrounding the Flatbush Gardens complex is residential on all sides. For long periods of time, Flatbush Gardens stood side by side with a vibrant working-class neighborhood, but in the 1960s the area began to change. The neighborhood shifted as longstanding middle-class residents moved out of the neighborhood and were replaced by recent immigrants. Over time, Flatbush Gardens became a low-cost rental option in Brooklyn and the tenant quality and the physical appearance of the complex declined rapidly and criminal activity increased significantly. When we acquired the complex in 2005, it was in disrepair. However, the essential residential neighborhood feel around the complex remained. Unlike other New York City housing communities where entire neighborhoods were blighted, we believe the residential areas surrounding this property’s neighborhood remained intact. The Newkirk Avenue subway station, which is serviced by the No. 2 and No. 5 trains, is located on the west side of the complex. Brooklyn College is located 0.6 miles along Nostrand Avenue to south of Flatbush Gardens. The No. 2 and No. 5 trains, which service both Flatbush Gardens and Brooklyn College, provide direct access to the west side and east side, respectively, of Manhattan, as well as other points in Brooklyn. Two larger regional medical centers are located within a mile of the complex.

 

Over the past eight years, we have steadily expended funds to bring the internal and external areas of the complex to code and provide reliable basic services. As a result of our effort in managing the complex, including these upgrades, we have reduced outstanding New York City violations from over 8,000 at the time of the acquisition to approximately 359 currently, and substantially improved resident safety. The management team uses EMPOWER software, commonly used in this space, to efficiently and effectively manage resident complaints in order to remedy potential violations to the extent possible. EMPOWER alerts the management team with real-time data directly from New York City agencies, including the Department of Housing Preservation & Development, so management can take appropriate action in responding to residents’ concerns. Utilizing the software provides the management team with powerful tools to manage work orders, requests, complaints, violations, hearings, compliance, inspections, registrations, permits, job fillings and financial statements. By streamlining day-to-day operations, delivering early notifications of new complaints and keeping track of important dates and events, EMPOWER allows the management team to save time addressing potential violations by resolving them before they escalate.

 

We believe we are now in position to take the complex to a higher level of service and amenities. The neighboring areas are improving rapidly, as rental rates have increased significantly and condo development has begun to penetrate the neighborhood. Neighborhood schools and parks have been upgraded. We believe that the gentrification trends that are moving east across Brooklyn have arrived in East Flatbush. These trends tie into our belief that rental rates at Flatbush Gardens are now significantly below the local market rates. The surrounding neighborhood has moved well ahead of Flatbush Gardens in terms of rental rates which we believe provides us with an opportunity to significantly improve our position in the market. Based on the improving tenant credit profile that we see in tenant applications on a weekly basis, we believe residents who would not have considered our complex when we acquired the property are now looking at Flatbush Gardens as a viable lower-cost housing option. We believe a capital investment plan that upgrades the common areas and park-like open spaces of the complex will bring Flatbush Gardens up to the standards of the surrounding neighborhood. Increasingly, the limited supply of units in Flatbush Gardens—currently a low-cost option in East Flatbush—supports our vision.

 

The Company is in the process of undertaking a comprehensive capital program for the Flatbush Gardens complex. The program’s budget is estimated to be approximately $38 million and it will be conducted in multiple phases dependent on various tiers of priority. The first phase of the capital program will focus on completing improvements on the common areas of the complex, including the lobbies, outdoor activity space and playgrounds. This will improve the overall facade of the complex and assist in increasing rent growth. Through this program, we plan to develop a community atmosphere in the complex. The second phase of the capital program will focus on upgrades to individual apartments on a rolling basis. We expect to perform both major overhauls and minor improvements where deemed necessary. The Company is currently receiving average rents of $21.14 per square foot, while market rents in the area average approximately $29.00 per square foot per StreetEasy listings in Flatbush and Northeast Flatbush as of September 27, 2016. We believe committing to such capital improvements in Flatbush Gardens will permit us to realize the difference in rents between existing rates and where the market is pricing similar apartments in nearby neighborhoods. To implement the program, we intend to utilize contractors with whom we have worked in the past, both at Flatbush Gardens and in other locations, and we have the ability to engage additional contractors given our strong relationships and reputation in the local market. Additionally, given the size of the complex, we will be able to take advantage of bulk pricing and economies of scale to reduce costs and enhance returns on our investment. We expect to complete the aforementioned capital program at Flatbush Gardens in 2018 with respect to exterior work and in 2019 with respect to interior work.

 

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There is $170 million in mortgage debt secured by Flatbush Gardens, as of June 30, 2016, in the form of two mortgage notes to New York Community Bank. A $150 million mortgage note matures on October 1, 2024 and has a fixed interest rate of 3.88%. A $20 million mortgage note also matures on October 1, 2024 and has an interest rate of 3.88% through September 2019, after which the interest is Prime plus 2.75% subject to an option to fix the rate. Under both notes, we have the option to prepay all (but not less than all) of the unpaid balance of the loan prior to the maturity date, but must pay a prepayment premium of 4% if the prepayment occurs prior to October 1, 2016, 3% if it occurs from October 1, 2016 through September 30, 2017, 2% if it occurs from October 1, 2017 through September 30, 2018, and 1% if it occurs from October 1, 2018 through June 30, 2019. David Bistricer entered into guaranties of recourse obligations in connection with both notes for which we will indemnify him.

 

Property highlights include:

 

Building Type · Residential
     
Number of units · 2,496 units
     
Other Amenities · Park-like space between buildings
     
  · Parking lots
     
Nearby rapid transit access · MTA Subway 2, 5 trains

 

141 Livingston Street

 

The 141 Livingston Street property is a 15-story commercial property totaling 206,084 square feet located on a 0.26-acre site at 141 Livingston Street in Downtown Brooklyn. The property’s main commercial tenant, the City of New York, executed a new 10-year lease in December 2015, with effect as of June 2014. Under the agreement with the City of New York, the tenant has an option to terminate the lease after five years. However, if it decides to continue to occupy the building after five years, the rent will increase by 25%, or $2.1 million, beginning the sixth year of the lease. The agreement with the City of New York, as compared to the prior lease, increases rent by 82% per square foot and increases the rentable square feet by 37% as a result of a building remeasurement, resulting in an overall increase in rental revenue of approximately 149%. The lease imposes a requirement on the Company to refurbish the air-conditioning system and perform other upgrades that the Company estimates will cost approximately $5.2 million.

 

The 141 Livingston Street property is located in Downtown Brooklyn, approximately 500 feet from the Jay Street-Metrotech, Hoyt-Schermerhorn, Hoyt Street, and Borough Hall subway stops, offering direct one-seat access to the east and west sides of Manhattan, as well as access to surrounding regions of Brooklyn and Queens, and connections to every other New York City subway line. The property is located near the Fulton Street Mall, a pedestrian mall that runs along Fulton Street between Boerum Place and Flatbush Avenue, and is within walking distance from Barclays Center and Atlantic Avenue. Due to its proximity to lower Manhattan and excellent transit accessibility, Downtown Brooklyn occupies a valuable and unique position in New York City as a competitive, back-office alternative to New Jersey. In addition, the significant residential development activity over the past few years has increased the residential population within Downtown Brooklyn. In the future we may be able to convert the property to residential units, a change made at several nearby buildings, including 110 Livingston Street. Additionally, the property includes an adjacent lot at 22 Smith Street currently used as a parking lot having approximately 5,000 square feet for which the Company has received written expressions of interest in excess of $15 million.

 

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There is $79.5 million in mortgage debt secured by 141 Livingston Street, as of June 30, 2016, in the form of a mortgage note to New York Community Bank. The note bears interest at 3.875% and matures on June 1, 2028. We may prepay the debt in whole or in part, subject to a prepayment premium. David Bistricer and Sam Levinson entered into a guaranty of recourse obligations in connection with this loan for which we will indemnify them.

 

Property highlights include:

 

Location · 141 Livingston Street
     
Building Type · Commercial
     
  · Retail (parking)
     
Tenant · City of New York
     
Other Amenities · Elevators
     
  · Parking
     
Nearby rapid transit access · MTA Subway A, C, F, G, R, 2, 3, 4, 5 trains

 

250 Livingston Street

 

250 Livingston Street is a 12-story mixed-use building with commercial and residential uses on the upper floors and office and retail at grade. The total land area of the site is 29,707 square feet. This space recently has been remeasured according to REBNY standards to approximately 353,000 square feet, an increase of approximately 33% consistent with the remeasurement described above at the nearby 141 Livingston Street property, which features a similar class of office space. There is 266,569 square feet of office space which is currently 100% leased to the City of New York’s Department of Environmental Protection and Human Resources Administration under leases which expire in December 2016 and August 2020. We have agreed upon a term sheet with the City of New York for renewal of the lease expiring at the end of 2016 at $40.00 per square foot for increased square feet that would increase annual rent by approximately $2.6 million. The lease on this portion of the building would terminate with the lease expiring in 2020. However, there can be no assurance that we will reach agreement with the City of New York on the extension or renewal of the leases for all or a portion of their office space. Additionally, the property includes 36 units, or 26,819 square feet, of multi-family residential apartment units, which were developed by Clipper Equity in 2003 through 2013.

 

250 Livingston Street is situated on a block through site that is located along the north side of Schermerhorn Street and the south side of Livingston Street between Bond and Hoyt Streets within Downtown Brooklyn. The upscale rental properties have a separate entrance on Schermerhorn Street, which allows residential tenants access away from the office tenants’ entrance on Livingston. We are currently working on a small capital plan to upgrade the 233 Schermerhorn entrance street façade, which we believe will provide a more residential feel consistent with residential development in the area. Additionally, we recently entered into a lease for the retail space on Schermerhorn Street close to the residential entrance. The new tenant, which operates multiple upscale delis in New York, is paying approximately $80 per square foot. We believe this addition to Schermerhorn Street is an attractive, high quality amenity for our residential tenants.

 

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The property is located in Downtown Brooklyn near the Hoyt-Schermerhorn, Hoyt Street, DeKalb Avenue, and Nevins Street subway stations, offering direct one-seat access to the east and west sides of Manhattan, as well as access to surrounding regions of Brooklyn and Queens, and connections to every other New York City subway line. The Fulton Street Mall is one block north, and the property is within easy walking distance of Barclays Center and Atlantic Avenue. The surrounding area is the site of much commercial and residential development, with new residential developments including the Schermerhorn House, a 9-story, 217 unit residential building located at 160 Schermerhorn Street, and the 25-story, 246-unit residential condominium building known as Be@Schermorhorn located at 189 Schermerhorn.

 

There is approximately $35 million in mortgage debt secured by 250 Livingston Street, as of June 30, 2016, in the form of a mortgage note to Citigroup Global Markets Realty Corp., which has been securitized. The note requires monthly principal and interest payments of $179,000, bears interest of 4.00% and matures on May 6, 2023. We may prepay the debt within two months of May 6, 2023 in whole without having to pay a prepayment premium. David Bistricer entered into a guaranty of recourse obligations in connection with this loan for which we will indemnify him.

 

Location · 250 Livingston Street
     
Building Type · Commercial
     
  · Residential
     
  · Retail
     
Tenant · City of New York
     
Other Amenities · Elevators
     
Nearby rapid transit access · MTA Subway A, B, C, F, G, Q, R, 2, 3, 4, 5 trains

 

The Aspen property

 

On June 27, 2016, the Company purchased the Aspen property located at 1955 1 st Avenue, New York, NY for $103 million. The property fronts the west side of First Avenue on the full block between 100 th and 101st Streets, and comprises 186,602 square feet, 232 residential rental units, three retail units and a parking garage. The residential units are subject to regulations established by the HDC under which there are no rental restrictions on approximately 55% of the units and low and middle income restrictions on approximately 45% of the units. The residential units feature stainless steel appliances including a range, oven, refrigerator, microwave, and dishwasher. The project amenities include a courtyard, game-room, fitness center, clubhouse, laundry facilities and onsite below-grade garage parking. The residential apartment units are approximately 98% occupied at an average rental rate of approximately $33 per square foot. The retail units comprise of three grade-level commercial spaces and a grade level parking garage with 109 licensed spaces. The retail space is fully occupied at an average rental rate of approximately $42.60 per square foot.

 

There is $70 million in mortgage debt secured by Aspen as of June 30, 2016 in the form of a mortgage note with Capital One Multifamily finance LLC. The note matures on July 1, 2028 and bears interest at 3.68%. The note requires interest-only payments through July 2017, monthly principal and interest payments of $321,000 from August 2017 through July 2028 based on a 30-year amortization schedule and principal and interest payments thereafter based on the remaining period of the initial 30-year amortization schedule.

 

Location · 1955 1 st Avenue
     
Building Type · Residential
     
  · Retail
     
Other Amenities · Courtyard, game room, fitness center
     
Nearby rapid transit access · MTA Subway 4, 5, 6 trains

 

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Regulation

 

Environmental and Related Matters

 

Under various federal, state and local laws, ordinances and regulations, as a current or former owner and operator of real property, we may be liable for costs and damages resulting from the presence or release of hazardous substances (such as lead, asbestos and polychlorinated biphenyls), waste, petroleum products and other miscellaneous products (including but not limited to natural products such as methane and radon gas) at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of our properties have been or may be affected by contamination arising from current or prior uses of the property or adjacent properties for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our properties may adversely affect our ability to attract and retain tenants, and our ability to develop or sell or borrow against those properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.

 

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Some of our properties may be adjacent to or near other properties used for industrial or commercial purposes or that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. Releases from these properties could affect our properties.

 

In addition, our properties are subject to various federal, state and local environmental and health and safety laws and regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in turn have a material adverse effect on us. We sometimes require our tenants to comply with environmental and health and safety laws and regulations and to indemnify us for any related liabilities in our leases with them. However, in the event of the bankruptcy or inability of any of our tenants to satisfy such obligations, we may be required to satisfy such obligations. We are not presently aware of any instances of material noncompliance with environmental or health and safety laws or regulations at our properties, and we believe that we and our tenants have all material permits and approvals necessary under current laws and regulations to operate our properties.

 

As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material. Environmental and health and safety laws require that asbestos-containing material be properly managed and maintained and may impose fines or penalties on owners, operators or employers for noncompliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if asbestos-containing material would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of releases of asbestos-containing material into the environment. We are not presently aware of any material liabilities related to building conditions, including any instances of material noncompliance with asbestos requirements or any material liabilities related to asbestos.

 

In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties.

 

Americans with Disabilities Act and Similar Laws

 

Our properties must comply with Title III of the ADA to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. In addition, The FHAA requires apartment communities first occupied after March 13, 1991, to comply with design and construction requirements for disabled access. For projects receiving Federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. We have not conducted a recent audit or investigation of all of our properties to determine our compliance with these or other federal, state or local laws. Noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

 

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Insurance

 

We carry commercial general liability insurance coverage on our properties, with limits of liability customary within the industry to insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils of flood and earthquake shock. Our policies also cover the loss of rental revenue during any reconstruction period. Our policies reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance policies when acquiring new properties, which insure fee title to our real properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including litigation costs. In addition, for properties we may self-insure certain portions of our insurance program, and therefore, use our own funds to satisfy those limits, when applicable. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our management, the properties in our portfolio are adequately insured.

 

Competition

 

The leasing of real estate is highly competitive in Manhattan, Brooklyn, and the greater New York metropolitan market in which we operate. We compete with numerous acquirers, developers, owners and operators of commercial and residential real estate, many of which own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased.

 

In addition, we face competition from numerous commercial developers, real estate companies and other owners and operators of real estate for commercial buildings for acquisition and pursuing buyers for dispositions. We expect competition from other real estate investors, including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue.

 

Employees

 

As of August 31, 2016, we had approximately 177 employees who provide property management, maintenance, landscaping, construction management and accounting services. Certain of these employees are covered by union-sponsored, collectively bargained, multiemployer defined benefit pension and profit-sharing plans, and health insurance, legal and training plans. Contributions to the plans are determined in accordance with the provisions of the negotiated labor contract. The Local 32BJ Service Employees International Union contract is in effect through December 31, 2019.

 

Legal Proceedings

 

From time to time, we are party to various lawsuits, claims for negligence and other legal proceedings that arise in the ordinary course of our business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material effect on our business, financial condition or results of operations if determined adversely to us.

 

Clipper Equity

 

As has been widely reported, several prosecutorial and regulatory entities have opened inquiries regarding the fundraising activities of New York City Mayor Bill de Blasio. In connection with one of those inquiries, in August 2016 information subpoenas were sent to David Bistricer and Clipper Equity, the entity through which David Bistricer operates his real estate business in properties in which our company does not invest. Mr. Bistricer had organized a March 2016 fundraiser to benefit Mr. de Blasio's campaign committee. Mr. Bistricer and Clipper Equity were advised that they were not targets of the investigation. In September 2016, Mr. Bistricer and Clipper Equity provided the documents requested by the subpoenas, which focused on contacts with de Blasio fundraisers or senior de Blasio administration officials, contributions made to or solicited for campaign committees associated with Mr. de Blasio, and two business transactions with the City of New York, including the renewal of our lease with the City of New York at our 141 Livingston Street property.

 

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Company Information

 

Our principal executive offices are located at 4611 12 th Avenue, Brooklyn, New York 11219. Our current facilities are adequate for our present and future operations. Our telephone number is (718) 438-2804. Our website address is www.clipperrealty.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus.

 

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MANAGEMENT

 

Executive Officers and Directors

 

Our board of directors consists of five directors. Of these five directors, four are “independent” under NYSE listing standards.

 

Set forth below are the names, ages and positions of our directors and executive officers as of the date of this prospectus.

 

Name   Age   Position with the Company
         
David Bistricer   67   Co-Chairman and Chief Executive Officer
Lawrence E. Kreider, Jr.   69   Chief Financial Officer
JJ Bistricer   35   Chief Operating Officer
Jacob Schwimmer   45   Chief Property Management Officer
Sam Levinson   42   Co-Chairman, Head of Investment Committee
Howard M. Lorber   67   Director
Robert J. Ivanhoe   63   Director
Roberto A. Verrone   48   Director

 

David Bistricer has been the managing member of Clipper Equity for more than 10 years. He served as Co-Chairman of the board of directors of Coleman Cable Inc. from January 1999 through February 2011. He was previously Co-Chairman of Riblet Products Corporation from January 1987 until its merger with the Coleman Cable Inc. in 2000. Mr. Bistricer brings to our board of directors industry experience, leadership abilities and strategic insight that make him a valuable asset as Co-Chairman of the board of directors and Chief Executive Officer. Mr. Bistricer has also been the managing member of Berkshire Capital LLC and Morgan Capital, real estate investment firms that are no longer active, for more than 10 years. He has also been the managing member and investor in a number of real estate investments unrelated to those of the Company, principally in the New York City area, since approximately 1978.

 

Lawrence E. Kreider, Jr. was retired and self-employed as a financial consultant from 2012 to August 2015, when he became the Chief Financial Officer of the Company. Mr. Kreider was Chief Financial Officer of Cedar Realty Trust from 2007 to 2011, where he had direct responsibility for all aspects of the Company’s financial operations. From 2001 to 2007, Mr. Kreider was Senior Vice President, Chief Financial Officer, Chief Information Officer and Chief Accounting Officer for Affordable Residential Communities, now named Hilltop Holdings Inc. From 1999 to 2001, Mr. Kreider was Senior Vice President of Finance for Warnaco Group Inc. and, in 2000 and 2001, President of Warnaco Europe. From 1986 to 1999, Mr. Kreider held several senior finance positions with Revlon, Inc., as Senior Vice President, Controller and Chief Accounting Officer, and with MacAndrews & Forbes Holdings. Prior to 1986, he held senior finance positions with Zale Corporation, Johnson Matthew Jewelry Corporation and Refinement International Company. Mr. Kreider began his career with Coopers & Lybrand, now PricewaterhouseCoopers. Mr. Kreider holds a B.A. from Yale University and an M.B.A. from the Stanford Graduate School of Business.

 

JJ Bistricer has, since 2006, served as Chief Operating Officer at several properties in the New York City metropolitan area in which David Bistricer is General Manager, with direct responsibility for acquisitions dispositions, leasing, property development and property operations. Mr. Bistricer has been an officer of Clipper Equity since 2006. At the Flatbush Gardens property, Mr. Bistricer has served as overall operating manager since 2006. At the 250 Livingston Street property, Mr. Bistricer managed the conversion of office space to residential since 2006. Mr. Bistricer has served as Chief Operating Officer at the Tribeca House properties since acquisition in December 2014, responsible for residential and retail leasing, development and operations. JJ Bistricer is the son of David Bistricer. As Chief Operating Officer at a number of other properties in the New York metropolitan area, Mr. Bistricer has additional experience in repositioning properties from office and hospital use to residential rental and condominium use.

 

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Jacob Schwimmer has, since 1992, managed, developed, purchased and sold residential and commercial real estate properties in the New York City metropolitan area in conjunction with his parents and in partnership with David Bistricer and Sam Levinson. Mr. Schwimmer, members of his family and family trusts were principal investors in the acquisitions of the 141 and 250 Livingston Street properties in 2002 and the Flatbush Gardens property in 2005. Mr. Schwimmer has served as the principal property management executive at these properties since acquisition. Mr. Schwimmer also serves in the same capacity at another property in New York City in which David Bistricer is the managing member.

 

Sam Levinson is the Chief Investment Officer at Glick Family Investments, a private family office located in New York, New York, where he has overseen private equity investments since 2004. He has been a member of the board of directors of Stonegate Mortgage Corporation (NYSE: SGM) since 2013, serving as Chairman of the Compensation Committee. Mr. Levinson has served as a director of Canary Wharf Group, a U.K. property developer and manager of over 16 million square feet of Class A office and retail space, since 2004, including as a member of the Operating Committee and Chairman of the Audit Committee. Mr. Levinson has also served as a non-executive director of Songbird Estates, Canary Wharf Group’s holding company, since 2004; of American European Group Insurance Company since 2006; and of Dynasty Financial Partners, LLC, which provides investment and technology platforms for independent financial, investment, and wealth management advisors, since 2011. Additionally, Mr. Levinson served as a director of Coleman Cable Inc., a manufacturer of wire and cable, from 2005 until its sale in 2014 and of West Coast Bancorp of Portland, Oregon from February 2011 until its sale in April 2013. Mr. Levinson’s wife is the niece of David Bistricer. We believe Mr. Levinson is qualified to serve as a Co-Chairman of our board of directors because he is an experienced executive and director with numerous years of experience in the financial and real estate industries.

 

Howard M. Lorber is President and Chief Executive Officer and member of the board of directors of Vector Group Ltd. (NYSE: VGR) and Chairman of Douglas Elliman Realty, LLC, a majority-owned subsidiary of Vector Group, which operates the largest residential brokerage company in the New York City metropolitan area and the fourth-largest in the United States. Mr. Lorber has been with Vector Group and its diversified interests since 1994. Mr. Lorber is also Chairman of the board of directors of Nathan’s Famous, Inc.; a director of United Capital Corp., a real estate investment and diversified manufacturing company; Vice Chairman of the board of directors of Ladenburg Thalmann Financial Services; and Chairman of Morgans Hotel Group Co. Mr. Lorber brings to our board of directors his valuable expertise in the real estate and investment industries, including more than 25 years of experience serving on the board of a restaurant and real estate company.

 

Robert J. Ivanhoe is Chair of the 200+ lawyer Global Real Estate Practice and Co-Chair of the REIT group at Greenberg Traurig LLP, where he has worked since 1996. He concentrates his practice in sophisticated real estate structures, financings, workouts, restructurings, acquisitions and dispositions of all asset classes of real estate. Mr. Ivanhoe is actively involved in real estate industry current affairs and is regularly asked to write and lecture on industry topics. He has been recognized by Chambers and Partners USA , The New York Observer and Real Estate New York as one of the leading real estate attorneys in New York City and throughout the United States. He has represented numerous nationally-recognized owner/developer and institutional lender/investor clients domestically and internationally for more than 30 years. Mr. Ivanhoe is a member of Greenberg Traurig LLP’s Executive Committee, Board of Directors and Operating Committee. Mr. Ivanhoe brings to our board of directors valuable expertise in the real estate industry.

 

Roberto A. Verrone is a founder and principal owner of Iron Hound Management Company, which provides advisory and capital placement services in the commercial real estate industry. Mr. Verrone began his career at Bear Stearns in 1990, which included time in the Commercial Real Estate Group. In 2001, he joined Wachovia Corporation following the merger of First Union and Wachovia, and in 2002 he became manager of Wachovia’s Large Loan Group. Prior to founding Iron Hound in early 2009, Mr. Verrone also served as Co-Head of Wachovia’s Real Estate Group, where he was responsible for managing approximately 600 employees and oversaw a debt portfolio valued in excess of $80 billion. Mr. Verrone received a Bachelor of Arts degree from Moravian College. Mr. Verrone brings to our board of directors his valuable expertise in the commercial real estate industry, in which he has more than 23 years of experience.

 

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Board of Directors

 

Pursuant to our charter and bylaws, the number of our directors may not be fewer than the minimum number required by Maryland law, which is one, and may not be greater than fifteen, and will generally be determined from time to time by resolution of the board of directors. Our current board of directors consists of five persons. Our board of directors has determined that Messrs. Ivanhoe, Lorber, Levinson and Verrone meet the independence standards of the NYSE.

 

Our board of directors believes its members collectively have the experience, qualifications, attributes and skills to effectively oversee the management of our company, including a high degree of personal and professional integrity, an ability to exercise sound business judgment on a broad range of issues, sufficient experience and background to have an appreciation of the issues facing our company, a willingness to devote the necessary time to board of directors duties, a commitment to representing the best interests of our company and our stockholders and a dedication to enhancing stockholder value.

 

Committees of the Board of Directors

 

Our board of directors has four committees: the Audit Committee, the Investment Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, each of which meets the NYSE independence standards and other governance requirements for such a committee, subject to certain transition rules for newly public companies as noted below. Each of these committees consists of three members.

 

Audit Committee. We have established an Audit Committee comprising Messrs. Lorber, Ivanhoe and Verrone. The Audit Committee assists the board of directors in overseeing our accounting and financial reporting processes and the audits of our financial statements. Our board of directors has affirmatively determined that a majority of the directors who serve on the Audit Committee meet the independence standards of the NYSE for audit committee members, and satisfy the independence requirements of Rule 10A-3 of the Exchange Act. Mr. Ivanhoe is the only director who serves on the Audit Committee who does not satisfy the independence requirements for audit committee members. Our board of directors has also determined that Mr. Lorber qualifies as an “audit committee financial expert” under SEC rules and regulations. In accordance with applicable transition rules, our board of directors will change the membership of the Audit Committee in due course as may be necessary to ensure that all of its members will satisfy the independence requirements within one year after the effective date of the registration statement of which this prospectus forms a part.

 

Investment Committee. The Investment Committee, comprising Messrs. Levinson, Bistricer and Verrone, supports the board of directors in identifying and analyzing the Company’s investment activity. Specifically, the Investment Committee’s duties include reviewing and making recommendations to the board of directors about potential investments in properties by the Company and the Company’s Investment Policy; reviewing and making recommendations to the board of directors with respect to related party transactions; and reporting to the board of directors about potential investment opportunities.

 

Compensation Committee. We have established a Compensation Committee comprising Messrs. Bistricer, Levinson and Lorber. The Compensation Committee supports the board of directors in fulfilling its oversight responsibilities relating to senior management and director compensation, including the administration of the Clipper Realty Inc. 2015 Omnibus Incentive Compensation Plan and the Clipper Realty Inc. 2015 Non-Employee Director Plan. A majority of directors who serve on the Compensation Committee meet the independence standards of the NYSE for compensation committee members. Mr. Bistricer is the only director who serves on the Compensation Committee who does not meet the independence standards of the NYSE for compensation committee members. In accordance with applicable transition rules, our board of directors will change the membership of the Compensation Committee in due course as may be necessary to ensure that all of its members will satisfy the independence requirements within one year after our listing date.

 

Nominating and Corporate Governance Committee. We have established a Nominating and Corporate Governance Committee comprising Messrs Bistricer, Levinson and Ivanhoe. The Nominating and Corporate Governance Committee assists the board of directors in identifying and recommending candidates to fill vacancies on the board of directors and for election by the stockholders, recommending committee assignments for members to the board of directors, overseeing the board of directors’ annual evaluation of the performance of the board of directors, its committees and individual directors, reviewing compensation received by directors for service on the board of directors and its committees and developing and recommending to the board of directors appropriate corporate governance policies, practices and procedures for our company. Mr. Bistricer is the only director who serves on the Nominating and Corporate Governance Committee who does not meet the independence standards of the NYSE. In accordance with applicable transition rules, our board of directors will change the membership of the Nominating and Corporate Governance Committee in due course as may be necessary to ensure that all of its members will satisfy the independence requirements within one year after our listing date.

 

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Compensation Committee Interlocks and Insider Participation

 

None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other legal entity that has one or more executive officers serving as a member of our board of directors or Compensation Committee.

 

Code of Business Conduct and Ethics

 

Our board of directors has adopted a code of business conduct and ethics that applies to our officers, directors and employees. Among other matters, this code of conduct works together with our Investment Policy and is designed to promote honest and ethical conduct, including ethical handling of conflicts of interest. The purpose of the code of conduct is to ensure that our honesty and integrity, and therefore our reputation, are not compromised.

 

A fundamental principle of the code of conduct is that service to our Company should never be subordinated to personal gain and advantage and conflicts of interest should be avoided unless they have been approved by or exist at the direction of our board of directors or our Audit Committee. The code of conduct recognizes that our corporate structure and business do not make it practicable to avoid all relationships that could give rise to conflicts of interest and, accordingly, permits conflicts of interest that have been approved by or at the direction of our board of directors or the Audit Committee. For example, our Investment Policy provides that our officers and directors, including David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, are not required to present certain identified investment opportunities to us, including for-sale condominium or cooperative conversions, development projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, and land acquisitions.

 

The full text of the code of conduct will be posted on our website. We intend to disclose future amendments to the code or waivers of its requirements on our website.

 

Limitations on Liability and Indemnification of Directors and Officers

 

Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from:

 

  · actual receipt of an improper benefit or profit in money, property or services; or

 

  · active and deliberate dishonesty that is established by a final adverse judgment and is material to the cause of action.

 

Our charter contains a provision that eliminates the liability of our directors and officers to the maximum extent permitted by Maryland law.

 

Maryland law requires a Maryland corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with any proceeding to which he or she may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:

 

  · the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty;

 

  · the director or officer actually received an improper personal benefit in money, property or services; or

 

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  · in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

 

Under Maryland law, a Maryland corporation also may not indemnify a director or officer in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or for a judgment of liability on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct; however, indemnification for an adverse judgment in a suit by or on behalf of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

 

In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:

 

  · a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and

 

  · a written undertaking by the director or officer or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that he or she did not meet the standard of conduct necessary for indemnification by the corporation.

 

To the maximum extent permitted by Maryland law in effect from time to time, our charter authorizes us to indemnify any individual who serves or has served, and our bylaws obligate us to indemnify any individual who is made or threatened to be made a party to or witness in a proceeding by reason of his or her service:

 

  · as a present or former director or officer; or

 

  · while a director or officer and at our request, as a director, officer, partner, manager, member or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, limited liability company, employee benefit plan or other enterprise

 

from and against any claim or liability to which he or she may become subject or that he or she may incur by reason of his or her service in any of these capacities. Our charter authorizes us, and our bylaws require us, without requiring a preliminary determination of such individual’s ultimate entitlement to indemnification, to pay or reimburse any such individual’s reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served a predecessor of our company in any of the capacities described above and any employee or agent of our company or a predecessor of our company.

 

We have entered into indemnification agreements with each of our directors and executive officers that provide for indemnification and advance of expenses to the maximum extent permitted by Maryland law.

 

We have purchased and maintained insurance on behalf of all of our directors and executive officers against liability asserted against or incurred by them in their official capacities, whether or not we are required or have the power to indemnify them against the same liability.

 

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Summary Compensation Table

 

The following table presents compensation awarded in the fiscal year ended December 31, 2015 to our principal executive officer and our two other most highly compensated persons serving as executive officers as of December 31, 2015. We refer to these executive officers are our “named executive officers”. Because we are a recently formed company, we did not pay compensation to employees, including our named executive officers, during the fiscal year ended December 31, 2014.

 

Name & Principal Position   Year   Salary (1)     Stock Awards     Non-Equity
Incentive Plan
Compensation
    All Other
Compensation
    Total  
David Bistricer (2)   2015   $ 208,333     $ 1,800,000           $ 5,778     $ 2,014,111  
Chief Executive Officer                                            
Lawrence Kreider (2)   2015   $ 135,417     $ 630,000           $ 2,022     $ 767,439  
Chief Financial Officer                                            
JJ Bistricer   2015   $ 104,167     $ 630,000     $ 250,000     $ 2,022     $ 986,189  
Chief Operating Officer                                            

 

  (1) We entered into employment agreements with each of our named executive officers on August 3, 2015, and did not pay a salary to our named executive officers prior to such date.

 

  (2) 2015 annual incentive bonuses for David Bistricer and Lawrence Kreider were paid in the form of LTIP units in March 2016, and are not reflected in this Summary Compensation Table. David Bistricer’s annual incentive bonus was equal to $700,000 (represented by 51,852 LTIP units), and Lawrence Kreider’s annual incentive bonus was equal to $150,000 (represented by 11,112 LTIP units).

 

Outstanding Equity Awards at Fiscal Year End

 

As of December 31, 2014, none of the named executive officers held any outstanding Clipper Realty equity-based awards. In 2015 and in connection with the private offering, we made a special one-time grant of LTIP units to each of our named executive officers. The following table provides information about the outstanding Clipper Realty equity-based awards held by each of our named executive officers as of December 31, 2015:

 

Name   Number of Shares or
Units of Stock That
Have Not Vested (#)
    Market Value of Shares
or Units of Stock That
Have Not Vested (1)
    Equity Incentive Plan
Awards: Number of
Unearned Shares, Units
or Other Rights That
Have Not Vested (#)
    Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares, Units
or Other Rights That
Have Not Vested
 
David Bistricer     133,334 (2)   $ 1,800,000              
Lawrence Kreider     46,667 (2)   $ 630,000              
JJ Bistricer (3)     46,667 (2)   $ 630,000              

 

  (1) The market value of our common stock is based on our initial offering price of $13.50 per share.

 

  (2) Represents a special one-time grant of LTIP units on August 3, 2015. The LTIP units are scheduled to cliff vest on August 3, 2018, generally subject to continued employment through the vesting date. In addition, in March 2016 we granted 51,852 LTIP units to David Bistricer and 11,112 LTIP units to Lawrence Kreider as payment of their respective 2015 annual incentive bonuses.

 

  (3) In March 2016 and in connection with the private offering, we made a special additional one-time grant of 16,667 LTIP units to JJ Bistricer. The value of such grant is not reflected in the table above.

 

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Employment Agreements

 

On August 3, 2015, we entered into, through our operating partnership, employment agreements with each of our named executive officers for fiscal year 2015. Under the employment agreements, David Bistricer serves as Chief Executive Officer, Lawrence Kreider serves as Chief Financial Officer and JJ Bistricer serves as Chief Operating Officer. The term of each employment agreement is for an unspecified duration and constitutes “at will” employment.

 

Each employment agreement provides for, among other things: (i) an annual base salary of $500,000 for David Bistricer, $325,000 for Lawrence Kreider and $250,000 for JJ Bistricer, (ii) an annual incentive bonus with a target bonus opportunity of 50% of annual base salary for David Bistricer, 46% of annual base salary for Lawrence Kreider and 100% of annual base salary for JJ Bistricer, with the actual amount earned ranging from 0% to 200% of target based on actual achievement against performance metrics to be established by the Compensation Committee, (iii) annual long-term equity incentive compensation awards to be granted beginning in 2016 in form, including vesting restrictions, and amount determined in the sole discretion of the Compensation Committee and the board of directors and (iv) participation in the Company’s employee benefit and welfare plans.

 

Annual incentive bonuses for 2015 were paid to our named executive officers in March 2016 in the following amounts: David Bistricer—$700,000; JJ Bistricer—$250,000 and Lawrence Kreider—$150,000. David Bistricer’s and Lawrence Kreider’s bonuses were paid in the form of LTIP units, and are not reflected in the Summary Compensation Table. Such LTIP units are scheduled to vest on January 2, 2018. JJ Bistricer’s bonus was paid in cash, and is reflected under the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Upon a termination of any executive’s employment by the Company without “cause,” subject to a general release of claims in favor of the Company, the executive will be entitled to: (i) a prorated annual incentive bonus for the year of termination based on actual performance, (ii) either (A) continued benefits under the Company’s group healthcare, vision and dental plans through the 12-month anniversary of termination of employment or (B) a lump-sum payment (grossed up for applicable taxes) equal to 12 times the monthly COBRA cost of continued health and medical coverage and (iii) continued vesting of any outstanding equity compensation awards as if the executive had remained employed through the applicable vesting dates.

 

“Cause” generally means the executive’s: (i) conviction of, or plea of guilty or no contest to, any felony or any crime involving fraud or moral turpitude, (ii) engagement in gross misconduct that causes material financial or reputation harm to the company, (iii) material violation of the terms of the employment agreement or any written Company policy or (iv) disqualification or bar by any governmental or self-regulatory authority from serving in the capacity required by the executive’s job description, or loss of any governmental or self-regulatory license that is reasonably necessary for the executive to perform his duties or responsibilities.

 

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Each employment agreement also contains confidentiality and non-disparagement provisions, which apply indefinitely, and non-competition as well as client and employee non-solicitation provisions that apply during the term of the employment agreement and for one year following a termination of employment for any reason. In addition, the employment agreements for David Bistricer and JJ Bistricer acknowledge that each such executive provides services to Clipper Equity and other entities and businesses affiliated with David Bistricer (which we refer to as the “affiliated entities”), that such responsibilities preclude the executives from devoting substantially all of their time to the Company, and that there may be certain potential conflicts of interest or duties associated with their roles at the Company and the affiliated entities.

 

Other than the employment agreements described above and the employment agreement with Jacob Schwimmer, we do not currently have any agreements, plans or arrangements that provide for severance payments to our executive officers.

 

Retirement Benefits

 

We do not currently offer plans that provide for retirement benefits, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified defined contribution plans, or nonqualified defined contribution plans.

 

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Director Compensation

 

The following table provides information concerning the compensation of each non-employee director for service on our board in 2015. Directors who are employees of us or any of our subsidiaries did not receive, and will not receive, any compensation for their services as directors.

 

Name   Fees Earned or
Paid in Cash
    Stock Awards     All Other
Compensation
    Total  
Sam Levinson   $ 62,500     $ 1,350,000     $ 4,333     $ 1,416,833  
Howard M. Lorber   $ 39,583     $ 22,500     $ 0     $ 62,155  
Robert J. Ivanhoe   $ 31,250     $ 22,500     $ 0     $ 53,822  
Roberto A. Verrone   $ 31,250     $ 22,500     $ 0     $ 53,822  

 

In connection with the private offering, we adopted a compensation program for our directors pursuant to which we pay customary fees to each of our non-employee directors, including a $75,000 cash retainer and other board of directors and board committee fees as determined from time to time, including additional fees for the chairman of each of our board committees and co-chairman of our board.

 

We have granted a total of 120,742 LTIP units (105,001 LTIP units granted in 2015 and 15,741 LTIP units granted in 2016) to our non-employee directors, with an initial value of $1,562,503.50 (represented by 115,741 LTIP units) for Sam Levinson and approximately $22,500 (represented by 1,667 LTIP units) for each of the other non-employee directors. The LTIP units granted to Sam Levinson in 2015 will cliff vest on the third anniversary of the grant date; of the 15,741 LTIP units granted to Sam Levinson in 2016, 10,185 LTIP units vested immediately, 2,778 LTIP units will vest on September 30, 2016 and 2,778 LTIP units will vest on December 31, 2016; and the LTIP units granted to the other non-employee directors will cliff vest on the first anniversary of the grant date, in each case generally subject to continued service as a director. We will also reimburse our directors for reasonable out-of-pocket expenses incurred in connection with the performance of their duties as directors, including without limitation travel expenses in connection with their attendance in-person at board of directors and committee meetings.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Private Offering; Formation Transactions and Related Transactions

 

1,000,000 of the shares in the private offering were sold directly by us to members of our management and board of directors, and their friends, family members and affiliates.

 

In connection with the private offering, we consummated the following formation transactions:

 

  · We formed our operating partnership, of which we are the sole general partner. The holders of LTIP units are the initial limited partners of our operating partnership.

 

  · We invested the net proceeds from the private offering in our operating partnership and our operating partnership invested such proceeds in the predecessor entities in consideration for class A LLC units in each predecessor entity. Our operating partnership became the managing member of each of our predecessor entities.

 

  · Prior to the contribution by our operating partnership described above, our predecessor entities distributed approximately $15 million of available unrestricted cash to the continuing investors.

 

  · The continuing investors had their LLC interests in the predecessor entities converted into class B LLC units. In addition, we issued to one continuing investor 755,939 shares of our common stock.

 

  · We issued a number of shares of our special voting stock to our continuing investors equal to the number of class B LLC units issued to them.

 

  · We granted to members of our senior management team a total of 290,002 LTIP units, and to our non-employee directors a total of 105,001 LTIP units, all of which are subject to certain vesting requirements.

 

  · We entered into the tax protection agreement described below with our continuing investors.

 

  · We entered into the services agreements described below.

 

  · We entered into employment agreements with David Bistricer, Lawrence Kreider, JJ Bistricer and Jacob Schwimmer providing for salary, bonus and other benefits, including certain payments and benefits upon a termination of employment under certain circumstances and the issuance of equity awards. Under those employment agreements, David Bistricer, JJ Bistricer and Jacob Schwimmer spend such time on matters relating to our company as is appropriate and Lawrence Kreider spends all of his working time on matters relating to our company. See “Management—Employment Agreements.”

 

  · We entered into indemnification agreements with our directors and executive officers providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions brought, or threatened to be brought, against such persons in their capacities with us and our subsidiaries.

 

  · David Bistricer and entities controlled by Sam Levinson were released from and otherwise indemnified for liabilities arising under certain guarantees and indemnities with respect to approximately $721.1 million of mortgage loans on our properties, which were assumed by us upon closing of the formation transactions in respect of obligations arising after the closing of the private offering. The guarantees and indemnities with respect to all of the indebtedness are, in most instances, limited to losses incurred by the applicable lender arising from acts such as fraud, misappropriation of funds, intentional breach, bankruptcy and certain environmental matters. In connection with our assumption of these mortgage loans, we have sought to have the guarantors and indemnitors released from these guarantees and indemnities and to have our operating partnership assume any such guarantee and indemnity obligations as replacement guarantor or indemnitor. To the extent lenders did not consent to the release of these guarantors and indemnitors, and they remain guarantors or indemnitors on assumed indebtedness following the private offering, our operating partnership entered into indemnification agreements with the guarantors and indemnitors pursuant to which our operating partnership is obligated to indemnify such guarantors and indemnitors for any amounts paid by them under guarantees and indemnities with respect to the assumed indebtedness. We believe that since we control the properties, it is appropriate, and consistent with market practice, for Mr. Bistricer and entities controlled by Mr. Levinson to be indemnified by our operating partnership to the extent the lenders did not consent to the release of these guarantors and indemnitors. In addition, in connection with future mortgage loans that we would enter into in connection with future property acquisitions or refinancing of our properties, we intend to enter into any necessary guarantees directly and neither Mr. Bistricer and entities controlled by Mr. Levinson nor any of our other directors, executive officers or stockholders would be expected to enter into such guarantees.

 

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  · We entered into a continuing investors registration rights agreement described below.

 

Non-Contributed Properties and Businesses

 

All of the previous employees of our Predecessor’s management companies who spent a majority of their time on matters related to the properties in our portfolio became our employees. We entered into two services agreements with entities that own interests in the non-contributed properties and businesses. One of these agreements is a services agreement under which the non-contributed properties and businesses continue to provide us with the services they previously provided to the properties in our portfolio, including certain construction and information technology services, finance services and executive support services, and one is a services agreement with the non-contributed properties and businesses pursuant to which our employees continue to provide the services they previously provided for those non-contributed properties and businesses, including certain financial controller services and leasing services. The term of each services agreement commenced on August 3, 2015 and each will terminate on August 3, 2018, unless earlier terminated pursuant to the provisions therein or renewed by mutual consent of the parties thereto. We expect that the net amount paid by or to us under these agreements will not exceed $120,000 per year.

 

Tax Protection Agreement

 

We do not presently intend to sell or take any other action that would result in a tax protection payment with respect to the properties covered by the tax protection agreement. We entered into a tax protection agreement with our continuing investors pursuant to which we agreed to indemnify the continuing investors against certain tax liabilities incurred during the 8-year period following the private offering (or with respect to item (iv) below, certain tax liabilities resulting from certain transfers occurring during the 8-year period following the private offering) if those tax liabilities result from (i) the sale, transfer, conveyance or other taxable disposition of any of the properties of our LLC subsidiaries, (ii) any of Renaissance, Berkshire or Gunki failing to maintain a level of indebtedness allocable for U.S. federal income tax purposes to any of the continuing investors such that any of the continuing investors is allocated less than a specified minimum indebtedness in each such LLC subsidiary (in order to comply with this requirement, (1) Renaissance needs to maintain approximately $101.3 million of indebtedness, (2) Berkshire needs to maintain approximately $125.8 million of indebtedness and (3) Gunki needs to maintain approximately $34.4 million of indebtedness), (iii) in a case that such level of indebtedness cannot be maintained by the applicable LLC subsidiary, failing to make available to such a continuing investor the opportunity to execute a guarantee of indebtedness of the LLC subsidiary meeting certain requirements that would enable the continuing investor to continue to defer certain tax liabilities, or (iv) the imposition of New York City or New York State real estate transfer tax liability upon a continuing investor as a result of the formation transactions, private offering, this offering and/or certain subsequent transactions (including subsequent issuances of additional LLC units or interests, issuances of OP units by the operating partnership, issuances of common stock by Clipper Realty, issuances of common stock in exchange for class B LLC units, or dispositions of property by any LLC subsidiary) or as a result of any of those transfers being aggregated. See “Risk Factors—Risks Related to Real Estate.” We estimate that had all of their assets subject to the tax protection agreement been sold in a taxable transaction immediately after the private offering, the amount of our LLC subsidiaries’ indemnification obligations under the tax protection agreement (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $364.9 million. In addition, we estimate that if New York City or New York State real estate transfer taxes had been imposed on our continuing investors, the maximum amount of our LLC subsidiaries’ indemnification obligations pursuant to the tax protection agreement in respect of New York City or New York State real estate transfer tax liability (based on then current tax rates and the valuations of our assets based on the private offering price of $13.50 per share, and including additional payments to compensate the indemnified continuing investors for additional tax liabilities resulting from the indemnification payments) would have been approximately $74.9 million (although the amount may have been significantly less).

 

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Operating Partnership Agreement and Limited Liability Company Agreements

 

Concurrently with the completion of the private offering, we entered into the operating partnership agreement with the various persons who received LTIP units, and the operating partnership entered into amended and restated limited liability company agreements with the various continuing investors in our LLC subsidiaries. These include certain members of our senior management team and our other continuing investors. As a result, such persons became either limited partners of our operating partnership or non-managing members in our LLC subsidiaries.

 

Pursuant to the partnership agreement and LLC agreements, each limited partner of our operating partnership has the right, subject to the terms and conditions set forth in the partnership agreement to require our operating partnership to redeem all or a portion of the OP units held by such limited partner in exchange for a cash amount equal to the number of tendered OP units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the partnership agreement), unless the terms of such OP units or a separate agreement entered into between the operating partnership and the holder of such OP units provide that the holder is not entitled to a right of redemption or impose conditions on the exercise of such right of redemption. On or before the close of business on the fifth business day after we receive a notice of redemption, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered OP units from the tendering person in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each OP unit (subject to anti-dilution adjustments provided in the partnership agreement). See “Description of the Limited Partnership Agreement of Our Operating Partnership.”

 

Each non-managing member of the LLC subsidiaries has the right, subject to the terms and conditions set forth in the LLC agreements, to require the operating partnership to exchange all or a portion of the class B LLC units held by such non-managing member, together with the same number of shares of our special voting stock, for a cash amount equal to the number of tendered class B LLC units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the LLC agreements), unless the terms of such class B LLC units or a separate agreement entered into between an LLC subsidiary and the holder of such class B LLC units provide that the holder is not entitled to a right of exchange or imposes conditions on the exercise of such right of exchange. On or before the close of business on the fifth business day after we and the operating partnership receive a notice of exchange, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered class B LLC units from the tendering non-managing member in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each class B LLC unit (subject to anti-dilution adjustments provided in the LLC agreements). See “Description of the Limited Liability Company Agreements of our LLC Subsidiaries.”

 

Continuing Investor Registration Rights Agreement

 

We entered into a continuing investors registration rights agreement with certain persons receiving shares of our common stock and class B LLC units in the formation transactions, including certain members of our senior management team and the other continuing investors. The continuing investors registration rights agreement provides for the registration of such shares of common stock and shares of common stock that are issuable upon the exchange of class B LLC units.

 

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Indemnification of Our Directors and Officers

 

To the maximum extent permitted by Maryland law in effect from time to time, our charter authorizes us to indemnify any individual who serves or has served, and our bylaws obligate us to indemnify any individual who is made or threatened to be made a party to or witness in a proceeding by reason of his or her service:

 

· as a present or former director or officer; or

 

· while a director or officer and at our request, as a director, officer, partner, manager, member or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, limited liability company, employee benefit plan or other enterprise

 

from and against any claim or liability to which he or she may become subject or that he or she may incur by reason of his or her service in any of these capacities. Our charter authorizes us, and our bylaws require us, without requiring a preliminary determination of such individual’s ultimate entitlement to indemnification, to pay or reimburse any such individual’s reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served a predecessor of our company in any of the capacities described above and any employee or agent of our company or a predecessor of our company.

 

Following completion of the private offering, we entered into indemnification agreements with each of our directors and executive officers that provided for indemnification and advance of expenses to the maximum extent permitted by Maryland law. See “Management—Limitations on Liability and Indemnification of Directors and Officers” and “Description of the Limited Liability Company Agreements of Our LLC Subsidiaries—Management Liability and Indemnification.”

 

Related Party Transaction Approval Policy

 

Our board of directors will adopt, prior to completion of this offering, a written related party transaction approval policy pursuant to which an independent committee (which may be a standing or ad hoc committee) of our board of directors will review and approve or take such other action as it may deem appropriate with respect to the following transactions:

 

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· a transaction in which we are a participant and which involves an amount exceeding $120,000 and in which any of our directors, officers or 5% stockholders, or any other “related person” as defined in Item 404 of SEC Regulation S-K (“Item 404”), has or will have a direct or indirect material interest;

 

· any material amendment, modification or extension of the tax protection agreement, services agreements or continuing investors registration rights agreement; and

 

· any other transaction that meets the related party disclosure requirements of the SEC as set forth in Item 404.

 

This policy will set forth factors to be considered by an independent committee in determining whether to approve any such transaction, including the nature of our involvement in the transaction, whether we have demonstrable business reasons to enter into the transaction, whether the transaction would impair the independence of a director and whether the proposed transaction involves any potential reputational or other risk issues.

 

To simplify the administration of the approval process under this policy, an independent committee may, where appropriate, establish guidelines for certain types of related party transactions or designate certain types of such transactions that will be deemed pre-approved. This policy will also provide that the following transactions are deemed pre-approved:

 

· decisions on compensation or benefits or the hiring or retention of our directors or executive officers, if approved by the applicable committee of the board of directors;

 

· the indemnification and advancement of expenses pursuant to our charter, bylaws or an indemnification agreement; and

 

· transactions where the related person’s interest or benefit arises solely from such person’s ownership of our securities and holders of such securities receive the same benefit on a pro rata basis.

 

If our board of directors appoints an ad hoc independent committee to review and take action with regard to any one or more related party transactions, the committee will be comprised of at least three independent directors. A director on any committee considering a related party transaction who has an interest in the transaction will not participate in the consideration of that transaction unless requested by the chairperson of the committee.

 

This policy will not apply to the implementation or administration of the tax protection agreement, the services agreements or the continuing investors registration rights agreement.

 

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INVESTMENT POLICY AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

 

The following is a discussion of our Investment Policy and certain of our other policies with respect to financing and other activities. These policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders.

 

Investment Policy

 

We will generally target wholly-owned multi-family and commercial properties located in the New York metropolitan area; however, we may also make majority or minority investments alongside partners.

 

We have adopted an Investment Policy that provides that our directors and officers (including officers involved with Clipper Equity), will not invest in any multi-family or commercial property (other than excluded assets) located in the metropolitan New York City area, unless the investment opportunity is first offered to our company and our board of directors (or an independent committee of our board of directors) determines that our company will not pursue the investment opportunity. Our officers and directors, including each of David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, can pursue investment opportunities related to excluded assets, which include (i) for-sale condominium or cooperative conversion or development projects, (ii) projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, or (iii) land acquisitions, without first offering them to our company. In addition, our board of directors has established a conflict of interest and business ethics policy that is designed to work together with the Investment Policy. See “Management—Code of Business Conduct and Ethics.”

Our charter provides that we renounce any interest or expectancy in, or right to be offered or to participate in, any business opportunity identified in any investment policy (including the Investment Policy) or agreement with any of our directors or officers unless the policy or agreement contemplates that the director or officer must first present, communicate or offer such business opportunity to us. See “Certain Provisions of Maryland Law and Clipper Realty’s Charter and Bylaws—Competing Interests and Activities of our Directors and Officers.”

 

Clipper Equity, which includes the real estate business of David Bistricer in which our company did not invest in connection with the formation transactions, owns interests in and controls and manages entities that own interests in multi-family and commercial properties in the New York metropolitan area. Each of David Bistricer, our Co-Chairman and Chief Executive Officer, and JJ Bistricer, our Chief Operating Officer, is an officer of Clipper Equity and will continue to be involved in such capacity with Clipper Equity. Each of Sam Levinson, our Co-Chairman and the Head of our Investment Committee, and Jacob Schwimmer, our Chief Property Management Officer, have ownership interests in Clipper Equity and will continue to be involved in such capacity with Clipper Equity. The employment agreements of David Bistricer, Jacob Schwimmer and JJ Bistricer with the Company acknowledge that each such executive provides services to other businesses affiliated with David Bistricer (including Clipper Equity in the case of David Bistricer and JJ Bistricer), that such responsibilities preclude the executives from devoting substantially all of their time to the Company, and that there may be certain potential conflicts of interest or duties associated with their roles at the Company and these affiliated entities.

 

Policies with Respect to Financing and Other Activities

 

Our board of directors is authorized, without approval of our common stockholders, to cause us to issue additional shares of our stock or to raise capital through the issuance of equity or debt securities, including preferred stock, options, warrants and other rights on terms and for consideration as our board of directors in its sole discretion may determine. In addition, our operating partnership may issue additional OP units or other partnership interests and our LLC subsidiaries may issue additional LLC units or equivalent interests without the consent of our stockholders, any limited partners of our operating partnership or any non-managing member of the applicable LLC subsidiary. See also “Description of the Limited Partnership Agreement of Our Operating Partnership–Operating Partnership Interests” and “Description of the Limited Liability Company Agreements of Our LLC Subsidiaries–LLC Units.” We have not adopted a specific policy governing the issuance of senior securities at this time.

 

We have not made any loans to third parties and do not intend to engage in lending activities, although we do not have a policy limiting our ability to make loans to third parties and we may do so in the future, including making loans to, or guaranteeing indebtedness of, joint ventures in which we may participate. We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. Our board of directors does not currently intend to cause us to repurchase any shares of common stock, although it has the power to do so.

 

We intend to make investments in such a manner as to qualify as a REIT. However, our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT.

 

Reporting Policies

 

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act. Under the Exchange Act, we will file annual, quarterly and current reports, as well as proxy statements and other information with the SEC. These periodic reports, proxy statements, and other information will be available for inspection and copying at the SEC’s Public Reference Room and the website of the SEC referred to above. We intend to make this information available on the investor relations section of our website, www.clipperrealty.com. Information on, or accessible through, our website is not part of this prospectus.

 

We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.

 

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SELLING STOCKHOLDERS

 

The following table sets forth information, as of             , 2016, known to us about the beneficial ownership of shares of our common stock immediately before this offering and immediately after this offering by the selling stockholders. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power of such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after the date through (i) the exercise of any option, warrant or right, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement, or (iv) the automatic termination of a trust, discretionary account or similar arrangement.

 

The common stock offered by the selling stockholders pursuant to this prospectus were originally issued and sold by us in connection with the private offering.

 

The selling stockholders who do not sell all of the shares of our common stock beneficially owned by them in this offering have agreed with FBR Capital Markets & Co. to restrictions on their ability to sell any shares of our common stock they do not sell in this offering for a period of 180 days after the effective date of the registration statement of which this prospectus forms a part. See “Underwriting.”

 

Percentage ownership calculations are based on         shares of common stock outstanding as of         , 2016 and               shares of our common stock outstanding following this offering. To our knowledge, except as indicated in the footnotes to the following table and under applicable community property laws, the persons or entities identified in the table below have sole voting and investment power with respect to all of the common stock shown as beneficially owned by them.

 

    Shares of Common
Stock Beneficially
Owned Before the
Offering
    Number of
Shares of
Common
    Shares of Common
Stock Beneficially
Owned After the
Offering
 
    Shares     Percent
of Class
    Stock Being
Offered
    Shares     Percent
of Class
 
Name of Beneficial Owner                                        

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information, as of August 1, 2016, known to us about the beneficial ownership of shares of our common stock and special voting stock immediately before this offering and immediately after this offering by our 5% or greater stockholders and by our executive officers and directors. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power or investment power of such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after the date through (i) the exercise of any option, warrant or right, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement, or (iv) the automatic termination of a trust, discretionary account or similar arrangement.

 

As of August 1, 2016, there are 11,422,606 shares of our common stock and 26,317,396 shares of special voting stock outstanding. Immediately following the completion of this offering, there will be shares of our common stock and 26,317,396 shares of our special voting stock outstanding.

 

Unless otherwise indicated below, the address of each beneficial owner listed in the table below is c/o Clipper Realty Inc., 4611 Twelfth Avenue, Brooklyn, New York 11219.

 

    Immediately Prior to this Offering     Immediately After this Offering  
Name of
Beneficial
Owner
 

Number of
Shares of

Common Stock
Beneficially
Owned

    Percent
of
Class
    Number of
Shares of
Special
Voting
Stock
Beneficially
Owned
    Percent
of
Class
    Aggregate
number of
Voting
Securities
Beneficially
Owned
    Percent
of
Class 1
   

Number of
Shares
of Common Stock

Beneficially
Owned

    Percent
of
Class
    Number of
Shares of
Special
Voting
Stock
Beneficially
Owned
    Percent
of
Class
    Aggregate
number of
Voting
Securities
Beneficially
Owned
    Percent
of
Class 1
 
5% or Greater Stockholders                                                                                                
David Bistricer     318,262       2.8 %     4,278,058       16.3 %     4,596,320 2     12.2 %     318,262               4,278,058       16.3 %     4,596,320      
Moric Bistricer     -       -       4,278,058       16.3 %     4,278,058 3     11.3 %     -               4,278,058       16.3 %     4,278,058          
Sam Levinson     1,119,415       9.8 %     7,296,279       27.7 %     8,415,694 4     22.3 %     1,119,415               7,296,279       27.7 %     8,415,694          
Eva Schwimmer     -       -       2,731,667       10.4 %     2,731,667       7.2 %     -       -       2,731,667       10.4 %     2,731,667          
Jacob Schwimmer     -       -       2,188,334       8.3 %     2,188,334 5     5.8 %     -       -       2,188,334       8.3 %     2,188,334          
David Bistricer Trust of 2014 6     -       -       2,772,500       10.5 %     2,772,500       7.3 %     -       -       2,772,500       10.5 %     2,772,500          
Moric Bistricer Trust of 2014 7     -       -       2,772,500       10.5 %     2,772,500       7.3 %     -       -       2,772,500       10.5 %     2,772,500          
Indaba Capital Fund L.P. 8     1,115,730       9.8 %     -       -       1,115,730       3.0 %                     -       -                  
Signature Global Asset Management 9     1,116,311       9.8 %     -       -       1,111,451       2.9 %                     -       -                  
American Financial Group, Inc. 10     1,111,111       9.7 %     -       -       1,111,111       2.9 %                     -       -                  
Greenlight Capital, Inc. 11     1,000,000       8.7 %     -       -       1,000,000       2.6 %                     -       -                  
BHCO Master, Ltd. 12     740,740       6.5 %     -       -       740,740       2.0 %                     -       -                  
AmTrust Financial Services, Inc. 13     740,740       6.5 %     -       -       740,741       2.0 %                     -       -                  
Metacapital Management, L.P. 14     740,741       6.5 %     -       -       740,741       2.0 %                     -       -                  

 

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    Immediately Prior to this Offering     Immediately After this Offering  
Name of
Beneficial
Owner
  Number of
Common
Shares
Beneficially
Owned
    Percent
of
Class
    Number of
Shares of
Special
Voting
Stock
Beneficially
Owned
    Percent
of
Class
    Aggregate
number of
Voting
Securities
Beneficially
Owned
    Percent
of
Class 1
    Number of
Common
Shares
Beneficially
Owned
    Percent
of
Class
    Number of
Shares of
Special
Voting
Stock
Beneficially
Owned
    Percent
of
Class
    Aggregate
number of
Voting
Securities
Beneficially
Owned
    Percent
of
Class 1
 
Executive Officers and Directors                                                                                                
David Bistricer     318,262       2.8 %     4,278,058       16.3 %     4,596,320 2     12.2 %     318,262               4,278,058       16.3 %     4,596,320          
Sam Levinson     1,119,415       9.8 %     7,296,279       27.7 %     8,415,694 4     22.3 %     1,119,415               7,296,279       27.7 %     8,415,694          
Robert J. Ivanhoe     -       -       -       -       -       -       -       -       -       -       -       -  
Howard Lorber     -       -       -       -       -       -       -       -       -       -       -       -  
Roberto Verrone     -       -       -       -       -       -       -       -       -       -       -       -  
Lawrence E. Kreider, Jr.     -       -       -       -       -       -       -       -       -       -       -       -  
J.J. Bistricer     -       -       -       -       -       -       -       -       -       -       -       -  
Jacob Schwimmer     -       -       2,188,334       8.3 %     2,188,334 6     5.8 %     -       -       2,188,334       8.3 %     2,188,334          
All executive officers and directors as a group (8 persons)     1,437,677       12.6 %     13,762,671       52.3 %     15,200,348       40.3 %     1,437,677               13,762,671       52.3 %     15,200,348          

 

 

 

Percentages are rounded.

 

  1 Holders of our special voting stock generally are entitled to vote together as a single class with holders of our common stock on all matters on which our common stockholders are entitled to vote, as described under “Description of Capital Stock—Special Voting Stock.” Holders of shares of our special voting stock also hold an equal number of class B LLC units. As of August 1, 2016, the aggregate number of outstanding shares of common stock and special voting stock is 37,740,002. Immediately following the completion of this offering, the aggregate number of outstanding shares of common stock and special voting stock will be                   .

 

  2 Represents 4,278,058 shares of special voting stock held directly and 318,262 shares of common stock owned by the Moric Bistricer 2012 Family Trust, for which David Bistricer is one of two trustees. Excludes 185,186 LTIP units, which will vest in 2018, generally subject to continued employment through the vesting date. Excludes 318,262 shares of common stock owned by the David Bistricer Trust of 2013 and 2,772,500 shares of special voting stock owned by the David Bistricer Trust of 2014. Marc Bistricer, the son of David Bistricer, is the sole trustee of the David Bistricer Trust of 2013 and the David Bistricer Trust of 2014. David Bistricer disclaims beneficial ownership of the shares of common stock and special voting stock owned by the David Bistricer Trust of 2013 and David Bistricer Trust of 2014, respectively.

 

  3 Represents 4,278,058 shares of special voting stock held directly. Excludes (i) 318,262 shares of common stock owned by the Moric Bistricer 2012 Family Trust, for which David Bistricer is one of two trustees and (ii) 2,772,500 shares of special voting stock owned by the Moric Bistricer Trust of 2014, for which Marc Bistricer, the grandson of Moric Bistricer, is the sole trustee. Moric Bistricer disclaims beneficial ownership of the shares of common stock and special voting stock owned by the Moric Bistricer 2012 Family Trust and the Moric Bistricer Trust of 2014, respectively.

 

  4 Represents (i) 991,598 shares of common stock and 4,464,692 shares of special voting stock owned by Trapeze Inc., a Delaware corporation, (ii) 61,482 shares of common stock and 1,362,039 shares of special voting stock owned by Trapeze D Holdings LLC, a Delaware limited liability company and (iii) 66,335 shares of common stock and 1,469,548 shares of special voting stock owned by ECL Holdings LLC, a Delaware limited liability company. Sam Levinson has sole voting and investment control over all of the shares held by these entities. Excludes 115,741 LTIP units, 100,000 of will vest in 2018, 10,185 of  which have vested and 5,556 of which will vest by December 31, 2016, in each case generally subject to Mr. Levinson’s continued service as a director. The address for Trapeze Inc., Trapeze D Holdings LLC, ECL Holdings LLC and Sam Levinson is 810 Seventh Avenue, 28 th Floor, New York, New York 10019.

 

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  5 Represents 437,667 shares of special voting stock owned by Jacob Schwimmer and 1,750,667 shares of special voting stock owned by the Schwimmer Family Irrevocable Gift Trust 2. Excludes 57,779 LTIP units owned by Jacob Schwimmer, which will vest in 2018, generally subject to continued employment through the vesting date. Jacob Schwimmer is the trustee of the Schwimmer Family Irrevocable Gift Trust 2 and has sole voting and investment control over all of the shares held by this trust.

 

  6 Marc Bistricer, the sole trustee of the David Bistricer Trust of 2014, has sole voting and investment control over all of the shares held by this trust.

 

  7 Marc Bistricer, the sole trustee of the Moric Bistricer Trust of 2014, has sole voting and investment control over all of the shares held by this trust.
     
  8 Indaba Capital Fund, L.P. is a limited partnership organized under the laws of the Cayman Islands. Derek Schrier, the Managing Partner and Chief Investment officer of the general partner of the limited partnership (Indaba Capital Partners, LLC) controls the voting power and dispositive power over the shares held by Indaba Capital Fund, L.P. The address for Indaba Capital Fund, L.P., Indaba Partners LLC and Derek Schrier is c/o Indaba Capital Management, L.P., 1 Letterman Drive, Building D, Suite DM 700, San Francisco, CA 94129.
     
  9 Represents (i) 523,500 shares of common stock owned by Signature Diversified Yield II Fund, (ii) 279,710 shares of common stock owned by Signature Diversified Yield Fund, (iii) 161,530 shares of common stock owned by CI Income Fund (iv) 146,371 shares of common stock owned by Sign Diversified Yield Corporate Class and (v) 5,200 shares of common stock owned by Signature Real Estate Pool (collectively, the “Signature Funds”).  Signature Global Asset Management (“Signature”), a division of CI Investments Inc. (“CI”), a company incorporated in Canada is the investment manager of each of the Signature Funds.  Signature and CI control the voting power and dispositive power over the shares held by the Signature Funds. The address for each of these entities is 2 Queen St. East, 18 th Floor, Toronto, ON MSC 367.
     
  10 Represents 666,667 shares of common stock owned by Great American Life Insurance Company (“GALIC”) and 444,444 shares of common stock owned by Great American Insurance Company (“GAIC”).  Each of GALIC and GAIC is a wholly-owned subsidiary of American Financial Group, Inc. (“AFG”).  The board of directors of AFG controls the voting power and dispositive power over the shares held by GALIC and GAIC.  The address for all of these entities is 301 East 4 th Street, Cincinnati, OH 45202.
     
  11 Represents (i) (A) 195,400 shares of common stock held by Greenlight Capital Qualified, L.P., (B) 33,900 shares of common stock held by Greenlight Capital, L.P. and (C) 362,600 shares of common stock held by Greenlight Capital Offshore Partners (collectively, the “Greenlight Capital Funds”), (ii) 131,000 shares of common stock held by Greenlight Reinsurance, Ltd. (“Greenlight Reinsurance”) and (iii) (A) 137,200 shares of common stock held by Greenlight Capital (Gold), LP and (B) 139,900 shares of common stock held by Greenlight Capital Offshore Master (Gold), Ltd. (collectively, the “Greenlight Capital (Gold) Funds”).  Greenlight Capital, Inc. (“Greenlight Inc.”) is the investment manager for each of the Greenlight Capital Funds, and as such has voting and dispositive power over the shares owned by the Greenlight Capital Funds. DME Advisors, LP (“DME Advisors”) is the investment manager for Greenlight Reinsurance, and as such has voting and dispositive power over the shares owned by Greenlight Reinsurance. DME Capital Management, LP (“DME Management”) is the investment manager for the Greenlight Capital (Gold) Funds, and as such has voting and dispositive power over the shares owned by the Greenlight Capital (Gold) Funds. DME Advisors GP, LLC (“DME GP”) is the general partner of DME Advisors and DME Management, and as such has voting and dispositive power over 408,100 shares of common stock. David Einhorn is the principal of Greenlight Inc., DME Advisors, DME Management and DME GP, and as such has voting and dispositive power over 1,000,000 shares of common stock held by these affiliates of Green light, Inc. Mr. Einhorn disclaims beneficial ownership of these shares, except to the extent of any pecuniary interest therein. The address for all of these entities and Mr. Einhorn is c/o Greenlight Capital, Inc., 140 East 45th Street, 24th Floor, New York, NY 10017.

 

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  12 BHCO Master, Ltd. is an Exempted Company incorporated in the Cayman Islands. Michael Thompson is the portfolio manager of BHCO Master, Ltd. and controls the voting power and dispositive power over the shares held by BHCO Master, Ltd. The address for BHCO Master, Ltd. and Michael Thompson is c/o BHR Capital LLC, 733 Third Avenue, 15 th Floor, New York, NY 10017.
     
  13 Represents (i) 195,000 shares of common stock owned by Technology Insurance Company, Inc., (ii) 146,000 shares of common stock owned by Wesco Insurance Company, (iii) 143,000 shares of common stock owned by Security National Insurance Company, (iv) 107,740 shares of common stock owned by Associated Industries Insurance Company, Inc., (v) 76,000 shares of common stock owned by First Nonprofit Insurance Company and (vi) 73,000 shares of common stock owned by Sequoia Insurance Company (collectively, the “AmTrust Entities”).  Each of the AmTrust Entities is a subsidiary of AmTrust Financial Services, Inc. The board of directors of each of the AmTrust Entities controls the voting power and dispositive power over the shares held by it. The address for each of these entities is 59 Maiden Lane, 43 rd Floor, New York, NY 10038.
     
  14 Represents (i) 522,667 shares of common stock owned by Metacapital Mortgage Opportunities Master Fund, Ltd., (ii) 171,735 shares of common stock owned by Metacapital Mortgage Value Master Fund, Ltd. and (iii) 46,339 shares of common stock owned by Super Certus Cayman Fund Limited (collectively, the “Metacapital Funds”).  Metacapital Management, L.P. (“Metacapital”) is the investment manager of each of the Metacapital Funds.  In such capacity, Metacapital  controls the voting power and dispositive power over the shares held by the Metacapital Funds.  Deepak Narula is the managing member of Metacapital GP, LLC (“Metacapital GP”), which is the general partner of Metacapital.  Each of Metacapital, Metacapital GP, and Mr. Narula disclaims beneficial ownership of the shares owned by the Metacapital Funds. The address for each of these entities, and Mr. Narula is 152 West 57 th Street, 38 th Floor, New York, NY 10019.

 

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DESCRIPTION OF CAPITAL STOCK

 

The following description of the material terms of our stock is only a summary. For a complete description, we refer you to the Maryland General Corporation Law, and our charter and our bylaws, which have been filed as exhibits to the registration statement of which this prospectus forms a part.

 

General

 

Our charter provides that we may issue up to 500,000,000 shares of common stock, $0.01 par value per share, 150,000,000 shares of special voting stock, $0.01 par value per share, and up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 140 shares are classified and designated as 12.5% Series A Cumulative Non-Voting Preferred Stock. Our charter provides that our board of directors, without common stockholder approval, may amend our charter to increase or decrease the aggregate number of shares of stock that we are authorized to issue or the number of authorized shares of any class or series of our stock. On the date hereof, we have 11,422,606 shares of our common stock, 26,317,396 shares of our special voting stock, and 132 shares of series A preferred stock issued and outstanding. Under Maryland law, our stockholders generally are not liable for our debts or obligations solely as a result of the stockholder’s status as a stockholder. Following this offering, shares of common stock will be issued and outstanding (        shares if the underwriters exercise their option to purchase additional shares in full).

 

Class B LLC units in our predecessor entities are exchangeable, together with an equal number of shares of our special voting stock, for an amount of cash equal to the fair market value of an equal number of shares of our common stock or, at our election, an equal number of shares of our common stock, subject to certain adjustments and restrictions.

 

Common Stock

 

All of the shares of common stock offered by this prospectus will be duly authorized, validly issued, fully paid and nonassessable. Subject to the preferential rights, if any, of holders of any other class or series of our stock (including our series A preferred stock) and to the provisions of our charter relating to the restrictions on ownership and transfer of our stock, holders of our common stock are entitled to receive dividends when authorized by our board of directors and declared by us out of assets legally available for distribution to our stockholders, and will be entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up, after payment of or adequate provision for all of our known debts and liabilities.

 

Subject to (a) the specific class voting rights of holders of any other class or series of our stock, including our series A preferred stock and our special voting stock (b) certain restrictions required by the registration rights agreement on the rights of our directors and executive officers, and their affiliates, to vote at a special election meeting, on amendments to the provisions of our charter and bylaws relating to special election meetings and the vote required to amend such provisions and, after a special election meeting and, until our common stock is listed on a national securities exchange as required by the registration rights agreement, on the removal or reelection of directors initially elected at a special election meeting and the expansion of the size of the board of directors, and (c) to the provisions of our charter relating to the restrictions on ownership and transfer of our stock, each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of our stockholders, including the election of directors. Except as provided with respect to any other class or series of our stock (including our series A preferred stock and our special voting stock), the holders of our common stock will possess the exclusive voting power. There is no cumulative voting in the election of directors and directors will be elected by a plurality of the votes cast in the election of directors, which means that stockholders (including holders of our special voting stock) entitled to cast a majority of the votes entitled to be cast in the election of directors can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors.

 

Holders of our common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Subject to the provisions of our charter relating to the restrictions on ownership and transfer of our stock, all holders of our common stock will have equal dividend, liquidation and other rights.

 

 - 130 -

 

 

Under Maryland law, a Maryland corporation generally cannot amend its charter, consolidate, merge, convert, sell all or substantially all of its assets, engage in a statutory share exchange or dissolve unless the action is advised by its board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. As permitted by Maryland law, except for amendments to the provisions of our charter relating to the removal of directors and the vote required to amend the removal provision, which must be approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, our charter provides that any of these actions may be approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. Holders of our special voting stock and holders of our series A preferred stock have the right to vote as separate classes of stock on certain amendments to our charter (including, in the case of our series A preferred stock, certain amendments to our charter effected by merger, consolidation, sale of assets or otherwise) as described below under “ —Special Voting Stock” and “—Series A Preferred Stock.” In addition, as long as the registration rights agreement remains in effect, our directors and executive officers, as well as their affiliates, are not entitled to vote on amendments to certain provisions of our charter relating to special election meetings or the vote required to amend such provisions. Maryland law also permits a Maryland corporation to transfer all or substantially all of its assets without the approval of its stockholders to an entity owned, directly or indirectly, by the corporation. Because our operating assets may be held by our wholly owned subsidiaries, these subsidiaries may be able to merge or transfer all or substantially all of their assets without the approval of our stockholders.

 

Except for amendments to certain provisions of our bylaws relating to any special election meeting described below under the caption “Certain Provisions of Maryland Law and Clipper Realty’s Charter and Bylaws – Special Meetings of Stockholders,” or the vote required to amend such provisions, which, for so long as the registration rights agreement remains in effect, must be approved by our board of directors and the holders of two-thirds of our outstanding common stock, excluding shares held by our directors and executive officers and their affiliates, and our special voting stock, our board of directors has the exclusive power to amend our bylaws.

 

Special Voting Stock

 

Holders of our special voting stock are entitled to vote together as a single class with holders of our common stock on all matters (other than, for so long as the registration rights agreement remains in effect, matters considered at a special election meeting, amendments to certain provisions of our charter and bylaws relating to special election meetings and the vote required to amend such provisions and, after a special election meeting and until our common stock is listed on a national securities exchange as required by the registration rights agreement, the removal or reelection of directors initially elected at a special election meeting or the expansion of the size of the board of directors) brought before our common stockholders, including the election of directors, on an as-exchanged basis, as if such holder of our special voting stock had exchanged any class B LLC units in our predecessor entities held by such holder for shares of our common stock. In addition, holders of our special voting stock have the exclusive right to vote, as a single class, on any amendment to our charter on which our stockholders are entitled to vote that would alter only the contract rights, as expressly set forth in our charter, of the special voting stock. Holders of our special voting stock are not entitled to any dividends or other distributions from us, including any distribution of our assets upon our liquidation, dissolution or winding up, except that holders of special voting stock may receive distributions of our securities, including shares of any class or series of our stock, when, as and if authorized by our board of directors and declared by us. Holders of our special voting stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Shares of our special voting stock are exchangeable, together with an equal number of class B LLC units in our predecessor entities, for an amount of cash equal to the fair market value of an equal number of shares of our common stock or, at our election, an equal number of shares of our common stock, subject to certain adjustments and restrictions.

 

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Series A Preferred Stock

 

With respect to the payment of dividends and redemption rights and the distribution of our assets upon dissolution, liquidation or winding up, the series A preferred stock is senior to all other existing classes and series of our stock, including our common stock and our special voting stock. Holders of our series A preferred stock are entitled to dividends that accrue on a daily basis at the rate of 12.5% per annum of the sum of $1,000 plus all accumulated and unpaid dividends thereon, and are cumulative from and including the date of issuance. Dividends on outstanding shares of series A preferred stock accrue whether or not they have been declared and whether or not we have funds that are legally available for distribution. We must pay or set apart for payment all accrued and unpaid dividends for all past dividend periods on all outstanding shares of series A preferred stock before we may pay any dividend or other distribution to holders of, or redeem or repurchase, shares of any other class or series of our stock, including common stock. If we pay less than the total amount of dividends then accrued with respect to the outstanding shares of series A preferred stock, such a payment must be distributed ratably among the holders of outstanding shares of series A preferred stock on the basis of the number of shares of series A preferred stock then owned by each holder.

 

Dividends on series A preferred stock are payable semiannually, in arrears, on or before June 30 and December 31 of each year, when, as and if authorized by our board and declared by us, except that no dividends on series A preferred stock will be payable at any time that the payment of such dividends would be restricted or prohibited by law or would constitute a breach of or default under the terms of any written agreement between the us and any person that is not our affiliate. Dividends payable on series A preferred stock for any partial period, including the first dividend period, are computed on the basis of a 360-day year consisting of twelve 30-day months. We will pay dividends to holders of record of series A preferred stock as they appear in our stock transfer records at the close of business as of June 15 and December 15 of each year, or on such other date designated by our board as the record date for the payment of such dividend that is not more than 30 days before the applicable payment date for such dividend.

 

The holders of series A preferred stock are not entitled to vote in the election of directors or on any other matters submitted to our stockholders, except that the approval of the holders of at least a majority of the outstanding shares of series A preferred stock, voting as a separate class, is required for us to (a) authorize or issue any equity security senior to or on a parity with series A preferred stock, (b) reclassify the outstanding series A preferred stock or (c) amend our charter, whether by merger, consolidation, transfer or conveyance of all or substantially all of our assets or otherwise (an “Event”), in a manner that materially and adversely affects any right, preference, privilege or voting power of the series A preferred stock or that increases the number of authorized shares of series A preferred stock to a number greater than 140. So long as shares of series A preferred stock remain outstanding with their terms materially unchanged after the occurrence of an Event or, as a result of an Event, the holders of series A preferred stock receive equity securities of the successor or survivor of the Event with substantially identical rights as the series A preferred stock (even if, after the Event, we are not the surviving entity or the surviving entity is not a corporation), the occurrence of the Event will not be deemed to materially and adversely affect the rights, preferences, privileges or voting powers of the series A preferred stock and the holders of series A preferred stock will not be entitled to vote with respect to the Event unless the number of authorized series A preferred stock is increased to a number greater than 140 as a result of the Event.

 

The outstanding shares of series A preferred stock are subject to redemption, in whole or in part, at any time, upon notice by us to the record holders of the series A preferred stock to be redeemed, on the redemption date selected by us. If we elect to redeem any shares of series A preferred stock, such shares will be redeemed for a price per share, payable in cash on the redemption date, equal to $1,000 plus all accrued and unpaid dividends thereon (whether or not declared) to and including the redemption date, plus a redemption premium of $100 per share if the redemption date falls on or before December 31, 2017. No redemption premium will be payable if the redemption date is after December 31, 2017. Unless full cumulative dividends on all outstanding shares of series A preferred stock for all past dividend periods that have ended have been, or contemporaneously are, paid or set apart for payment for all past dividend periods, we may not redeem less than all of the outstanding shares of series A preferred stock or, generally, redeem or repurchase equity securities that rank junior to the series A preferred stock, including common stock and the special voting stock, except by conversion into or exchange for other equity securities that rank junior to the series A preferred stock or pursuant to the provisions of our charter relating to the restrictions on ownership and transfer of our stock.

 

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In the event of any voluntary or involuntary dissolution, liquidation or winding up of our affairs, the holders of outstanding shares of series A preferred stock will be entitled to be paid, out of our assets that are legally available for distribution, a liquidation preference per share of series A preferred stock equal to $1,000 plus the amount of any accrued and unpaid dividends thereon (whether or not declared) to and including the date the liquidation preference is paid, plus the redemption premium described above, if any, that would be payable if the shares of series A preferred stock were redeemed on the date the liquidation preference is paid. If our assets that are legally available for distribution upon dissolution, liquidation or winding up are insufficient to pay the full amount of the liquidation preference, the assets available for distribution will be distributed ratably among the holders of outstanding shares of series A preferred stock on the basis of the number of shares of series A preferred stock then owned by each holder. A consolidation or merger the Company with one or more entities, a sale or transfer of all or substantially all of our assets, or a statutory share exchange will not be deemed a dissolution, liquidation, or winding up of the Company.

 

The series A preferred stock is not convertible or exchangeable for any other of our property or securities.

 

Power to Reclassify and Increase the Number of Authorized Shares of Stock

 

Our board of directors may, without common stockholder approval, classify any unissued shares of our preferred stock and reclassify any unissued previously-classified shares of our stock into other classes or series of stock. Before authorizing the issuance of shares of any new class or series, our board of directors must set, subject to the provisions of our charter relating to the restrictions on ownership and transfer of our stock and the rights of holders of our series A preferred stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms and conditions of redemption for each class or series of stock. In addition, our charter authorizes our board of directors, with the approval of a majority of the entire board of directors and without common stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock, or the number of shares of any class or series of stock, that we are authorized to issue. These actions can be taken without common stockholder approval, unless stockholder approval is required by applicable law, the terms of any other class or series of our stock (including our series A preferred stock) or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

 

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Restrictions on Ownership and Transfer

 

In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities such as qualified pension plans) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). To qualify as a REIT, we must satisfy other requirements as well. See “Material U.S. Federal Income Tax Consequences—Taxation of the Company as a REIT—Requirements for Qualification.”

 

Our charter contains restrictions on the ownership and transfer of our stock. Subject to the exceptions described below, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock, excluding any shares of such class or series of common stock that are not treated as outstanding for federal income tax purposes, or 9.8% of the aggregate value of all our outstanding stock, excluding any shares of our stock not treated as outstanding for federal income tax purposes. We refer to these restrictions collectively as the “ownership limit.”

 

The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding shares of any class or series of our common stock, or the acquisition of an interest in an entity that owns shares of our common stock of any class or series could, nevertheless, cause the acquiror or another individual or entity to own shares of our common stock of any class or series in excess of the ownership limit.

 

Our board of directors may, upon receipt of such representations and agreements as it may require and in its sole discretion, prospectively or retroactively, exempt a person from all or any component of the ownership limit or establish a different limit on ownership for a person if the person’s ownership in excess of the ownership limit could not result in our being “closely held” under Section 856(h) of the Code (without regard to whether the interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT. As a condition of granting a waiver of the ownership limit or creating an excepted holder limit, our board of directors may, but is not required to, require an opinion of counsel or IRS ruling satisfactory to our board of directors as it may deem necessary or advisable to determine or ensure our status as a REIT and may impose any conditions or restrictions on such a waiver or excepted holder limit as it deems appropriate.

 

In connection with granting a waiver of the ownership limit or creating an excepted holder limit or at any other time, our board of directors may increase or decrease the ownership limit or any component of the ownership limit unless, after giving effect to any increased or decreased ownership limit, five or fewer persons could beneficially own, in the aggregate, more than 49.9% in value of the aggregate outstanding shares of our stock or we would otherwise fail to qualify as a REIT. A decreased ownership limit will not apply to any person whose ownership of our stock at the time the ownership limit is decreased exceeds the decreased ownership limit until the person’s ownership of our stock, in the aggregate, or of the applicable classes or series of our common stock, equals or falls below the decreased ownership limit, but any acquisition of our stock, or of shares of the applicable class or series of our common stock, by such a person after the decrease in the ownership limit will violate the decreased ownership limit.

 

In addition to the ownership limit, our charter prohibits:

 

  · any person from beneficially or constructively owning shares of our stock that could result in our being “closely held” under Section 856(h) of the Code (without regard to whether the stockholder’s interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT;

 

  · any person from transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned by fewer than 100 persons;

 

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  · until our common stock qualifies as a class of publicly offered securities or we qualify for another exception to the DOL Plan Asset Regulations (other than the insignificant participation exception), Benefit Plan Investors from beneficially owning 25% or more of the total value of the outstanding shares of our common stock, disregarding shares of common stock (or interests therein) held by Controlling Persons (other than Controlling Persons who are Benefit Plan Investors);

 

  · until our common stock qualifies as a class of publicly offered securities or we qualify for another exemption from the DOL Plan Asset Regulations (other than the insignificant participation exception), any person from transferring shares of our common stock unless the transferee provides to us (a) a representation that the transferee is not, and will not be acting on behalf of, a Benefit Plan Investor or Controlling Person and will not transfer or assign its interest in our common stock to any Benefit Plan Investor or Controlling Person and (b) an agreement that such transferee will obtain from its transferee the representation and agreement set forth in this sentence (including without limitation clauses (a) and (b)); and

 

  · until we qualify for an exception to the DOL Plan Asset Regulations (other than the insignificant participation exception), no person may transfer shares of any class or series of our stock that does not qualify as a class or series of publicly offered securities (other than shares of our common stock transferred after obtaining the representation and agreement referenced in the immediately preceding bullet) unless such person obtains from its transferee a representation and agreement that (a) such transferee is not, and will not be, and is not acting on behalf of, a Benefit Plan Investor or Controlling Person and (b) such transferee will obtain from its subsequent transferee the foregoing representations and agreements described in clauses (a) and (b).

 

Any person who acquires or attempts to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limit or any of the other restrictions on transfer and ownership of our stock discussed above, or who would have owned shares of our stock that are transferred to the trust as described below, must give notice immediately to us or, in the case of a proposed transaction, give at least 15 days prior written notice to us and provide us with any other information we request in order to determine the effect of such transfer on our qualification as a REIT or our qualification for any exception from the DOL Plan Asset Regulations.

 

Any attempted transfer of shares of our stock that, if effective, would result in our stock being beneficially owned by fewer than 100 persons will be void and the intended transferee will acquire no rights in the shares. Any attempted transfer of our stock that, if effective, would result in a violation of the ownership limit, our being “closely held” under Section 856(h) of the Code (without regard to whether the stockholder’s interest is held during the last half of a taxable year) or our otherwise failing to qualify as a REIT, will cause the number of shares causing the violation (rounded up to the nearest whole share) to be transferred automatically to one or more trusts for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee will not acquire any rights in the shares. The automatic transfer will be effective as of the close of business on the business day before the date of the attempted transfer or other event that resulted in the transfer to the trust. If the transfer to the trust as described above does not occur or is not automatically effective, for any reason, to prevent a violation of the applicable restrictions on ownership and transfer of our stock, then the attempted transfer which, if effective, would have resulted in a violation of the restrictions on ownership and transfer of our stock will be null and void.

 

We expect that immediately following this offering our common stock will qualify as a class of publicly offered securities and, as a result, the restrictions in the last three bullet points in the immediately preceding paragraph will cease to apply.

 

Shares of our stock held in the trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares of our stock held in the trust and will have no rights to dividends and no rights to vote or other rights attributable to the shares of our stock held in the trust. The trustee of the trust will exercise all voting rights and receive all dividends and other distributions with respect to shares held in the trust for the exclusive benefit of the charitable beneficiary of the trust. Any dividend or other distribution paid before we discover that the shares have been transferred to a trust as described above must be repaid by the recipient to the trustee upon demand by us. Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee will have the authority to rescind as void any vote cast by a proposed transferee before our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee. However, if we have already taken irreversible corporate action, then the trustee may not rescind and recast the vote.

 

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Within 20 days of receiving notice from us of a transfer of shares to the trust, the trustee must sell the shares to a person that could own the shares without violating the ownership limit or the other restrictions on ownership and transfer of our stock contained in our charter. After the sale of the shares, the interest of the charitable beneficiary in the shares transferred to the trust will terminate and the trustee must distribute to the proposed transferee an amount equal to the lesser of:

 

  · the price paid by the proposed transferee for the shares or, if the event causing the shares to be held in the trust did not involve a purchase of such shares at market price, the market price of the shares on the day of such event; and

 

  · the net sale price received by the trustee from the sale or other disposition of the shares.

 

The trustee may reduce the amount payable to the proposed transferee by the amount of any dividends or other distributions that we paid to the proposed transferee before we discovered that the shares had been transferred to the trust and that is owed by the proposed transferee to the trustee as described above. The trustee must distribute any remaining amounts held by the trust with respect to the shares to the charitable beneficiary. If the shares are sold by the proposed transferee before we discover that they have been transferred to the trust, the shares will be deemed to have been sold on behalf of the trust and the proposed transferee must pay to the trustee, upon demand the amount, if any, that the proposed transferee received in excess of the amount that the proposed transferee would have received had the shares been sold by the trustee.

 

Shares of our stock held in the trust will be deemed to be offered for sale to us, or our designee, at a price per share equal to the lesser of:

 

  · the price per share in the transaction that resulted in the transfer to the trust (or, if the event causing the shares to be held in the trust did not involve a purchase of such shares at market price, the market price of the shares on the day of such event); and

 

  · the market price on the date we, or our designee, accept the offer.

 

We may reduce the amount so payable by the amount of any dividends or other distributions that we paid to the proposed transferee before we discovered that the shares had been transferred to the trust and that is owed by the proposed transferee to the trustee as described above, and, in such case, we must pay such amount to the trustee for distribution to the beneficiary of the trust. We have the right to accept the offer until the trustee has otherwise sold the shares of our stock held in the trust. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee must distribute the net proceeds of the sale to the proposed transferee and distribute any dividends or other distributions held by the trustee with respect to the shares to the charitable beneficiary.

 

Every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of the outstanding shares of our stock, within 30 days after the end of each taxable year, must give us written notice stating the person’s name and address, the number of shares of our stock of each class and series that the person beneficially owns and a description of the manner in which the shares are held. Each such owner also must promptly provide to us, in writing, any additional information that we request in order to determine the effect, if any, of the person’s beneficial ownership on our status as a REIT and to ensure compliance with the ownership limit. In addition, any person or entity that is a beneficial owner or constructive owner of shares of our stock and any person or entity (including the stockholder of record) who is holding shares of our stock for a beneficial owner or constructive owner must, on request, disclose to us in writing such information as we may request in order to determine our status as a REIT or our qualification for any exception from the DOL Plan Asset Regulations or to comply, or determine our compliance, with the requirements of any governmental or taxing authority.

 

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Any certificates representing shares of our stock will bear a legend referring to the restrictions described above.

 

Certain of these restrictions on ownership and transfer of our stock will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT or that compliance with any or all such restrictions is no longer required in order for us to qualify as a REIT.

 

These restrictions on ownership and transfer of our stock could delay, defer or prevent a transaction or a change of control of us that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. The transfer agent’s address is 6201 15 th Avenue, Brooklyn, New York 11219.

 

Market Listing

 

We will apply for listing our common stock on the NYSE under the symbol “CLPR”.

 

Registration Rights

 

The purchasers of common stock in the private offering and their transferees, including the persons who received common stock in the formation transactions, are entitled to the benefits of a registration rights agreement between us and FBR Capital Markets & Co., the initial purchaser and placement agent in the private offering, acting for itself and for the benefit of the investors in that offering, which has been filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Under the registration rights agreement, as amended, we were obligated, among other things and at our expense, to use our commercially reasonable efforts to confidentially submit or file with the SEC as soon as reasonably practicable following the completion of the private offering (but in no event later than November 1, 2015) a shelf registration statement registering for resale the registrable shares (as defined in the registration rights agreement) plus any additional common stock issued in respect thereof whether by stock dividend, stock distribution, stock split, or otherwise. We refer to this registration statement as the “resale shelf registration statement.” We are obligated to use our commercially reasonable efforts to cause the resale shelf registration statement to be declared effective by the SEC as soon as practicable after filing, but in no event later than the earlier of (i) October 31, 2016 and (ii) 60 days after the closing of this offering (such earlier date, the “first trigger date”), so long as the closing date of this offering is not later than October 31, 2016; provided, however, that if this offering occurs within the 60 days prior to October 31, 2016, such date shall be 60 days after the closing of this offering of our common stock.

 

We are also required to use our commercially reasonable efforts to cause the registrable shares to be listed on a national securities exchange concurrently with the effectiveness of the resale shelf registration statement.

 

If (A) a resale shelf registration statement registering for resale the registrable shares has not been declared effective by the SEC by the first trigger date, or (B) the registrable shares have not been listed for trading on a national securities exchange by such first trigger date, then we will be required to call a special meeting of our stockholders, which we refer to as a “special election meeting,” for the purpose of considering and voting on proposals to expand the size of our board of directors by two, in the event of a failure to satisfy the requirements of clause (A) of this paragraph, or by three, in the event of a failure to satisfy the requirements of clause (B) of this paragraph, and to elect new directors to fill such vacancies.

 

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If (A) a resale shelf registration statement registering for resale the registrable shares has not been declared effective by the SEC by the first anniversary of the first trigger date (the “second trigger date”), or (B) the registrable shares have not been listed for trading on a national securities exchange by such second trigger date, then we will be required to call a special election meeting for the purpose of considering and voting on proposals to remove all of the then-serving directors of our company and to elect new directors to fill the vacancies created by such removals and any other vacancies on our board of directors. Individuals nominated for election at a special election meeting in accordance with the procedures specified in the registration rights agreement will be required to resign upon the effectiveness of the resale shelf registration statement or the listing of the registrable shares on a national securities exchange, as applicable.

 

The holders of at least two-thirds of the outstanding registrable shares (other than registrable shares held by certain of our directors or executive officers or their affiliates) may waive or defer the requirement that we hold any special election meeting. Our directors and officers and their affiliates, and holders of shares of our special voting stock, are not entitled to vote at any special election meeting.

 

A share of common stock will cease to be a “registrable share” upon the earliest to occur of: (i) the date on which the resale of such share has been registered pursuant to the Securities Act and it has been disposed of in accordance with the registration statement relating to it, (ii) the date on which such share either (a) has been transferred pursuant to Rule 144 or (b) is freely saleable, without being subject to any volume limitation or other condition pursuant to Rule 144, including any current public information requirements, (iii) the date on which such share is sold to us, or (iv) the date on which such share ceases to be outstanding.

 

We will use our commercially reasonable efforts to cause the resale shelf registration statement to become effective under the Securities Act as soon as practicable after the filing and, subject to certain blackout periods, to continuously maintain the effectiveness of the resale shelf registration statement under the Securities Act until the earliest of:

 

  · the date on which the registrable shares covered by the resale shelf registration statement have been sold in accordance with the resale shelf registration statement;

 

  · there are no registrable shares outstanding; or

 

  · the first anniversary of the effective date of the resale shelf registration statement (subject to the condition that the registrable shares have been transferred to an unrestricted CUSIP, are listed on a national securities exchange or an alternative trading system with the registrable shares qualified under the applicable state securities or “blue sky” laws of all 50 states).

 

All holders of the registrable shares may elect to offer their shares for resale in this offering, subject to:

 

  · execution of a customary underwriting agreement; completion and execution of any questionnaires, powers of attorney, indemnities, custody agreements, securities escrow agreements and other documents, including opinions of counsel, reasonably required under the terms of such underwriting agreement; and provision to us of such information as we may reasonably request in writing for inclusion in the registration statement;

 

  · compliance with the registration rights agreement;

 

  · cutback rights on the part of the underwriters, provided that the holders of registrable shares will be permitted to include registrable shares comprising at least 25% of the total number of shares included in this offering; and

 

  · other conditions and limitations that may be imposed by the underwriters.

 

Election by a holder to include registrable shares in this offering will not affect the inclusion of such registrable shares in the resale shelf registration statement until such registrable shares have been sold in the offering.

 

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We will bear certain expenses incident to our registration obligations upon exercise of these registration rights, including the payment of federal securities law and state “blue sky” registration fees, except that we will not bear any brokers’ or underwriters’ discounts and commissions or transfer taxes relating to sales of our common stock. We have agreed to indemnify each selling stockholder for certain violations of federal or state securities laws in connection with any registration statement in which such selling stockholder sells its common stock pursuant to these registration rights. Each selling stockholder has in turn agreed to indemnify us for federal or state securities law violations that occur in reliance upon written information it provides to us for use in the registration statement.

 

The preceding summary of certain provisions of the registration rights agreement is not intended to be complete, and is subject to, and qualified in its entirety by reference to, all of the provisions of the registration rights agreement, as amended. You should read this summary together with the complete text of the registration rights agreement, a copy of which has been filed as an exhibit to the registration statement.

 

We also entered into a continuing investors registration rights agreement with certain persons receiving shares of our common stock and class B LLC units in the formation transactions, including certain members of our senior management team and the other continuing investors. The continuing investors registration rights agreement provides for the registration of such shares of common stock and shares of common stock that are issuable upon the exchange of class B LLC units.

 

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CERTAIN PROVISIONS OF MARYLAND LAW AND CLIPPER REALTY’S

CHARTER AND BYLAWS

 

The following description of certain provisions of Maryland law and of our charter and bylaws is only a summary. For a complete description, we refer you to the Maryland General Corporation Law, and our charter and bylaws.

 

Election and Removal of Directors

 

Our charter and bylaws provide that, except as provided in connection with a special election meeting as described below, the number of our directors may be established only by our board of directors but may not be fewer than one nor, unless our bylaws are amended, more than fifteen.

 

There is no cumulative voting in the election of directors, and directors will be elected by a plurality of the votes cast in the election of directors. Consequently, stockholders entitled to cast a majority of the votes entitled to be cast in the election of directors will be able to elect all of the directors to be elected at any annual or special meeting of our stockholders.

 

Pursuant to a provision of our charter, we have elected to be subject to a provision of Maryland law that provides that, at such time as we have a class of securities registered under the Exchange Act and at least three independent directors (which we expect will be upon completion of this offering), and subject to the rights, if any, of holders of any class or series of our stock other than our common stock and except at a special election meeting, vacancies on our board of directors may be filled only by the remaining directors and that any directors elected by the board of directors to fill a vacancy will serve for the remainder of the full term of the class of directors in which the vacancy occurred.

 

Our charter provides that a director may be removed with or without cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors, except that, for so long as the registration rights agreement is in effect, after any special election meeting and until our common stock is listed on a national securities exchange as required by the registration rights agreement, holders of our special voting stock and our directors and executive officers, and their affiliates, are not entitled to vote on the removal or reelection of directors initially elected at a special election meeting or on the expansion of the size of the board of directors.

 

Business Combinations

 

Under Maryland law, certain “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

  · any person who beneficially owns ten percent or more of the voting power of the corporation’s outstanding voting stock; or

 

  · an affiliate or associate of the corporation who, at any time within the two-year period before the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation.

 

A person is not an interested stockholder if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

 

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After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

 

  · 80% of the votes entitled to be cast by stockholders entitled to vote generally in the election of directors; and

 

  · two-thirds of the votes entitled to be cast by stockholders entitled to vote generally in the election of directors, other than the interested stockholder with whom or with whose affiliate the business combination is to be effected or an affiliate or associate of the interested stockholder.

 

These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

 

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. As permitted by statute, our board of directors has adopted a resolution exempting any business combination between us and any other person that has been approved by our board of directors, including a majority of our directors who are not affiliates or associates of such person. There can be no assurance that our board of directors will not amend or revoke this resolution at any time in the future.

 

Control Share Acquisitions

 

Maryland law provides that a holder of control shares of a Maryland corporation acquired in a control share acquisition has no voting rights with respect to the control shares except to the extent approved by at least two-thirds of the votes entitled to be cast by stockholders entitled to vote generally in the election of directors, excluding votes entitled to be cast by the acquiror, officers and employees who are directors of the corporation. Control shares are voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would cause the acquiror to be entitled to exercise voting power in electing directors within one of the following ranges of voting power:

 

  · one-tenth or more but less than one-third,

 

  · one-third or more but less than a majority, or

 

  · a majority or more.

 

Control shares do not include shares that the acquiror is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions.

 

A person who has made or proposes to make a control share acquisition may, upon satisfaction of certain conditions (including an undertaking to pay expenses), compel the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

 

If voting rights of control shares are not approved at the meeting or if the acquiror does not deliver an acquiring person statement as required by the statute, then the corporation may, subject to certain limitations and conditions, redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of any meeting of stockholders at which the voting rights of such shares are considered and not approved or, if no such meeting is held, as of the date of the last control share acquisition by the acquiror. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights, unless the corporation’s charter or bylaws provide otherwise. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

 

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The control share acquisition statute does not apply to (a) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) acquisitions approved or exempted by the charter or bylaws of the corporation.

 

Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

 

Subtitle 8

 

Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions of the MGCL which provide, respectively, that:

 

  · the corporation’s board of directors will be divided into three classes;

 

  · the affirmative vote of two-thirds of the votes entitled to be cast in the election of directors generally is required to remove a director;

 

  · the number of directors may be fixed only by vote of the directors;

 

  · a vacancy on the board be filled only by the remaining directors and that directors elected to fill a vacancy will serve for the remainder of the full term of the class of directors in which the vacancy occurred; and

 

  · the request of stockholders entitled to cast a majority of the votes entitled to be cast at a special meeting is required for stockholders to require the calling of a special meeting of stockholders.

 

Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (a) require the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors to remove a director from our board of directors, (b) vest in our board of directors the exclusive power to fix the number of directors, by vote of a majority of the entire board, and (c) require, unless called by either of our Co-Chairmen of our board of directors, our President, our Chief Executive Officer or our board of directors, the request of stockholders entitled to cast a majority of votes entitled to be cast at the meeting to call a special meeting. Our charter provides that, at such time as we become eligible to make the election provided for under Subtitle 8 (which we expect will be upon completion of this offering) and subject to the rights, if any, of holders of any class or series of our stock other than our common stock and except at a special election meeting, vacancies on our board of directors may be filled only by the affirmative vote of a majority of the remaining directors then in office, and directors elected to fill a vacancy will serve for the full term of the class of directors in which the vacancy occurred. Our board of directors is not currently classified. In the future, our board of directors may elect, without stockholder approval, to classify our board of directors or elect to be subject to any of the other provisions of Subtitle 8.

 

Special Meetings of Stockholders

 

Either of our Co-Chairmen, our President, our Chief Executive Officer or our board of directors may call special meetings of our stockholders. A special meeting of our stockholders to act on any matter that may properly be considered at a meeting of our stockholders must also be called by our secretary upon the written request of stockholders entitled to cast a majority of all the votes entitled to be cast on such matter at the meeting and containing the information required by our bylaws. Our secretary will inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including our proxy materials), and the requesting stockholder must pay such estimated cost before our secretary may prepare and mail the notice of the special meeting.

 

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In addition, pursuant to the registration rights agreement and our bylaws, if (A) a resale shelf registration statement registering for resale the registrable shares has not been declared effective by the SEC by the first trigger date, or (B) the registrable shares have not been listed for trading on a national securities exchange by such first trigger date, then we will be required to call a special election meeting for the purposes of considering and voting on proposals to expand the size of our board of directors by two, in the event of a failure to satisfy the requirements of clause (A) of this paragraph, or by three, in the event of a failure to satisfy the requirements of clause (B) of this paragraph, and to elect new directors to fill such vacancies, unless the holders of at least two-thirds of the registrable shares, other than registrable shares held by our officers, directors and their affiliates, waive the requirement to call such a special meeting of stockholders.

 

If (A) a resale shelf registration statement registering for resale the registrable shares has not been declared effective by the SEC by the second trigger date, or (B) the registrable shares have not been listed for trading on a national securities exchange by such second trigger date, then, unless the holders of at least two-thirds of the registrable shares, other than registrable shares held by our officers, directors and their affiliates, waive the requirement to call such a special meeting of stockholders, we will be required to call a special election meeting, for the purpose of considering and voting on proposals to remove of all of the then-serving directors of our company and to elect new directors to fill the vacancies created by such removals and any other vacancies on our board of directors. Individuals nominated for election at a special election meeting in accordance with the procedures specified in the registration rights agreement will be required to resign upon the effectiveness of the resale shelf registration statement or the listing of the registrable shares on a national securities exchange, as applicable.

 

For so long as the registration rights agreement is in effect, holders of our special voting stock and our directors and executive officers, and their affiliates, are not entitled to vote at any special election meeting or, after any special election meeting and until our common stock is listed on a national securities exchange as required by the registration rights agreement, on the removal or reelection of directors initially elected at a special election meeting or on the expansion of the size of the board of directors. For so long as the registration rights agreement is in effect, certain provisions of our charter and bylaws that relate to special election meetings or the vote required to amend such provisions may not be amended without the approval of our board of directors and the affirmative vote of two-thirds of votes entitled to be cast on such amendments and our directors and executive officers and their affiliates and holders of our special voting stock are not entitled to vote on such amendments.

 

Advance Notice of Director Nomination and New Business

 

Our bylaws provide that nominations of individuals for election to our board of directors and proposals of business to be considered by stockholders at any annual meeting of our stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by our board of directors or (iii) by any stockholder who was a stockholder of record, as of the record date for the meeting, at the time the stockholder provides the notice required by our bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of the individuals so nominated or on such other proposed business and who has complied with the advance notice requirements of, and provided the information and other materials required by, our bylaws. Stockholders generally must provide notice to our secretary not earlier than the 150 th day nor later than the 120 th day before the first anniversary of the date of our proxy statement for the solicitation of proxies for the election of directors at the preceding year’s annual meeting.

 

Only the business specified in our notice of the meeting may be brought before a special meeting of our stockholders. Nominations of individuals for election to our board of directors at a special meeting of stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction of our board of directors or (iii) if the special meeting has been called in accordance with our bylaws for the purpose of electing directors, by any stockholder who is a stockholder of record, as of the record date for the meeting, at the time the stockholder provides the notice required by our bylaws and at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice requirements of, and provided the information and other materials required by, our bylaws. Stockholders generally must provide notice to our secretary not before the 120th day before such special meeting and after the later of the 90th day before the special meeting or the tenth day after public announcement of the date of the special meeting and the nominees of our board of directors to be elected at the meeting.

 

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With respect to a special election meeting, our bylaws provide that nominations of individuals for election as directors at a special election meeting also may be made by holders of at least 20% of the outstanding registrable shares within the time period and containing the information specified in our bylaws and the registration rights agreement.

 

Competing Interests and Activities of Our Directors and Officers

 

Our charter provides that we renounce any interest or expectancy in, or right to be offered or to participate in, any business opportunity identified in any investment policy adopted by our board of directors or agreement with any of our directors or officers unless the policy or agreement contemplates that the director or officer must present, communicate or offer such business opportunity to us, or an identified opportunity. Accordingly, except for an identified opportunity (a) no director or officer of our company is required to present, communicate or offer any business opportunity to us and (b) any director or officer of our company, on his or her own behalf or on behalf of any other person, may hold and exploit any business opportunity, or direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to himself or herself or to any person or entity other than us. Our charter also provides that the taking by any of our directors or officers for himself or herself, or the offering or other transfer to another person or entity, of any identified opportunity, will not constitute or be construed or interpreted as an act or omission of the director committed in bad faith or as the result of active or deliberate dishonesty or receipt by the director of an improper benefit or profit in money, property, services or otherwise.

 

We have adopted an Investment Policy that provides that our directors and officers, including David Bistricer, Sam Levinson, JJ Bistricer and Jacob Schwimmer, are not required to present certain identified investment opportunities to us, including assets located outside the New York metropolitan area, for-sale condominium or cooperative conversions, development projects, projects that would require us to obtain guarantees from third parties or to backstop obligations of other parties, and land acquisitions. As a result, except to the extent that our officers and directors must present certain identified business opportunities to us, our officers and directors will have no duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we or our subsidiaries engage or propose to engage or to refrain from otherwise competing with us.

 

Effect of Certain Provisions of Maryland law and our Charter and Bylaws

 

The restrictions on ownership and transfer of our stock discussed under the caption “Description of Capital Stock—Restrictions on Ownership and Transfer” prevent any person from acquiring more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our common stock or 9.8% of the aggregate value of all our outstanding stock without the approval of our board of directors. These provisions, as well as the voting power represented by our special voting stock, the business combination statute and control share statute discussed above under the captions “– Business Combinations” and “– Control Share Acquisitions” and the supermajority vote required to remove our directors or to amend certain provisions of our charter may delay, defer or prevent a change in control of us. Our board of directors, without common stockholder approval, has the power to increase the aggregate number of authorized shares and to classify and reclassify any unissued shares of our stock into other classes or series of stock, and to authorize us to issue the newly-classified shares, as discussed under the captions “Description of Capital Stock—General” and “Description of Capital Stock—Power to Reclassify and Increase the Number of Authorized Shares of Stock,” and could authorize the issuance of shares of a class or series of stock that could have the effect of delaying, deferring or preventing a change in control of us. We believe that the power to increase the aggregate number of authorized shares and to classify or reclassify unissued shares of stock, without common stockholder approval, provides us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise.

 

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The provisions of our charter requiring that our directors may be removed only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors prevent our stockholders from removing incumbent directors except upon a substantial affirmative vote. Our charter and bylaws also provide that, other than in connection with a special election meeting, the number of directors may be established only by our board of directors, which prevents our stockholders from increasing the number of directors on our board of directors and filling any vacancies created by such removal with their own nominees. The provisions of our bylaws discussed above under the captions “– Special Meetings of Stockholders” and “– Advance Notice of Director Nomination and New Business” require stockholders seeking to call a special meeting, nominate an individual for election as a director or propose other business at an annual meeting to comply with certain notice and information requirements. We believe that these provisions will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors and promote good corporate governance by providing us with clear procedures for calling special meetings, information about a stockholder proponent’s interest in us and adequate time to consider stockholder nominees and other business proposals. However, these provisions, alone or in combination, could make it more difficult for our stockholders to remove incumbent directors or fill vacancies on our board of directors with their own nominees and could delay, defer or prevent a change in control, including a proxy contest or tender offer that might involve a premium price for our common stockholders or otherwise be in the best interest of our stockholders.

 

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DESCRIPTION OF THE LIMITED PARTNERSHIP AGREEMENT

OF OUR OPERATING PARTNERSHIP

 

The following is a summary of the material provisions of the limited partnership agreement of Clipper Realty L.P., our operating partnership. The following description does not purport to be complete and is subject to and qualified in its entirety by reference to applicable provisions of the Delaware Revised Uniform Limited Partnership Act, as amended, and the partnership agreement. For the purposes of this section, references to the “general partner” refer to Clipper Realty Inc.

 

General

 

Clipper Realty L.P. (the “operating partnership”) is a Delaware limited partnership. Clipper Realty Inc. is the sole general partner of the operating partnership. Pursuant to the partnership agreement of the operating partnership (the “partnership agreement”), the general partner has full, exclusive and complete responsibility and discretion in the management and control of the operating partnership, including the ability to cause the operating partnership to enter into certain major transactions such as acquisitions, dispositions and borrowings. No limited partner may take part in the operation, management or control of the business of the operating partnership by virtue of being a holder of OP units, LTIP units or other limited partnership units. The limited partners have no power to remove the general partner without the general partner’s consent.

 

The general partner is under no obligation to give priority to the separate interests of the limited partners or our stockholders in deciding whether to cause the operating partnership to take or decline to take any actions. If there is a conflict between the interests of our stockholders on one hand and the limited partners on the other, the general partner will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the limited partners. However, the general partner may give priority to the separate interests of the Company and its stockholders, including with respect to tax consequences to limited partners. The general partner is not liable under the partnership agreement to the operating partnership or to any partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by limited partners in connection with such decisions, provided that the general partner has acted in good faith. We and our affiliates may also engage in any transactions with the operating partnership on such terms as we may determine in our sole and absolute discretion.

 

Substantially all of our business activities, including all activities pertaining to the acquisition and operation of properties, must be conducted through the operating partnership and its subsidiaries, and the operating partnership must be operated in a manner that will enable us to satisfy the requirements for qualification as a REIT.

 

Operating Partnership Interests

 

The operating partnership’s interests are currently classified as the general partner interest and LTIP units. The general partner is authorized to cause the operating partnership to issue limited partnership units (“OP units”) or other partnership interests and to admit additional limited partners to the operating partnership from time to time, on such terms and conditions and for such capital contributions as the general partner may establish in its sole and absolute discretion, without the approval or consent of any limited partner, including: (i) upon the conversion, redemption or exchange of any debt, units or other partnership interests or other securities issued by the operating partnership; (ii) for less than fair market value; or (iii) in connection with any merger of any other entity into the operating partnership.

 

Pursuant to the partnership agreement, upon the issuance of our stock other than in connection with a redemption of OP units (as described below), we will generally be obligated to contribute or cause to be contributed the cash proceeds or other consideration received from the issuance to the operating partnership, thereby increasing the general partner interest.

 

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Redemption Rights; Exchange for Common Stock

 

Each limited partner of our operating partnership has the right, subject to the terms and conditions set forth in the partnership agreement to require our operating partnership to redeem all or a portion of the OP units held by such limited partner in exchange for a cash amount equal to the number of tendered OP units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the partnership agreement), unless the terms of such OP units or a separate agreement entered into between the operating partnership and the holder of such OP units provide that they are not entitled to a right of redemption or impose conditions on the exercise of such right of redemption. On or before the close of business on the fifth business day after we receive a notice of redemption, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered OP units from the tendering person in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each OP unit (subject to anti-dilution adjustments provided in the partnership agreement). Without the consent of the general partner, an exchange may not be effected for less than 1,000 OP units of the applicable LLC subsidiary (or, if the holder holds less than 1,000 OP units, all of the units held by such holder). In addition, the consummation of any exchange shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

 

Transferability of Interests

 

We, as general partner of the operating partnership, are not able to withdraw voluntarily from the operating partnership or transfer our interest in the operating partnership, unless the transfer is made in connection with (i) any merger, consolidation or other combination in which, following the consummation of such transaction, the equity holders of the surviving entity are substantially identical to our stockholders, (ii) a transfer to a qualified REIT subsidiary or (iii) as otherwise expressly permitted under the partnership agreement. The partnership agreement permits us to engage in a merger, consolidation or other combination, or sale of substantially all of our assets if:

 

  · we receive the consent of a majority in interest of the limited partners;

 

  · following the consummation of such transaction, substantially all of the assets of the surviving entity consist of partnership units; or

 

  · as a result of such transaction all limited partners will receive, or will have the right to receive, for each partnership unit an amount of cash, securities or other property equal in value to the greatest amount of cash, securities or other property paid in the transaction to a holder of one share of our common stock, provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding shares of our common stock, each holder of partnership units shall be given the option to exchange its partnership units for the greatest amount of cash, securities or other property that a limited partner would have received had it exercised its redemption right (described above) and received shares of our common stock immediately prior to the expiration of the offer.

 

With certain limited exceptions, the limited partners may not transfer their interests in our operating partnership, in whole or in part, without the general partner’s prior written consent, which consent may be withheld in the general partner’s sole and absolute discretion.

 

Distributions

 

The partnership agreement generally provides that the general partner may cause the operating partnership to make quarterly (or more frequent) distributions of all, or such portion as the general partner may in its sole and absolute discretion determine, of available cash (which is defined to be cash available for distribution as determined by the general partner) pro rata according to the partners’ respective percentage interests. The operating partnership also has the ability to grant preferred operating partnership interests, which would be entitled to distributions in accordance with any such preference (and, within each such class, pro rata according to their respective percentage interests).

 

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Allocations of Net Income and Net Loss

 

Except as otherwise provided in the partnership agreement, net income and net loss of our operating partnership (including a corresponding share of each item of income, gain, loss or deduction that is taken into account in computing net income or net loss) are generally allocated at the end of each fiscal year to the partners in accordance with their respective percentage interests; provided that any limited partners holding preferred operating partnership interests would be allocated net income in a manner that reflects any preference in distributions. Notwithstanding the foregoing, net capital gain will be allocated first to the LTIP unitholders until the capital account balances of such LTIP unitholders are in proportion to the capital account balances of partners that are not LTIP unitholders. Under the Code, items of income, gain, loss and deduction with respect to appreciated or depreciated property which is contributed to a partnership, such as the operating partnership, in a tax-free transaction must be specially allocated among the partners in such a manner so as to take into account such variation between tax basis and fair market value.

 

Tax Matters

 

Pursuant to the partnership agreement, the general partner is the tax matters partner of the operating partnership and has certain other rights relating to tax matters. Accordingly, as both the general partner and tax matters partner, we have authority to handle tax audits and to make tax elections under the Code, in each case, on behalf of the operating partnership. The partnership agreement provides that the operating partnership is to be operated in a manner that will enable us to satisfy the requirements for qualification as a REIT for U.S. federal income tax purposes, and ensure that the operating partnership will not be classified as a “publicly traded partnership” taxable as a corporation for purposes of the Code.

 

Term

 

The operating partnership will continue perpetually, unless earlier terminated in the following circumstances:

 

  · a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the general partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the general partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless, prior to the entry of such order or judgment, a majority in interest of the remaining outside limited partners agree in writing, in their sole and absolute discretion, to continue the business of the operating partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a successor general partner;

 

  · an election to dissolve the operating partnership made by the general partner in its sole and absolute discretion;

 

  · entry of a decree of judicial dissolution of the operating partnership pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act;

 

  · the occurrence of any sale or other disposition of all or substantially all of the assets of the operating partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the operating partnership; or

 

  · the incapacity or withdrawal of the general partner, unless all of the remaining partners in their sole and absolute discretion agree in writing to continue the business of the operating partnership and to the appointment, effective as of a date prior to the date of such incapacity, of a substitute general partner.

 

Amendments to the Partnership Agreement

 

Amendments to the partnership agreement may only be proposed by the general partner. Generally, the partnership agreement may be amended with the general partner’s approval and the approval of the limited partners holding a majority in interests of all limited partners. Certain amendments that would, among other things, have the following effects, must be approved by each partner adversely affected thereby:

 

  · convert a limited partner’s interest into a general partner’s interest (except as a result of the general partner acquiring such interest);

 

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  · modify the limited liability of a limited partner;

 

  · alter the rights of any partner to receive the distributions to which such partner is entitled (subject to certain exceptions);

 

  · alter or modify the redemption rights provided by the partnership agreement; or

 

  · alter or modify the provisions governing transfer of the general partner’s partnership interest.

 

Notwithstanding the foregoing, the general partner has the power, without the consent of the limited partners, to amend the partnership agreement as may be required to:

 

  · add to our obligations or surrender any right or power granted to us or any of our affiliates for the benefit of the limited partners;

 

  · reflect the admission, substitution, or withdrawal of partners or the termination of the operating partnership in accordance with the partnership agreement and to amend the list of OP unit and LTIP unit holders in connection with such admission, substitution or withdrawal;

 

  · reflect a change that is of an inconsequential nature or does not adversely affect the limited partners as such in any material respect, or to cure any ambiguity, correct or supplement any provision in the partnership agreement not inconsistent with the law or with other provisions, or make other changes with respect to matters arising under the partnership agreement that will not be inconsistent with the law or with the provisions of the partnership agreement;

 

  · satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a U.S. federal or state agency or contained in U.S. federal or state law;

 

  · set forth or amend the designations, preferences, conversion or other rights, voting powers, duties restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of the holders of any additional partnership interests issued or established pursuant to the partnership agreement;

 

  · reflect such changes as are reasonably necessary for us to maintain or restore our qualification as a REIT, to satisfy the REIT requirements or to reflect the transfer of all or any part of a partnership interest among our company and any qualified REIT subsidiary or entity that is disregarded as an entity separate from the general partner for U.S. federal income tax purposes;

 

  · modify either or both the manner in which items of net income or net loss are allocated or the manner in which capital accounts are computed (but only to the extent set forth in the partnership agreement, or to the extent required by the Code or applicable income tax regulations under the Code);

 

  · issue additional partnership interests; and

 

  · reflect any other modification to the partnership agreement as is reasonably necessary for the business or operations of the operating partnership or the general partner and which does not otherwise require the consent of each partner adversely affected.

 

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Liability and Indemnification

 

Neither the general partner nor its directors and officers are liable to the operating partnership, the limited partners or their assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission, so long as such person acted in good faith. The partnership agreement provides for indemnification of the general partner, its affiliates and each of their respective officers, directors, employees and any persons the general partner may designate from time to time in its sole and absolute discretion, to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the operating partnership, provided that the operating partnership will not indemnify such person, for (i) willful misconduct or a knowing violation of the law, (ii) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the partnership agreement, or (iii) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful, as set forth in the partnership agreement.

 

The limited partners of the operating partnership have agreed that in the event of a conflict in the duties owed by our directors and officers to us and our stockholders and the fiduciary duties owed by us, in our capacity as general partner of the operating partnership, to such limited partners, we will fulfill our fiduciary duties to such limited partners by acting in the best interests of our stockholders.

 

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DESCRIPTION OF THE LIMITED LIABILITY COMPANY AGREEMENTS

OF OUR LLC SUBSIDIARIES

 

The following is a summary of the material provisions of the amended and restated limited liability company agreements of our LLC subsidiaries, Renaissance, Berkshire, Gunki, and 50/53 JV. The following description does not purport to be complete and is subject to and qualified in its entirety by reference to applicable provisions of the New York Limited Liability Company Act, as amended, the Delaware Limited Liability Company Act, as amended, and the limited liability company agreements. For the purposes of this section, references to the terms “operating partnership” or “managing member” refer to Clipper Realty L.P.

 

General

 

Renaissance Equity Holdings LLC is a New York limited liability company that was formed on September 22, 2005. Berkshire Equity LLC is a Delaware limited liability company that was formed on March 27, 2002. Gunki Holdings LLC is a Delaware limited liability company that was formed on January 10, 2003. 50/53 JV LLC is a Delaware limited liability company that was formed on November 26, 2014. Each LLC subsidiary is a predecessor entity of the Company.

 

Following the formation transactions and the amendment and restatement of the limited liability company agreement of each LLC subsidiary (the “LLC agreements”), the operating partnership is the sole managing member of each LLC subsidiary. The continuing investors are the initial non-managing members of the LLC subsidiaries. The operating partnership has, subject to certain protective rights of non-managing members described below, full, exclusive and complete responsibility and discretion in the management and control of the LLC subsidiaries, including the ability to cause an LLC subsidiary to enter into certain major transactions such as acquisitions, dispositions and borrowings. The non-managing members have no power to remove the operating partnership as managing member without the operating partnership’s consent.

 

The managing member is under no obligation to give priority to the separate interests of the non-managing members in deciding whether to cause an LLC subsidiary to take or decline to take any actions. If there is a conflict between the interests of our stockholders or the operating partnership or its partners on one hand and the non-managing members on the other, the managing member will endeavor in good faith to resolve the conflict in a manner not adverse to our stockholders, the operating partnership, its partners or the non-managing members. However, the managing member may give priority to the separate interests of the Company and its stockholders, including with respect to tax consequences to the members of the LLC subsidiaries. The managing member is not liable under the LLC agreements to the LLC subsidiaries or to any non-managing member for monetary damages for losses sustained, liabilities incurred, or benefits not derived by non-managing members in connection with such decisions, provided that it acted in good faith. We, the operating partnership and our affiliates may also engage in any transactions with an LLC subsidiary on such term as we may determine in our sole and absolute discretion.

 

LLC Units

 

The operating partnership owns class A units of each of the LLC subsidiaries and the continuing investors own Class B units of each of the LLC subsidiaries. The following table sets forth information about the number of class B LLC units that are held by the continuing investors in each LLC subsidiary:

 

LLC Subsidiary   Number of Class B LLC Units held
by Continuing Investors
 
Renaissance Equity Holdings LLC     5,216,987  
Berkshire Equity LLC     12,694,841  
Gunki Holdings LLC     1,768,174  
50/53 JV LLC     6,637,394  

 

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The managing member is authorized to acquire interests in, and manage and control additional limited liability companies, limited partnerships or any other entities that will become LLC subsidiaries and to issue additional LLC units or equivalent interests from time to time, on such terms and conditions and for such contributions (in cash or in kind) as the managing member may establish in its sole and absolute discretion, without the approval or consent of any non-managing member, including: (i) upon the conversion, redemption or exchange of any debt, units, interests or other securities issued by an LLC subsidiary; (ii) for less than fair market value; or (iii) in connection with any merger of any other entity into an LLC subsidiary.

 

The LLC agreements generally provide that the managing member may cause the LLC subsidiaries to make quarterly (or more frequent) distributions of all, or such portion as the managing member may in its sole and absolute discretion determine, of available cash (which is defined to be cash available for distribution as determined by the managing member). The holders of the class B LLC units are entitled to a preferred distribution equal to the lesser of (i) the per OP unit distribution paid by the operating partnership or (ii) a pro rata share (determined for this purpose without regard to any class A LLC units held by the operating partnership) of all of the cash flow of the applicable LLC subsidiary. The class A LLC units held by our operating partnership are entitled to any remaining cash flow of such LLC subsidiary, subject to the discretion of the managing member of the LLC subsidiary to hold surplus amounts in reserve for application in future periods, including distributions to holders of class B LLC units in the subsequent periods in accordance with the previous sentence.

 

Exchange Rights

 

Each non-managing member of the LLC subsidiaries has the right, subject to the terms and conditions set forth in the LLC agreements, to require the operating partnership to exchange all or a portion of the class B LLC units held by such non-managing member, together with the same number of shares of our special voting stock, for a cash amount equal to the number of tendered class B LLC units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the LLC agreements), unless the terms of such class B LLC units or a separate agreement entered into between an LLC subsidiary and the holder of such class B LLC units provides that the holder is not entitled to a right of exchange or imposes conditions on the exercise of such right of exchange. On or before the close of business on the fifth business day after we and the operating partnership receive a notice of exchange, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered class B LLC units from the tendering non-managing member in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each class B LLC unit (subject to anti-dilution adjustments provided in the LLC agreements). Without the consent of the managing member, an exchange may not be effected (i) for less than 1,000 class B LLC units of the applicable LLC subsidiary (or, if the non-managing member holds less than 1,000 class B LLC units, all of the units held by such member) or (ii) during the period after the record date with respect to a distribution by the Company for a distribution to its stockholders of some or all of its portion of such distribution. In addition, the consummation of any exchange shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

 

Transferability of Interests

 

The operating partnership, as managing member, is not able to withdraw voluntarily from the LLC subsidiaries or transfer its interest in the LLC subsidiaries unless the transfer is made in connection with (i) any merger, consolidation or other combination in which, following the consummation of such transaction, the equity holders of the surviving entity are either the operating partnership or substantially identical to our stockholders, (ii) a transfer to a qualified REIT subsidiary or (iii) as otherwise expressly permitted under the LLC agreements. The LLC agreements permit an LLC subsidiary to engage in a merger, consolidation or other combination, or sale of substantially all of its assets if:

 

  · the LLC subsidiary receives the consent of the managing member and a majority in interest of the non-managing members (excluding the managing member);

 

  · following the consummation of such transaction, substantially all of the assets of the surviving entity consist of LLC units; or

 

  · as a result of such transaction all non-managing members will receive, or will have the right to receive, for each LLC unit an amount of cash, securities or other property equal in value to the greatest amount of cash, securities or other property paid in the transaction to a holder of one share of our common stock, provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding shares of our common stock, each holder of LLC units shall be given the option to exchange its LLC units for the greatest amount of cash, securities or other property that a non-managing member would have received had it exercised its redemption right (described above) and received shares of our common stock immediately prior to the expiration of the offer.

 

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Allocations of Net Income and Net Loss

 

Except as otherwise provided in the LLC agreements, net income and net loss of each LLC subsidiary (including a corresponding share of each item of income, gain, loss or deduction that is taken into account in computing net income or net loss) is generally allocated at the end of each fiscal year to its members in a manner consistent with the distributions that each member is entitled to receive; provided that any holders of the class B LLC units that are entitled to the preferred distribution will be allocated net loss only to the extent such holders have a positive capital account. Under the Code, items of income, gain, loss and deduction with respect to appreciated or depreciated property which is contributed to a partnership, such as the LLCs, in a tax-free transaction must be specially allocated among the partners (the members) in such a manner so as to take into account such variation between tax basis and fair market value.

 

Tax Matters

 

Pursuant to the LLC agreements, the managing member is the tax matters member of the LLC subsidiaries and has certain other rights relating to tax matters. Accordingly, as both the managing member and tax matters partner, the operating partnership has authority to handle tax audits and to make tax elections under the Code, in each case, on behalf of the LLC subsidiaries. The LLC agreements provide that the LLC subsidiaries are to be operated in a manner that enables us to satisfy the requirements for qualification as a REIT for federal income tax purposes, and ensure that none of the LLC subsidiaries is classified as a “publicly traded partnership” taxable as a corporation for purposes of the Code.

 

Term

 

Each LLC subsidiary will continue perpetually, unless earlier terminated in the following circumstances:

 

  · a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the managing member is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the managing member, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless, prior to the entry of such order or judgment, a majority in interest of the remaining non-managing members of the applicable LLC subsidiary, agrees in writing, in their sole and absolute discretion, to continue the business of the applicable LLC subsidiary and to the appointment, effective as of a date prior to the date of such order or judgment, of a successor managing member;

 

  · an election to dissolve an LLC subsidiary made by the managing member in its sole and absolute discretion;

 

  · entry of a decree of judicial dissolution of an LLC subsidiary pursuant to the provisions of the Delaware Limited Liability Company Act or the New York Limited Liability Company Law, as applicable;

 

  · the occurrence of any sale or other disposition of all or substantially all of the assets of an LLC subsidiary or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the LLC subsidiary;

 

  · the exchange (or acquisition by the operating partnership) of all LLC units that the applicable LLC subsidiary has authorized other than those held by the operating partnership; or

 

  · the incapacity or withdrawal of the managing member, unless all of the remaining non-managing members in their sole and absolute discretion agree in writing to continue the business of the applicable LLC subsidiary and to the appointment, effective as of a date prior to the date of such incapacity, of a substitute managing member.

 

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Amendments to the LLC Agreements

 

Amendments to the LLC agreements may only be proposed by the managing member. Generally, the LLC agreements may be amended with the managing member’s approval and the approval of the non-managing members holding a majority of all outstanding LLC units of the applicable LLC subsidiary. Certain amendments that would, among other things, have the following effects, must be approved by each non-managing member adversely affected thereby:

 

  · modify the limited liability of a non-managing member;

 

  · alter the rights of any non-managing member to receive the distributions to which such non-managing member is entitled (subject to certain exceptions);

 

  · alter or modify the exchange rights provided by LLC agreements; or

 

  · alter or modify the provisions governing transfer of the managing member’s interest in the subsidiary LLCs.

 

Notwithstanding the foregoing, the managing member has the power, without the consent of the non-managing members, to amend the LLC agreements as may be required to:

 

  · add to the operating partnership’s obligations or surrender any right or power granted to the operating partnership or any of its affiliates for the benefit of the non-managing members;

 

  · reflect the admission, substitution, or withdrawal of members or the termination of the managing member in accordance with the LLC agreements and to amend the list of LLC units holders in connection with such admission, substitution or withdrawal;

 

  · reflect a change that is of an inconsequential nature or does not adversely affect the non-managing members as such in any material respect, or to cure any ambiguity, correct or supplement any provision in the LLC agreements not inconsistent with the law or with other provisions, or make other changes with respect to matters arising under the LLC agreements that will not be inconsistent with the law or with the provisions of the LLC agreements;

 

  · satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a U.S. federal or state agency or contained in U.S. federal or state law;

 

  · set forth or amend the designations, preferences, conversion or other rights, voting powers, duties restrictions, limitations as to distributions, qualifications or terms or conditions of exchange of the holders of any additional LLC units issued or established pursuant to the LLC agreements;

 

  · reflect such changes as are reasonably necessary for us to maintain or restore our qualification as a REIT, to satisfy the REIT requirements or to reflect the transfer of all or any part of a LLC interest among our the operating partnership and any qualified REIT subsidiary or entity that is disregarded as an entity separate from the operating partnership for U.S. federal income tax purposes;

 

  · modify either or both the manner in which items of net income or net loss are allocated or the manner in which capital accounts are computed (but only to the extent set forth in the LLC agreements, or to the extent required by the Code or applicable income tax regulations under the Code);

 

  · become the managing member of additional LLC subsidiaries and issue additional LLC units; and

 

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  · reflect any other modification to the LLC agreements as are reasonably necessary for the business or operations of the LLC subsidiaries or the managing member of the LLC subsidiaries and which does not otherwise require the consent of each member adversely affected.

 

Management Liability and Indemnification

 

Neither the managing member nor its directors and officers is liable to the LLC subsidiaries, the non-managing members or assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission, so long as such person acted in good faith. The LLC agreements provide for indemnification of the managing member, its affiliates and each of their respective officers, directors, employees and any persons the managing member may designate from time to time in its sole and absolute discretion, including members, managers, officers or controlling persons of the LLC subsidiaries and their subsidiaries prior to the formation transactions, to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the LLC subsidiaries, provided that the LLC subsidiaries do not indemnify such person, for (i) willful misconduct or a knowing violation of the law, (ii) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the LLC agreements, or (iii) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful, as set forth in the LLC agreements.

 

The non-managing members of the LLC subsidiaries have agreed that in the event of a conflict in the duties owed by our directors and officers to us and our stockholders and the fiduciary duties owed by us, in our capacity as general partner of the managing member, to such non-managing members, we will fulfill our fiduciary duties to such non-managing members by acting in the best interests of our stockholders.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

General

 

Upon the completion of this offering, as a result of the issuance of                       shares in this offering, we will have                       shares of common stock outstanding (                       shares if the underwriters exercise their option to purchase additional shares in full), some of which are subject to the registration rights agreement or the continuing investors registration rights agreement. Upon completion of this offering, we will also have 501,486 LTIP units outstanding, which, subject to certain conditions, are exchangeable for OP units in our operating partnership, which, in turn, may be submitted for redemption in exchange, at our option, for cash in an amount equal to the value of shares of our common stock or shares of our common stock. See “Description of the Limited Partnership Agreement of Our Operating Partnership.” In addition, upon completion of this offering, we will have 26,317,396 class B LLC units outstanding, which are exchangeable, together with an equal number of shares of our special voting stock, for an amount of cash equal to the fair market value of an equal number of shares of our common stock or, at our election, an equal number of shares of our common stock, subject to certain adjustments and restrictions. For a description of the terms of exchange of the class B LLC units, see “Description of the Limited Liability Company Agreements of Our LLC Subsidiaries.”

 

Upon effectiveness of the registration statement of which this prospectus forms a part, the shares offered for resale by the selling stockholders listed herein will be freely transferable without restriction or further registration under the Securities Act, subject to the limitations on ownership set forth in our charter, unless such shares are purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining outstanding shares of our common stock that were issued in the private offering and in connection with the formation transactions will be deemed to be “restricted securities” as that term is defined in Rule 144. Subject to certain contractual restrictions, including the lock-up agreements, holders of restricted shares will be entitled to sell those shares in the public market if and when they qualify for an exemption from registration under Rule 144 or any other applicable exemption under the Securities Act. See “—Rule 144” below.

 

Rule 144

 

In general, under Rule 144, a person (or persons whose shares are aggregated) who is not an affiliate of ours and has not been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the restricted securities proposed to be sold for at least one year, including the holding period of any prior owner other than an affiliate, is entitled to sell his or her securities without registration and without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. In addition, under Rule 144, beginning 90 days after the date of this prospectus, a person (or persons whose securities are aggregated) who is not an affiliate of ours and has not been one of our affiliates at any time during the three months preceding a sale, may sell his or her securities without registration, subject to the continued availability of current public information about us after a six-month holding period. Any sales by affiliates under Rule 144, even after the applicable holding periods, are subject to requirements and limitations with respect to volume, manner of sale, notice and the availability of current public information about us.

 

There is currently no established public market for our common stock. We intend to apply to have our common stock listed on the NYSE under the symbol “CLPR”. However, we can give no assurances that our common stock will be listed, as to the likelihood that an active trading market for our common stock will develop, the liquidity of any such market, the ability of our stockholders to sell their shares or the prices that our stockholders may obtain for any of their shares. No prediction can be made as to the effect, if any, that future sales of shares of our common stock, or the availability of shares of our common stock for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may affect adversely prevailing market prices of our securities. See “Risk Factors—Risks Related to Ownership of Our Common Stock.”

 

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For a description of certain restrictions on transfers of our common stock held by certain of our stockholders, see “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

2015 Omnibus Plan and 2015 Director Plan

 

We adopted the 2015 Omnibus Plan and 2015 Director Plan to give us a competitive advantage in attracting, retaining and motivating employees, consultants and directors and to more directly link incentives to the success of the Company and increases in stockholder value. 1,000,000 shares of our common stock were reserved for grant under the 2015 Omnibus Plan and 350,000 shares of our common stock were reserved for grant under the 2015 Director Plan. In connection with this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of our common stock issued and issuable pursuant to the 2015 Omnibus Plan and the 2015 Director Plan. Shares of our common stock registered under that registration statement will be available for sale on the open market, subject to Rule 144 volume limitations applicable to affiliates and vesting restrictions with us.

 

In connection with the private offering, on August 3, 2015, we granted LTIP units in respect of 273,335 shares to our executive officers. In connection with the private offering, in 2016, we made a special additional one-time grant of 16,667 LTIP units to an executive officer and we granted a total of 16,666 LTIP units to two key employees under our 2015 Omnibus Plan. In 2016, we also granted 74,076 LTIP units to our executive officers as an incentive award under our 2015 Omnibus Plan. In addition, on August 3, 2015, we granted LTIP units in respect of an aggregate of 105,001 shares to our non-employee directors and in 2016 we granted LTIP units in respect of an additional 15,741 shares to a non-employee director, in each case under our 2015 Director Plan. As of the date of this prospectus, we have 619,256 shares of our common stock remaining for future issuance under our 2015 Omnibus Plan and 229,258 shares of our common stock remaining for future issuance under our 2015 Director Plan. For a description of our 2015 Omnibus Plan and 2015 Director Plan, see “Management—2015 Omnibus Incentive Plan” and “Management—2015 Non-Employee Director Plan.”

 

Registration Rights

 

In the private offering, we issued and sold an aggregate of 10,666,667 shares of our common stock and entered into a registration rights agreement for the benefit of the purchasers in the private offering. Pursuant to the registration rights agreement, the purchasers in the private offering have a right to participate in this offering, subject to certain conditions, and holders of              shares of our common stock have exercised their rights to sell in this offering. In addition, under this registration rights agreement, as amended, we have agreed to use our commercially reasonable efforts to cause a resale shelf registration statement to become effective under the Securities Act as promptly as practicable after the filing of the resale shelf registration statement, and in any event, subject to certain exceptions, no later than October 31, 2016 and to maintain the resale shelf registration statement continuously effective under the Securities Act for a specified period. We also entered into a continuing investors registration rights agreement with certain persons receiving shares of our common stock and class B LLC units in the formation transactions, including certain members of our senior management team and other continuing investors. The continuing investors registration rights agreement provides for the registration of such shares of common stock and shares of common stock that are issuable upon the exchange of class B LLC units. See “Description of Capital Stock—Registration Rights.”

 

Lock-Up Periods

 

For a description of certain lock-ups, see “Underwriting—Lock-Up Agreements.”

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

 

The following discussion summarizes the taxation of the Company and the material U.S. federal income tax consequences to holders of shares of our common stock for your general information only. This summary is not tax advice. The tax treatment of a holder will vary depending upon the holder’s particular situation, and this summary addresses only holders that hold these shares as capital assets and does not deal with all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances. This summary also does not deal with all aspects of taxation that may be relevant to certain types of holders to which special provisions of the U.S. federal income tax laws apply, including:

 

  · dealers in securities or currencies;

 

  · traders in securities that elect to use a mark-to-market method of accounting for such traders’ securities holdings;

 

  · banks;

 

  · insurance companies;

 

  · tax-exempt organizations;

 

  · persons liable for the alternative minimum tax;

 

  · persons that hold shares of common stock that are a hedge, that are hedged against interest rate or currency risks or that are part of a straddle or conversion transaction;

 

  · persons that purchase or sell shares of common stock as part of a wash sale for tax purposes; and

 

  · U.S. stockholders whose functional currency is not the U.S. dollar.

 

This summary is based on the Code, its legislative history, existing and proposed regulations under the Code, published rulings and court decisions. This summary describes the provisions of these sources of law only as they are currently in effect. All of these sources of law may change at any time, and any change in the law may apply retroactively.

 

If a partnership holds shares of common stock, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding our common stock should consult such partner’s tax advisor with regard to the U.S. federal income tax treatment of an investment in our common stock.

 

We urge you to consult with your tax advisors regarding the tax consequences to you of acquiring, owning and selling our common stock, including the federal, state, local and foreign tax consequences of acquiring, owning and selling our common stock in your particular circumstances and potential changes in applicable laws.

 

Taxation of the Company as a REIT

 

In the opinion of Sullivan & Cromwell LLP, the Company has been organized in conformity with the current requirements for qualification as a REIT under the Code, the Company’s method of operation has enabled the Company to satisfy the requirements for qualification and taxation as a REIT under the Code for the taxable year ended December 31, 2015 and the Company’s current and proposed method of operation will enable the Company to satisfy the current requirements for qualification and taxation as a REIT under the Code for subsequent taxable years. Investors should be aware, however, that opinions of counsel are not binding upon the IRS or any court.

 

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In providing its opinion, Sullivan & Cromwell LLP is relying, without independent investigation, as to certain factual matters upon the statements and representations contained in a certificate provided to Sullivan & Cromwell LLP with respect to the Company.

 

The Company’s qualification as a REIT will depend upon the satisfaction by the Company of the requirements of the Code relating to qualification for REIT status. Some of these requirements depend upon actual operating results, distribution levels, diversity of stock ownership, asset composition, source of income and record keeping. Accordingly, while the Company intends to qualify to be taxed as a REIT, the actual results of the Company for any particular year might not satisfy these requirements. Neither Sullivan & Cromwell LLP nor any other such law firm will monitor the compliance of the Company with the requirements for REIT qualification on an ongoing basis.

 

The sections of the Code applicable to REITs are highly technical and complex. The following discussion summarizes material aspects of these sections of the Code.

 

As a REIT, the Company generally will not have to pay U.S. federal corporate income taxes on the Company’s net income that the Company currently distributes to its stockholders. This treatment substantially eliminates the “double taxation” at the corporate and stockholder levels that generally results from investment in a regular corporation. The Company’s dividends, however, generally will not be eligible for (i) the reduced rates of tax applicable to dividends received by noncorporate holders and (ii) the corporate dividends-received deduction.

 

However, the Company will have to pay U.S. federal income tax as follows:

 

  · First, the Company will have to pay tax at regular corporate rates on any undistributed real estate investment trust taxable income, including undistributed net capital gains.

 

  · Second, under certain circumstances, the Company may have to pay the alternative minimum tax on the Company’s items of tax preference.

 

  · Third, if the Company has (a) net income from the sale or other disposition of “foreclosure property,” as defined in the Code, which is held primarily for sale to customers in the ordinary course of business or (b) other non-qualifying income from foreclosure property, the Company will have to pay tax at the highest corporate rate on that income.

 

  · Fourth, if the Company has net income from “prohibited transactions,” as defined in the Code, the Company will have to pay a 100% tax on that income. Prohibited transactions are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business.

 

  · Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below under “ — Requirements for Qualification — Income Tests,” but has nonetheless maintained the Company’s qualification as a REIT because the Company has satisfied some other requirements, the Company will have to pay a 100% tax on an amount equal to (a) the gross income attributable to the greater of (i) 75% of the Company’s gross income over the amount of gross income that is qualifying income for purposes of the 75% test, and (ii) 95% of the Company’s gross income over the amount of gross income that is qualifying income for purposes of the 95% test, multiplied by (b) a fraction intended to reflect the Company’s profitability.

 

  · Sixth, if the Company should fail to distribute during each calendar year at least the sum of (1) 85% of the Company’s real estate investment trust ordinary income for that year, (2) 95% of the Company’s real estate investment trust capital gain net income for that year and (3) any undistributed taxable income from prior periods, the Company would have to pay a 4% excise tax on the excess of that required distribution over the sum of the amounts actually distributed and retained amounts on which income tax is paid at the corporate level.

 

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  · Seventh, if the Company acquires any asset from a C corporation in certain transactions in which the Company must adopt the basis of the asset or any other property in the hands of the C corporation as the basis of the asset in the hands of the Company, and the Company recognizes gain on the disposition of that asset during the 10-year period beginning on the date on which the Company acquired that asset, then the Company will have to pay tax on the built-in gain at the highest regular corporate rate. A C corporation means generally a corporation that has to pay full corporate-level tax.

 

  · Eighth, if the Company derives “excess inclusion income” from a residual interest in a real estate mortgage investment conduit, or “REMIC,” or certain interests in a taxable mortgage pool, or “TMP,” the Company could be subject to corporate-level U.S. federal income tax at a 35% rate to the extent that such income is allocable to certain types of tax-exempt stockholders that are not subject to unrelated business income tax, such as government entities.

 

  · Ninth, if the Company receives non-arm’s-length income from a TRS (as defined under “ — Requirements for Qualification — Taxable REIT Subsidiaries”), or as a result of services provided by a TRS to tenants of the Company, the Company will be subject to a 100% tax on the amount of the Company’s non-arm’s-length income.

 

  · Tenth, if the Company fails to satisfy a REIT asset test, as described below, due to reasonable cause and the Company nonetheless maintains its REIT qualification because of specified cure provisions, the Company will generally be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets that caused the Company to fail such test.

 

  · Eleventh, if the Company fails to satisfy any provision of the Code that would result in the Company’s failure to qualify as a REIT (other than a violation of the REIT gross income tests or a violation of the asset tests described below) and the violation is due to reasonable cause, the Company may retain its REIT qualification but will be required to pay a penalty of $50,000 for each such failure.

 

Requirements for Qualification

 

The Code defines a REIT as a corporation, trust or association:

 

  · that is managed by one or more trustees or directors;

 

  · the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

  · that would otherwise be taxable as a domestic corporation, but for the sections of the Code defining and providing special rules for REITs;

 

  · that is neither a financial institution nor an insurance company to which certain provisions of the Code apply;

 

  · except for the first taxable year in which an election is made to treat the corporation, trust or association as a REIT, the beneficial ownership of which is held by 100 or more persons;

 

  · during the last half of each taxable year (other than the first taxable year in which an election is made to treat the corporation, trust or association as a REIT), not more than 50% in value of the outstanding stock of which is owned, directly or constructively, by five or fewer individuals, as defined in the Code to include certain entities (the “not closely held requirement”); and

 

  · that meets certain other tests, including tests described below regarding the nature of its income and assets.

 

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The Code provides that the conditions described in the first through fourth bullet points above must be met during the entire taxable year and that the condition described in the fifth bullet point above must be met (other than the first taxable year in which an election is made to treat the corporation, trust or association as a REIT) during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

 

The Company expects to satisfy the conditions described in the first through fourth bullet points of the second preceding paragraph for the taxable year ended December 31, 2015 and subsequent taxable years. The Company intends to comply with the fifth and sixth bullet points of the second preceding paragraph beginning with the Company’s first taxable year following the Company’s taxable year ended December 31, 2015. In addition, the Company’s charter provides for restrictions regarding the ownership and transfer of the shares of common stock. These restrictions are intended to assist the Company in satisfying the share ownership requirements described in the fifth and sixth bullet points of the preceding paragraph. The ownership and transfer restrictions pertaining to our common stock are described in this prospectus under the heading “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

The Company believes that the Company’s special voting stock and class B LLC units in the Company’s LLC subsidiaries will be treated as separate interests in the Company and its LLC subsidiaries, respectively. The discussion in this section, except for this paragraph, assumes that the special voting stock and class B LLC units will be so treated. However, no assurance can be given that the IRS will not argue, or that a court would not find or hold, that the special voting stock and the class B LLC units should be treated as a single stock interest in the Company for U.S. federal income tax purposes. If the special voting stock and class B LLC units were treated as a single stock interest in the Company, and the provisions of our charter otherwise requiring such shares to be transferred to a trust for the benefit of a charitable beneficiary were found to be ineffective to prevent the violation, it is possible that more than 50 percent in value of the outstanding stock of the Company could be treated as held by five or fewer individuals. In such a case, the Company could be treated as “closely held” and could therefore fail to qualify as a REIT. Such failure could have significant adverse consequences as described under “Failure to Qualify as a REIT” below.

 

Qualified REIT Subsidiaries. A corporation that is a “qualified REIT subsidiary,” as defined in the Code, will not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary will be treated as assets, liabilities and items of these kinds of the REIT, unless the REIT makes an election to treat such corporation as a TRS. Thus, in applying the requirements described in this section, the Company’s qualified REIT subsidiaries (if any) will be ignored, and all assets, liabilities and items of income, deduction and credit of these subsidiaries will be treated as assets, liabilities and items of these kinds of the Company.

 

Investments in Partnerships. If a REIT is a partner in a partnership, Treasury regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to that proportionate share. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of the rules of the Code defining REITs, including satisfying the gross income tests and the asset tests. Thus, the Company’s proportionate share of the assets, liabilities and items of income of any partnership in which the Company is a partner will be treated as assets, liabilities and items of income of the Company for purposes of applying the requirements described in this section. Thus, actions taken by partnerships in which the Company owns an interest, either directly or through one or more tiers of partnerships or qualified REIT subsidiaries, can affect the Company’s ability to satisfy the REIT income and asset tests and the determination of whether the Company has net income from prohibited transactions. See the fourth bullet point under the heading “Taxation of the Company as a REIT” above for a brief description of prohibited transactions.

 

Taxable REIT Subsidiaries. A taxable REIT subsidiary, or TRS, is any corporation in which a REIT directly or indirectly owns stock, provided that the REIT and that corporation make a joint election to treat that corporation as a TRS. The election can be revoked at any time as long as the REIT and the TRS revoke such election jointly. In addition, if a TRS holds, directly or indirectly, more than 35% of the securities of any other corporation other than a REIT (by vote or by value), then that other corporation is also treated as a TRS. A corporation can be a TRS with respect to more than one REIT.

 

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A TRS is subject to U.S. federal income tax at regular corporate rates (currently a maximum rate of 35%), and may also be subject to state and local taxation. Any dividends paid or deemed paid by any one of the Company’s TRSs will also be taxable, either (1) to the Company to the extent the dividend is retained by the Company, or (2) to the Company’s stockholders to the extent the dividends received from the TRS are paid to the Company’s stockholders. The Company may hold more than 10% of the stock of a TRS without jeopardizing its qualification as a REIT notwithstanding the rule described below under “— Asset Tests” that generally precludes ownership of more than 10% of any issuer’s securities. However, as noted below, in order for the Company to qualify as a REIT, the securities of all of the TRSs in which the Company has invested either directly or indirectly may not represent more than 20% of the total value of the Company’s assets (25% with respect to the Company’s taxable years ending on or before December 31, 2017). The Company expects that the aggregate value of all of its interests in TRSs will represent at the time of the Company’s formation, and will continue to represent, less than 20% of the total value of the Company’s assets; however, the Company cannot assure that this will always be true. Other than certain activities related to operating or managing a lodging or health care facility, a TRS may generally engage in any business including the provision of customary or non-customary services to tenants of the parent REIT. We will have one TRS, Clipper TRS, which may provide certain non-customary services at our properties and may be the entity through which we convert certain of our properties into condominiums.

 

Income Tests. In order to maintain the Company’s qualification as a REIT, the Company annually must satisfy two gross income requirements.

 

  · First, the Company must derive at least 75% of its gross income, excluding gross income from prohibited transactions, for each taxable year directly or indirectly from investments relating to real property, mortgages on real property or investments in REIT equity securities, including “rents from real property,” as defined in the Code, or from certain types of temporary investments. Rents from real property generally include expenses of the Company that are paid or reimbursed by tenants.

 

  · Second, at least 95% of the Company’s gross income, excluding gross income from prohibited transactions, for each taxable year must be derived from real property investments as described in the preceding bullet point, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of these types of sources.

 

Rents that the Company receives will qualify as rents from real property in satisfying the gross income requirements for a REIT described above only if the rents satisfy several conditions.

 

  · First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from rents from real property solely because the rent is based on a fixed percentage or percentages of receipts or sales.

 

  · Second, the Code provides that rents received from a tenant will not qualify as rents from real property in satisfying the gross income tests if the REIT, directly or under the applicable attribution rules, owns a 10% or greater interest in that tenant; except that rents received from a TRS under certain circumstances qualify as rents from real property even if the Company owns more than a 10% interest in the subsidiary. We refer to a tenant in which the Company owns a 10% or greater interest as a “related party tenant.”

 

  · Third, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.

 

  · Finally, for rents received to qualify as rents from real property, except as described below, the REIT generally must not operate or manage the property or furnish or render services to the tenants of the property, other than through an independent contractor from whom the REIT derives no revenue or through a TRS. However, the Company may directly perform certain services that landlords usually or customarily render when renting space for occupancy only or that are not considered rendered to the occupant of the property.

 

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The Company directly performs services for some of its tenants. The Company may provide certain non-customary services through Clipper TRS. The Company does not believe that the provision of the services it provides directly will cause its gross income attributable to these tenants to fail to be treated as rents from real property. If the Company were to provide services to a tenant of a property of the Company other than those services landlords usually or customarily provide to tenants of properties of a similar class in the same geographic market when renting space for occupancy only, amounts received or accrued by the Company for any of these services will not be treated as rents from real property for purposes of the REIT gross income tests. However, the amounts received or accrued for these services will not cause other amounts received with respect to the property to fail to be treated as rents from real property unless the amounts treated as received in respect of the service, together with amounts received for certain management services, exceed 1% of all amounts received or accrued by the Company during the taxable year with respect to the property. If the sum of the amounts received in respect of the services to tenants and management services described in the preceding sentence exceeds the 1% threshold, then all amounts received or accrued by the Company with respect to the property will not qualify as rents from real property, even if the Company provides the impermissible service to some, but not all, of the tenants of the property.

 

The term “interest” generally does not include any amount received or accrued, directly or indirectly, if the determination of that amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term interest solely because the amount of the interest is based on a fixed percentage or percentages of receipts or sales.

 

From time to time, the Company may enter into hedging transactions with respect to one or more of the Company’s assets or liabilities. The Company’s hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase these items, and futures and forward contracts. Except to the extent provided by Treasury regulations, any income the Company derives from a hedging transaction that is clearly identified as such as specified in the Code, including gain from the sale or disposition of such a hedging transaction, will not constitute gross income for purposes of the 75% or 95% gross income tests, and therefore will be excluded for purposes of these tests, but only to the extent that the transaction hedges indebtedness incurred or to be incurred by us to acquire or carry real estate. The term “hedging transaction,” as used above, generally means any transaction the Company enters into in the normal course of its business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the Company. The term “hedging transaction” also includes any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property that generates such income or gain), including gain from the termination of such a transaction. If, in connection with an extinguishment of indebtedness or a disposition of property with respect to which the Company has entered into a hedging transaction described above in this paragraph, the Company enters into another hedge to effect the termination of the first hedge, the term “hedging transaction” generally includes both such hedges. The Company intends to structure any hedging transactions in a manner that does not jeopardize its status as a REIT.

 

If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, the Company may nevertheless qualify as a REIT for that year if the Company satisfies the requirements of other provisions of the Code that allow relief from disqualification as a REIT. These relief provisions will generally be available if:

 

  · The Company’s failure to meet the income tests was due to reasonable cause and not due to willful neglect; and

 

  · The Company files a schedule of each item of income in excess of the limitations described above in accordance with regulations to be prescribed by the IRS.

 

The Company might not be entitled to the benefit of these relief provisions, however. Even if these relief provisions apply, the Company would have to pay a tax on the excess income. The tax will be a 100% tax on an amount equal to (a) the gross income attributable to the greater of (i) 75% of the Company’s gross income over the amount of gross income that is qualifying income for purposes of the 75% test, and (ii) 95% of the Company’s gross income over the amount of gross income that is qualifying income for purposes of the 95% test, multiplied by (b) a fraction intended to reflect the Company’s profitability.

 

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Asset Tests. The Company, at the close of each quarter of its taxable year, must also satisfy four tests relating to the nature of its assets.

 

  · First, at least 75% of the value of the Company’s total assets must be represented by real estate assets, including (a) real estate assets held by the Company’s qualified REIT subsidiaries (if any), the Company’s allocable share of real estate assets held by partnerships in which the Company owns an interest and stock issued by another REIT, (b) for a period of one year from the date of the Company’s receipt of proceeds of an offering of the Company’s shares of beneficial interest or publicly offered debt with a term of at least five years, stock or debt instruments purchased with these proceeds and (c) cash, cash items and government securities.

 

  · Second, not more than 25% of the Company’s total assets may be represented by securities other than those in the 75% asset class.

 

  · Third, not more than 20% of the Company’s total assets may constitute securities issued by TRSs (25% with respect to the Company’s taxable years ending on or before December 31, 2017) and of the investments included in the 25% asset class, the value of any one issuer’s securities, other than equity securities issued by another REIT or securities issued by a TRS, owned by the Company may not exceed 5% of the value of the Company’s total assets. In addition, not more than 25% of the value of the Company’s total assets may consist of “nonqualified” debt instruments issued by publicly offered REITs.

 

  · Fourth, the Company may not own more than 10% of the vote or value of the outstanding securities of any one issuer, except for issuers that are REITs, qualified REIT subsidiaries or TRSs, or certain securities that qualify under a safe harbor provision of the Code (such as so-called “straight-debt” securities).

 

Solely for the purposes of the 10% value test described above, the determination of the Company’s interest in the assets of any partnership or other entity treated as a partnership for U.S. federal income tax purposes in which the Company owns an interest will be based on the Company’s proportionate interest in any securities issued by the partnership or other entity treated as a partnership for U.S. federal income tax purposes, excluding for this purpose certain securities described in the Code. Otherwise the determination of the Company’s interests in the assets of any partnership or other entity treated as a partnership for U.S. federal income tax purposes will be based on the Company’s proportionate capital interest.

 

If the IRS successfully challenges the partnership status of any of the partnerships in which the Company maintains a more than 10% vote or value interest, and the partnership is reclassified as a corporation or a publicly traded partnership taxable as a corporation, the Company could lose its REIT status. In addition, in the case of such a successful challenge, the Company could lose its REIT status if such recharacterization results in the Company otherwise failing one of the asset tests described above.

 

Certain relief provisions may be available to the Company if it fails to satisfy the asset tests described above after a 30-day cure period. Under these provisions, the Company will be deemed to have met the 5% and 10% REIT asset tests if the value of the Company’s nonqualifying assets (i) does not exceed the lesser of (a) 1% of the total value of the Company’s assets at the end of the applicable quarter and (b) $10,000,000, and (ii) the Company disposes of the nonqualifying assets within (a) six months after the last day of the quarter in which the failure to satisfy the asset tests is discovered or (b) the period of time prescribed by Treasury regulations to be issued. For violations due to reasonable cause and not willful neglect that are not described in the preceding sentence, the Company may avoid disqualification as a REIT under any of the asset tests, after the 30-day cure period, by taking steps including (i) the disposition of the nonqualifying assets to meet the asset test within (a) six months after the last day of the quarter in which the failure to satisfy the asset tests is discovered or (b) the period of time prescribed by Treasury regulations to be issued, (ii) paying a tax equal to the greater of (a) $50,000 or (b) the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets, and (iii) disclosing certain information to the IRS.

 

Annual Distribution Requirements. The Company, in order to qualify as a REIT, is required to distribute dividends, other than capital gain dividends, to the Company’s stockholders in an amount at least equal to (1) the sum of (a) 90% of the Company’s “real estate investment trust taxable income,” computed without regard to the dividends paid deduction and the Company’s net capital gain, and (b) 90% of the Company’s net after-tax income, if any, from foreclosure property minus (2) the sum of certain items of non-cash income.

 

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In addition, if the Company acquires an asset from a C corporation in a carryover basis transaction and disposes of such asset within 10 years of acquiring the asset, the Company may be required to distribute at least 90% of the after-tax built-in gain, if any, recognized on the disposition of the asset.

 

These distributions must be paid in the taxable year to which the distributions relate, or in the following taxable year if declared before the Company timely files its tax return for the year to which the distributions relate and if paid on or before the first regular dividend payment after the declaration. However, for U.S. federal income tax purposes, these distributions that are declared in October, November or December as of a record date in such month and actually paid in January of the following year will be treated as if the distributions were paid on December 31 of the year declared.

 

To the extent that the Company does not distribute all of its net capital gain or distributes at least 90%, but less than 100%, of the Company’s real estate investment trust taxable income, as adjusted, the Company will have to pay tax on the undistributed amounts at regular ordinary and capital gain corporate tax rates. Furthermore, if the Company fails to distribute during each calendar year at least the sum of (a) 85% of the Company’s ordinary income for that year, (b) 95% of the Company’s capital gain net income for that year and (c) any undistributed taxable income from prior periods, the Company would have to pay a 4% excise tax on the excess of the required distribution over the sum of the amounts actually distributed and retained amounts on which income tax is paid at the corporate level.

 

The Company intends to satisfy the annual distribution requirements.

 

From time to time, the Company may not have sufficient cash or other liquid assets to meet the 90% distribution requirement due to timing differences between (a) when the Company actually receives income and when the Company actually pays deductible expenses and (b) when the Company includes the income and deducts the expenses in arriving at the Company’s taxable income. If timing differences of this kind occur, in order to meet the 90% distribution requirement, the Company may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable stock dividends.

 

Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in the Company’s deduction for dividends paid for the earlier year. Thus, the Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company will be required to pay interest based upon the amount of any deduction taken for deficiency dividends.

 

Failure to Qualify as a REIT

 

If the Company would otherwise fail to qualify as a REIT because of a violation of one of the requirements described above, the Company’s qualification as a REIT will not be terminated if the violation is due to reasonable cause and not willful neglect and the Company pays a penalty tax of $50,000 for the violation. The immediately preceding sentence does not apply to violations of the income tests described above or a violation of the asset tests described above, each of which have specific relief provisions that are described above.

 

If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company will have to pay tax, including any applicable alternative minimum tax, on the Company’s taxable income at regular corporate rates. The Company will not be able to deduct distributions to stockholders in any year in which the Company fails to qualify, nor will the Company be required to make distributions to stockholders. In this event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable to the stockholders as dividend income (which may be subject to tax at preferential rates) and corporate distributees may be eligible for the dividends-received deduction if such distributees satisfy the relevant provisions of the Code. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. The Company might not be entitled to the statutory relief described above in all circumstances.

 

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Prohibited Transactions

 

If the Company is found to have held, acquired or developed property, other than foreclosure property, primarily for sale to customers in the ordinary course of business, the Company may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by the Company for at least two years and satisfies certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S. federal income tax).

 

Whether property is held primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances. Based upon the Company’s investment objectives, the Company believes that overall, its properties should not be considered property held primarily for sale to customers in the ordinary course of business. However, it may not always be practical for the Company to comply with one of the safe harbors, and, therefore, the Company may be subject to the 100% penalty tax on the gain from dispositions of property if the Company is otherwise deemed to have held the property primarily for sale to customers in the ordinary course of business.

 

In addition, the potential application of the prohibited transactions tax could cause the Company to forego potential dispositions of other property or to forego other opportunities that might otherwise be attractive to the Company, or to hold investments or undertake such dispositions or other opportunities through a TRS, which would generally result in corporate income taxes being incurred. For example, the Company anticipates that it would be necessary for the Company to transfer a property to a TRS prior to undergoing any condominium or cooperative conversion project with respect to such property.

 

Excess Inclusion Income

 

If the Company holds a residual interest in a REMIC or certain interests in a TMP from which the Company derives “excess inclusion income,” the Company may be required to allocate such income among its stockholders in proportion to the dividends received by the Company’s stockholders, even though the Company may not receive such income in cash. To the extent that excess inclusion income is allocable to a particular stockholder, the income (1) would not be allowed to be offset by any net operating losses otherwise available to the stockholder, (2) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from U.S. federal income tax, and (3) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction pursuant to any otherwise applicable income tax treaty, to the extent allocable to most types of foreign stockholders.

 

Certain Tax Aspects of Investments in Partnerships

 

The Company holds investments through entities that are classified as partnerships for U.S. federal income tax purposes, including the Company’s operating partnership and LLC subsidiaries. In general, partnerships are “pass-through” entities that are not subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are subject to tax on these items without regard to whether the partners receive a distribution from the partnership. As described above under “—Taxation of the Company as a REIT – Requirements for Qualification – Investments in Partnerships,” the Company includes in its income the Company’s proportionate share of these partnership items for purposes of the REIT asset and income tests. Consequently, to the extent that the Company holds an equity interest in a partnership, the partnership’s assets and operations may affect the Company’s ability to qualify as a REIT, even if the Company has no control, or only limited influence, over the partnership.

 

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The operating partnership agreement generally provides that items of net income and net loss are allocated to the holders of units in accordance with their respective percentage interests, provided that any limited partners holding preferred operating partnership interests would be allocated net income in a manner to reflect any preference in distributions. The LLC agreements of the Company’s LLC subsidiaries generally provide that items of net income and net loss of each LLC subsidiary are allocated at the end of each fiscal year to the holders of LLC units in a manner consistent with the distributions that each member is entitled; provided that any holders of LLC units that are entitled to a preferred distribution will be allocated net loss only to the extent that such holders have a positive capital account. If an allocation of partnership income or loss does not comply with the requirements of the Code and Treasury regulations thereunder, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership. This reallocation will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The operating partnership’s and LLC subsidiaries’ allocations of income and loss are intended to comply with the requirements of the Code of Treasury regulations thereunder.

 

Income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for tax purposes in a manner such that the contributing partner is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. In addition, income, gain, loss and deduction attributable to appreciated or depreciated property that is revalued by a partnership in connection with a contribution to or distribution by the partnership must be allocated for tax purposes in a manner such that the existing partners are charged with, or benefit from, the unrealized gain or unrealized loss associated with the property at the time of the revaluation. The amount of the unrealized gain or unrealized loss is generally equal to the difference between the fair market value, or book value, of the contributed property and the adjusted tax basis of such property at the time of the contribution or revaluation (a “book-tax difference”). Such allocations are solely for U.S. federal income tax purposes and do not affect partnership capital accounts or other economic or legal arrangements among the partners.

 

Treasury regulations provide partnerships with a choice of several methods of allocating book-tax differences. Under the tax protection agreement, the Company’s LLC subsidiaries have agreed to use the “traditional method” for accounting for book-tax differences for the properties in the Company’s current portfolio. The use of the traditional method (i) may cause the Company to be allocated lower amounts of depreciation and other deductions for tax purposes than would be allocated to the Company if all of the properties in the Company’s current portfolio were to have a tax basis equal to their fair market value at the time of formation transactions and (ii) in the event of a sale of such properties, could cause the Company to be allocated gain in excess of the Company’s corresponding economic or book gain (or taxable loss that is less than the Company’s economic or book loss), with a corresponding benefit to the continuing investors. Therefore, the use of the traditional method could result in the Company having taxable income that is in excess of the Company’s economic or book income as well as the Company’s cash distributions from the operating partnership, which might adversely affect the Company’s ability to comply with the REIT distribution requirements or result in a greater portion of the Company’s distributions being treated as taxable dividend income.

 

Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to the income tax returns of a partnership, it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from the partnership. The Company’s operating partnership and LLC subsidiaries may elect to have its partners take such audit adjustment into account in accordance with their interests in the applicable partnership during the tax year under audit, but there can be no assurance that such election will be effective in all circumstances. If, as a result of any such audit adjustment, the Company’s operating partnership or one of the LLC subsidiaries is required to make payments of taxes, penalties and interest, the cash available for distribution to its partners might be substantially reduced. These rules are not generally applicable for tax years beginning on or prior to December 31, 2017.

 

Taxation of Holders of Common Stock

 

U.S. Stockholders

 

As used in this section, the term “U.S. stockholder” means a beneficial owner of shares of our common stock who, for U.S. federal income tax purposes, is:

 

  · a citizen or resident of the United States;

 

  · a domestic corporation;

 

  · an estate whose income is subject to U.S. federal income taxation regardless of the income’s source; or

 

  · a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons have authority to control all substantial decisions of the trust.

 

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Dividends. As long as the Company qualifies as a REIT, distributions made by the Company out of its current or accumulated earnings and profits, and not designated as capital gain dividends, will constitute dividends taxable to the Company’s taxable U.S. stockholders as ordinary income. Noncorporate U.S. stockholders will generally not be entitled to the lower tax rate applicable to qualified dividend income except with respect to the portion of any distribution (a) that represents income from dividends the Company received from a corporation in which the Company owns shares (but only if such dividends would be eligible for the lower rate on dividends if paid by the corporation to its individual stockholders), (b) that is equal to the sum of the Company’s real estate investment trust taxable income (taking into account the dividends paid deduction available to the Company) and certain net built-in gain with respect to property acquired from a C corporation in certain transactions in which the Company must adopt the basis of the asset in the hands of the C corporation for the Company’s previous taxable year and less any taxes paid by the Company during its previous taxable year, or (c) that represents earnings and profits that were accumulated in a non-REIT taxable year, in each case, provided that certain holding period and other requirements are satisfied at both the REIT and individual stockholder level. Noncorporate U.S. stockholders should consult their own tax advisors to determine the impact of tax rates on dividends received from the Company. Distributions made by the Company will not be eligible for the dividends received deduction in the case of U.S. stockholders that are corporations. Distributions made by the Company that the Company properly designates as capital gain dividends will be taxable to U.S. stockholders as gain from the sale of a capital asset held for more than one year, to the extent that such dividends do not exceed our actual net capital gain for the taxable year, without regard to the period for which a U.S. stockholder has held our common stock. Thus, with certain limitations, capital gain dividends received by an individual U.S. stockholder may be eligible for preferential rates of taxation. U.S. stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income.

 

To the extent that the Company makes distributions not designated as capital gain dividends in excess of the Company’s current and accumulated earnings and profits, these distributions will be treated first as a tax-free return of capital to each U.S. stockholder. Thus, these distributions will reduce the adjusted basis that the U.S. stockholder has in our common stock for tax purposes by the amount of the distribution, but not below zero. Distributions in excess of a U.S. stockholder’s adjusted basis in our common stock will be taxable as capital gains, provided that our common stock has been held as a capital asset. For purposes of determining the portion of distributions on separate classes of shares that will be treated as dividends for U.S. federal income tax purposes, current and accumulated earnings and profits will be allocated to distributions resulting from priority rights of preferred stock before being allocated to other distributions.

 

As described above, dividends authorized by the Company in October, November, or December of any year and payable to a stockholder of record on a specified date in any of these months will be treated as both paid by the Company and received by the stockholder on December 31 of that year, provided that the Company actually pays the dividend on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any net operating losses or capital losses of the Company.

 

The Company may make distributions to holders of shares of common stock that are paid in shares of common stock. In certain circumstances, these distributions may be intended to be treated as dividends for U.S. federal income tax purposes and a U.S. stockholder would, therefore, generally have taxable income with respect to such distributions of shares and may have a tax liability on account of such distribution in excess of the cash (if any) that is received.

 

U.S. stockholders holding common stock at the close of the Company’s taxable year will be required to include, in computing the U.S. stockholders’ long-term capital gains for the taxable year in which the last day of the Company’s taxable year falls, the amount of the Company’s undistributed net capital gain that the Company designates in a written notice mailed to its stockholders. The Company may not designate amounts in excess of the Company’s undistributed net capital gain for the taxable year. Each U.S. stockholder required to include the designated amount in determining the stockholder’s long-term capital gains will be deemed to have paid, in the taxable year of the inclusion, the tax paid by the Company in respect of the undistributed net capital gains. U.S. stockholders to whom these rules apply will be allowed a credit or a refund, as the case may be, for the tax such stockholders are deemed to have paid. U.S. stockholders will increase their basis in our common stock by the difference between the amount of the includible gains and the tax deemed paid by the stockholder in respect of these gains.

 

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Distributions made by the Company and gain arising from a U.S. stockholder’s sale or exchange of common stock will not be treated as passive activity income. As a result, U.S. stockholders generally will not be able to apply any passive losses against that income or gain.

 

Sale or Exchange of Common Stock. When a U.S. stockholder sells or otherwise disposes of shares of common stock, the stockholder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between (a) the amount of cash and the fair market value of any property received on the sale or other disposition, and (b) the holder’s adjusted basis in the shares for tax purposes. This gain or loss will be capital gain or loss if the U.S. stockholder has held the shares as capital assets. The gain or loss will be long-term gain or loss if the U.S. stockholder has held the shares for more than one year. Long-term capital gain of an individual U.S. stockholder is generally taxed at preferential rates. In general, any loss recognized by a U.S. stockholder when the stockholder sells or otherwise disposes of shares of common stock that the stockholder has held for six months or less, after applying certain holding period rules, will be treated as a long-term capital loss, to the extent of distributions received by the stockholder from the Company that were required to be treated as long-term capital gains.

 

Backup Withholding. The Company will report to its U.S. stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, backup withholding may apply to a stockholder with respect to dividends paid unless the holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. The IRS may also impose penalties on a U.S. stockholder that does not provide the Company with such stockholder’s correct taxpayer identification number. A stockholder may credit any amount paid as backup withholding against the stockholder’s income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to the Company.

 

Taxation of Tax-Exempt Stockholders. The IRS has ruled that amounts distributed as dividends by a REIT generally do not constitute unrelated business taxable income when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder is not one of the types of entities described below and has not held our common stock as “debt financed property” within the meaning of the Code, the dividend income from our common stock will not be unrelated business taxable income to a tax-exempt stockholder. Similarly, income from the sale of shares of common stock will not constitute unrelated business taxable income unless the tax-exempt stockholder has held the shares as “debt financed property” within the meaning of the Code or has used the shares in a trade or business.

 

Notwithstanding the above paragraph, while the Company does not expect to have any “excess inclusion” income with respect to a REMIC residual interest or an interest in a TMP, tax-exempt stockholders would be required to treat as unrelated business taxable income any dividends paid by the Company that are allocable to any “excess inclusion” income of the Company.

 

Income from an investment in the Company’s common stock will constitute unrelated business taxable income for tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under the applicable subsections of Section 501(c) of the Code, unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the income generated by our common stock. Prospective investors of the types described in the preceding sentence should consult such investors’ own tax advisors concerning these “set aside” and reserve requirements.

 

Notwithstanding the foregoing, however, a portion of the dividends paid by a “pension-held REIT” will be treated as unrelated business taxable income to any trust that

 

  · is described in certain provisions of the Code relating to qualified pension, profit-sharing and stock bonus plans;

 

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  · is described in certain provisions of the Code relating to tax-exempt organizations; and

 

  · holds more than 10% (by value) of the equity interests in the REIT.

 

Tax-exempt pension, profit-sharing and stock bonus funds described in the first bullet point above are referred to below as “qualified trusts.” A REIT is a “pension-held REIT” if:

 

  · the REIT would not have qualified as a REIT but for the fact that the Code provides that stock owned by qualified trusts will be treated, for purposes of the “not closely held” requirement, as owned by the beneficiaries of the trust (rather than by the trust itself); and

 

  · either (a) at least one qualified trust holds more than 25% by value of the interests in the REIT or (b) one or more qualified trusts, each of which owns more than 10% by value of the interests in the REIT, hold in the aggregate more than 50% by value of the interests in the REIT.

 

The percentage of any REIT dividend treated as unrelated business taxable income to a qualifying trust is equal to the ratio of (a) the gross income of the REIT from unrelated trades or businesses, determined as though the REIT were a qualified trust, less direct expenses related to this gross income, to (b) the total gross income of the REIT, less direct expenses related to the total gross income. A de minimis exception applies where this percentage is less than 5% for any year. The Company does not expect to be classified as a pension-held REIT.

 

The rules described above under the heading “U.S. Stockholders” concerning the inclusion of the Company’s designated undistributed net capital gains in the income of the Company’s stockholders will apply to tax-exempt entities. Thus, tax-exempt entities will be allowed a credit or refund of the tax deemed paid by these entities in respect of the includible gains.

 

Medicare Tax. A U.S. stockholder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the U.S. stockholder’s “net investment income” (or “undistributed net investment income” in the case of an estate or trust) for the relevant taxable year and (2) the excess of the U.S. stockholder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on the individual’s circumstances). A holder’s net investment income generally includes the holder’s dividend income and the holder’s net gains from the disposition of shares of the Company’s common stock, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. stockholder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our common stock.

 

Non-U.S. Stockholders

 

The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and estates or trusts that in either case are not subject to U.S. federal income tax on a net income basis, who own shares of our common stock, which we call “non-U.S. stockholders,” are complex. The following discussion is only a limited summary of these rules. Prospective non-U.S. stockholders should consult with their own tax advisors to determine the impact of U.S. federal, state and local income tax laws with regard to an investment in our common stock, including any reporting requirements.

 

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Ordinary Dividends. Distributions, other than distributions that are treated as attributable to gain from sales or exchanges by the Company of U.S. real property interests, as discussed below, and other than distributions designated by the Company as capital gain dividends, will be treated as ordinary income to the extent that the distributions are made out of the Company’s current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution will ordinarily apply to distributions of this kind to non-U.S. stockholders, unless an applicable tax treaty reduces that tax. However, if income from the investment in our common stock is treated as effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business or is attributable to a permanent establishment that the non-U.S. stockholder maintains in the United States (if that is required by an applicable income tax treaty as a condition for subjecting the non-U.S. stockholder to U.S. taxation on a net income basis), tax at graduated rates will generally apply to the non-U.S. stockholder in the same manner as U.S. stockholders are taxed with respect to dividends, and the 30% branch profits tax may also apply if the stockholder is a foreign corporation. The Company expects that it or the required withholding agent will withhold U.S. tax at the rate of 30% on the gross amount of any dividends, other than dividends treated as attributable to gain from sales or exchanges of U.S. real property interests and capital gain dividends, paid to a non-U.S. stockholder, unless (a) a lower treaty rate applies and the required form evidencing eligibility for that reduced rate is filed with the Company or the appropriate withholding agent or (b) the non-U.S. stockholder files an IRS Form W-8ECI or a successor form with the Company or the appropriate withholding agent claiming that the distributions are effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business and in either case other applicable requirements were met.

 

While the Company does not expect to have any “excess inclusion” income with respect to a REMIC residual interest or an interest in a TMP, if a non-U.S. stockholder received an allocation of “excess inclusion income”, the non-U.S. stockholder would be subject to U.S. federal income tax withholding at the maximum rate of 30% with respect to such allocation, without reduction pursuant to any otherwise applicable income tax treaty.

 

Return of Capital. Distributions in excess of the Company’s current and accumulated earnings and profits, which are not treated as attributable to the gain from the Company’s disposition of a U.S. real property interest, will not be taxable to a non-U.S. stockholder to the extent that the distributions do not exceed the non-U.S. stockholder’s adjusted basis in such stockholder’s shares of common stock. Distributions of this kind will instead reduce the adjusted basis of such shares. To the extent that distributions of this kind exceed the non-U.S. stockholder’s adjusted basis in such stockholder’s shares of common stock, the distributions will give rise to tax liability if the non-U.S. stockholder otherwise would have to pay tax on any gain from the sale or disposition of the shares, as described below. If it cannot be determined at the time a distribution is made whether the distribution will be in excess of current and accumulated earnings and profits, withholding will apply to the distribution at the rate applicable to dividends. However, the non-U.S. stockholder may seek a refund of these amounts from the IRS if it is subsequently determined that the distribution was, in fact, in excess of the Company’s current and accumulated earnings and profits.

 

Also, the Company (or applicable withholding agent) could potentially be required to withhold at least 15% of any distribution in excess of the Company’s current and accumulated earnings and profits, even if the non-U.S. stockholder is not liable for U.S. tax on the receipt of that distribution. However, a non-U.S. stockholder may seek a refund of these amounts from the IRS if the non-U.S. stockholder’s tax liability with respect to the distribution is less than the amount withheld. Such withholding should generally not be required if a non-U.S. stockholder would not be taxed under the Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”), upon a sale or exchange of shares of common stock. See discussion below under “ — Sales of Common Stock.”

 

Capital Gain Dividends. Distributions that are attributable to gain from sales or exchanges by the Company of U.S. real property interests that are paid with respect to any class of stock that is regularly traded on an established securities market located in the United States and held by a non-U.S. stockholder who does not own more than 10% of such class of stock at any time during the one year period ending on the date of distribution will be treated as a normal distribution by the Company, and such distributions will be taxed as described above in “— Ordinary Dividends.” However, the Company believes that the Company’s common stock will be regularly traded on an established securities market for this purpose following this offering.

 

Distributions that are not described in the preceding paragraph that are attributable to gain from sales or exchanges by the Company of U.S. real property interests will be taxed to a non-U.S. stockholder under the provisions of FIRPTA. Under this statute, these distributions are taxed to a non-U.S. stockholder as if the gain were effectively connected with a U.S. business. Thus, non-U.S. stockholders will be taxed on the distributions at the normal capital gain rates applicable to U.S. stockholders, subject to any applicable alternative minimum tax and special alternative minimum tax in the case of individuals, and the 30% branch profits tax may also apply if the stockholder is a foreign corporation. The Company (or applicable withholding agent) is required by applicable Treasury regulations under this statute to withhold 35% of any distribution that the Company could designate as a capital gain dividend. However, if the Company designates as a capital gain dividend a distribution made before the day the Company actually effects the designation, then although the distribution may be taxable to a non-U.S. stockholder, withholding does not apply to the distribution under this statute. Rather, the Company must effect the 35% withholding from distributions made on and after the date of the designation, until the distributions so withheld equal the amount of the prior distribution designated as a capital gain dividend. The non-U.S. stockholder may credit the amount withheld against its U.S. tax liability.

 

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Distributions to a non-U.S. stockholder that are designated by the Company at the time of distribution as capital gain dividends that are not attributable to or treated as attributable to the disposition by the Company of a U.S. real property interest generally will not be subject to U.S. federal income taxation, except as described above.

 

Share Distributions. The Company may make distributions to holders of shares of common stock that are paid in shares of common stock. In certain circumstances, these distributions may be intended to be treated as dividends for U.S. federal income tax purposes and, accordingly, would be treated in a manner consistent with the discussion above under “— Ordinary Dividends” and “— Capital Gains Dividends.” If the Company (or applicable withholding agent) is required to withhold an amount in excess of any cash distributed along with the shares of common stock, some of the shares that would otherwise be distributed will be retained and sold in order to satisfy such withholding obligations.

 

Sales of Common Stock. Gain recognized by a non-U.S. stockholder upon a sale or exchange of shares of common stock generally will not be taxed under FIRPTA if the Company is a “domestically controlled REIT,” defined generally as a REIT, less than 50% in value of the stock of which is and was held directly or indirectly by foreign persons at all times during a specified testing period (provided that, if any class of a REIT’s stock is regularly traded on an established securities market in the United States, a person holding less than 5% of such class during the testing period is presumed not to be a foreign person, unless the REIT has actual knowledge otherwise). The Company believes that it is a domestically controlled REIT, and, therefore, assuming that the Company continues to be a domestically controlled REIT, that taxation under this statute generally will not apply to the sale of shares of common stock. However, gain to which this statute does not apply will be taxable to a non-U.S. stockholder if investment in our common stock is treated as effectively connected with the non-U.S. stockholder’s U.S. trade or business or is attributable to a permanent establishment that the non-U.S. stockholder maintains in the United States (if that is required by an applicable income tax treaty as a condition for subjecting the non-U.S. stockholder to U.S. taxation on a net income basis). In this case, the same treatment will apply to the non-U.S. stockholder as to U.S. stockholders with respect to the gain. In addition, gain to which FIRPTA does not apply will be taxable to a non-U.S. stockholder if the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, or maintains an office or a fixed place of business in the United States to which the gain is attributable. In this case, a 30% tax will apply to the nonresident alien individual’s capital gains. A similar rule will apply to capital gain dividends to which this statute does not apply.

 

If the Company does not qualify as a domestically controlled REIT, the tax consequences to a non-U.S. stockholder of a sale of shares of common stock depends upon whether such stock is regularly traded on an established securities market and the amount of such stock that is held by the non-U.S. stockholder. Specifically, a non-U.S. stockholder that holds a class of shares that is traded on an established securities market will only be subject to FIRPTA in respect of a sale of such shares if the stockholder owned more than 10% of the shares of such class at any time during a specified period. This period is generally the shorter of the period that the non-U.S. stockholder owned such shares or the five-year period ending on the date when the stockholder disposed of the shares. As discussed above, the Company expects that the Company’s common stock will be regularly traded on an established securities market for this purpose following this offering. If tax under FIRPTA applies to the gain on the sale of shares, the same treatment would apply to the non-U.S. stockholder as to U.S. stockholders with respect to the gain, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals.

 

Backup Withholding and Information Reporting. If you are a non-U.S. stockholder, we and other payors are required to report payments of dividends on IRS Form 1042-S even if the payments are exempt from withholding. However, you are otherwise generally exempt from backup withholding and information reporting requirements with respect to:

 

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  · dividend payments and

 

  · the payment of the proceeds from the sale of shares of common stock effected at a U.S. office of a broker,

 

as long as the income associated with these payments is otherwise exempt from U.S. federal income tax, and:

 

  · the payor or broker does not have actual knowledge or reason to know that you are a U.S. person and you have furnished to the payor or broker:

 

  · a valid IRS Form W-8BEN or W-8BEN-E, as applicable, or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-U.S. person, or

 

  · other documentation upon which the payor or broker may rely to treat the payments as made to a non-U.S. person in accordance with U.S. Treasury regulations, or

 

  · you otherwise establish an exemption.

 

Payment of the proceeds from the sale of shares of common stock effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of such shares that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if:

 

  · the proceeds are transferred to an account maintained by you in the United States,

 

  · the payment of proceeds or the confirmation of the sale is mailed to you at a United States address, or

 

  · the sale has some other specified connection with the United States as provided in U.S. Treasury regulations,

 

unless the broker does not have actual knowledge or reason to know that you are a U.S. person and the documentation requirements described above are met or you otherwise establish an exemption.

 

In addition, a sale of shares of common stock will be subject to information reporting if such sale is effected at a foreign office of a broker that is:

 

  · a U.S. person,

 

  · a controlled foreign corporation for U.S. federal tax purposes,

 

  · a foreign person 50% or more of whose gross income is effectively connected with the conduct of a U.S. trade or business for a specified three-year period, or

 

  · a foreign partnership, if at any time during its tax year:

 

  · one or more of such foreign partnership’s partners are “U.S. persons,” as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or

 

  · such foreign partnership is engaged in the conduct of a U.S. trade or business, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a U.S. person.

 

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You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the IRS.

 

FATCA Withholding

 

Pursuant to sections 1471 through 1474 of the Code, commonly known as the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax (“FATCA withholding”) will be imposed on certain payments to you or to certain foreign financial institutions, investment funds and other non-U.S. persons receiving payments on your behalf if you or such persons fail to comply with certain information reporting requirements. Such payments will include U.S.-source dividends and the gross proceeds from the sale or other disposition of stock that can produce U.S.-source dividends. Payments of dividends that you receive in respect of our common stock will be affected by this withholding if you are subject to the FATCA information reporting requirements and fail to comply with them or if you hold our common stock through a non-U.S. person (e.g., a foreign bank or broker) that fails to comply with these requirements (even if payments to you would not otherwise have been subject to FATCA withholding). However, FATCA withholding will not apply to payments of gross proceeds from a sale or other disposition of shares of common stock before January 1, 2019. You should consult your own tax advisors regarding the relevant U.S. law and other official guidance on FATCA withholding.

 

Federal Estate Taxes

 

Shares of common stock held by a non-U.S. stockholder at the time of death will be included in the stockholder’s gross estate for U.S. Federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

 

Other Tax Consequences

 

State or local taxation may apply to the Company and its stockholders in various state or local jurisdictions, including those in which the Company or its stockholders transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the U.S. federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company.

 

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UNDERWRITING

 

Subject to the terms and conditions set forth in the underwriting agreement between us and the underwriters named below, for whom FBR Capital Markets & Co. is acting as representative, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, the number of shares of our common stock listed next to its name in the following table:

 

Underwriter   Number of
Shares
 
FBR Capital Markets & Co.        
         
         
         
         
Total        

 

Under the terms of the underwriting agreement, the underwriters are committed to purchase all of the shares offered by this prospectus (other than the shares subject to the underwriters’ option to purchase additional shares), if the underwriters buy any of such shares. The underwriters’ obligation to purchase the shares is subject to satisfaction of certain conditions, including, among others, the continued accuracy of representations and warranties made by us in the underwriting agreement, delivery of legal opinions and the absence of any material changes in our assets, business or prospects after the date of this prospectus.

 

The underwriters initially propose to offer the common stock directly to the public at the public offering price set forth on the front cover page of this prospectus and to certain dealers at such offering price less a concession not to exceed $ per share. After the initial public offering of the shares of common stock, the offering price and other selling terms may be changed by the underwriters. Sales of shares of common stock made outside the United States may be made by affiliates of certain of the underwriters.

 

Over-Allotment Option

 

We have granted to the underwriters an option to purchase up to                      additional shares of our common stock at the same price per share as they are paying for the shares shown in the table above. The underwriters may exercise this option in whole or in part at any time within 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriters’ initial commitment as indicated in the table at the beginning of this section plus, in the event that any underwriter defaults in its obligation to purchase shares under the underwriting agreement, certain additional shares.

 

Discounts and Commissions

 

The following table shows the per share and total underwriting discounts and commissions we and the selling stockholders will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of our common stock.

 

          Total  
    Per Share     No Exercise     Full Exercise  
Public Offering Price   $       $       $    
Underwriting discounts and commissions to be paid by:                        
Us   $       $       $    
The selling stockholders   $       $       $    
Total   $       $       $    
Proceeds, before expenses, to us   $       $       $    
Proceeds, before expenses, to the selling stockholders   $       $       $    

 

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We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $                .

 

Right of First Refusal

 

In connection with the private offering, we granted FBR Capital Markets & Co. a right of first refusal until October 31, 2016 to act (i) as lead underwriter and lead book runner in connection with any public offering of our equity or debt securities, including this offering, (ii) as sole placement agent for any private offering of our equity or debt securities, and (iii) as financial advisor in connection with any merger and acquisition advisory work where an investment banker represents us.

 

Listing

 

We intend to apply to have our common stock listed on the NYSE under the symbol “CLPR”.

 

Stabilization

 

In accordance with Regulation M under the Exchange Act, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including short sales and purchases to cover positions created by short positions, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making.

 

  · Short positions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares or purchasing shares in the open market.

 

  · Stabilizing transactions permit bids to purchase the underlying security as long as the stabilizing bids do not exceed a specific maximum price.

 

  · Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriters’ option to purchase additional shares. If the underwriters sell more shares than could be covered by underwriters’ option to purchase additional shares, thereby creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

  · Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

  · In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase shares of our common stock until the time, if any, at which a stabilizing bid is made.

 

These activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result of these activities, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time.

 

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representative of the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

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Indemnification We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters or the selling stockholders may be required to make in respect of such liabilities.

 

Discretionary Accounts The underwriters have informed us that they do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the shares of our common stock being offered in this offering.

 

IPO Pricing Prior to the completion of this offering, there has been no public market for our common stock. The initial public offering price has been negotiated between us and the representatives of the underwriters. Among the factors considered in these negotiations are: the history of, and prospects for, us and the industry in which we compete; our past and present financial performance; an assessment of our management; the present state of our development; the prospects for our future earnings; the prevailing conditions of the applicable United States securities market at the time of this offering; previous trading prices for our common stock in the private market and market valuations of publicly traded companies that we and the representative believe to be comparable to us.

 

Lock-up Agreements We have agreed that for a period commencing on the date of the underwriting agreement for this offering and continuing for 180 days, we will not, without the prior written consent of FBR Capital Markets & Co., which may be withheld or delayed in FBR Capital Markets & Co.’s sole discretion:

 

  · offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise dispose of or transfer, directly or indirectly, any of our equity securities or any securities convertible into or exercisable or exchangeable for our equity securities, or file any registration statement under the Securities Act with respect to any of the foregoing; or

 

  · enter into any swap or other arrangement that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of any of our equity securities,

 

whether any such transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise. The prior sentence will not apply to (1) the registration and sale of the shares of common stock in accordance with the terms of the registration rights agreement, including the of filing any registration statement under the Securities Act with respect to shares of our common stock that is not prohibited by the registration rights agreement, (2) issuances of options or grants of restricted stock under the company’s stock option and incentive plans, (3) issuances of options or grants of restricted stock in connection with employment or other retention offers, (4) acquisitions or dispositions of our stock by operation of the provisions of our charter relating to restrictions on ownership and transfer of our stock and (5) issuances in connection with any acquisition, merger, consolidation or joint venture, including the filing of any registration statement under the Securities Act in connection therewith.

 

Each of our directors and our executive officers has agreed that for a period ending 180 days after the effective date of the registration statement of which this prospectus forms a part, none of them will, without the prior written consent of FBR Capital Markets & Co., which may be withheld or delayed in FBR Capital Markets & Co.’s sole discretion:

 

  · offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise dispose of or transfer, directly or indirectly, any of our equity securities or any securities convertible into or exercisable or exchangeable for our equity securities; or

 

  · enter into any swap or other arrangement that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of any of our equity securities, whether any such transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.

 

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Notwithstanding the prior sentence, subject to applicable securities laws and the restrictions contained in our charter, our directors and executive officers may transfer our securities: (i) pursuant to the exercise or conversion of securities of the company or any subsidiary of the company, including, without limitation, options, warrants, notes, preferred stock, partnership interests or limited liability company interests; (ii) as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound in writing by the same restrictions described above; (iii) to any affiliate of such director or executive officer, which affiliate is a controlling person of such director or executive officer or a person or entity controlled by such director or executive officer, provided that the transferee agrees to be bound in writing by the same restrictions described above; (iv) to any trust for the direct or indirect benefit of such director or executive officer or the immediate family of such director or executive officer, provided that the trustee of the trust agrees to be bound in writing by the same restrictions described above; (v) to or from any grantor retained annuity trust established by such director or executive officer or to or from continuing trusts for such director’s or executive officer’s immediate family members, provided that the trustee of any trust agrees to be bound in writing by the same restrictions described above; (vi) as an indirect or direct distribution to stockholders, partners or members of such director or executive officer, provided that such stockholders, partners or members agree to be bound in writing by the same restrictions described above; (vii) pursuant to any transfer required under any benefit plan or the company’s amended and restated bylaws; (viii) as required by participants in our 2015 Omnibus Plan or 2015 Director Plan in order to reimburse or pay U.S. federal income tax and withholding obligations in connection with vesting of restricted stock grants or the exercise of stock options; (ix) as collateral for any loan, provided that the lender agrees to be bound in writing by the same restrictions described above; or (x) in or in connection with any merger, consolidation, combination or sale of all or substantially all the assets of the company where all the stockholders will receive equal consideration for their interests and in or in connection with any tender offer or other offer to purchase at least 90% of the common stock of the company.

 

Notwithstanding the foregoing, nothing shall prevent our directors or executive officers from, or restrict their ability to, (i) purchase securities of the Company in a public or private transaction, purchase any exchange traded options or warrants based on shares of our common stock, or purchase other publicly traded securities of or related to the Company on the open market, (ii) exercise or convert any options, warrants or other convertible securities issued to or held by such director or executive officer, including those granted under any benefit plan of the Company, (iii) request the registration of any securities of the Company held by such director or executive officer pursuant to any registration rights agreement with the Company or (iv) sign a registration statement to be filed with the SEC.

 

Additionally, in connection with this offering, all of our other stockholders have agreed with us, to the extent requested by us or the lead managing underwriter(s), not to directly or indirectly sell, offer to sell, grant any option or otherwise transfer or dispose of our common stock for 180 days, in the case of the holders that are the selling stockholders in this offering and 60 days, in the case of the holders who are not selling stock in this offering, in each case after the effective date of the registration statement of which this prospectus forms a part.

 

Other Relationships

 

FBR Capital Markets & Co. was the sole initial purchaser and placement agent for the private offering, for which it was paid customary fees. FBR Capital Markets & Co. may in the future provide us and our affiliates with investment banking and financial advisory services for which FBR Capital Markets & Co. may in the future receive customary fees.

 

FBR Capital Markets & Co., in its sole discretion, may release, or authorize us to release, as the case may be, the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.

 

Electronic Distribution

 

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members, if any, participating in the offering. The representative may allocate a number of shares to the underwriters and selling group members, if any, for sale to their online brokerage account holders. Any such allocations for online distributions will be made by the representative on the same basis as other allocations.

 

 - 178 -

 

 

Selling Restrictions

 

Notice to Prospective Investors in the United Kingdom

 

This prospectus is only being distributed to and is only directed at persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or the Order, and/or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”).

 

This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom who is not a relevant person should not act or rely on this document or any of its contents.

 

Each underwriter has represented, warranted and agreed that:

 

  (A) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended, or the FSMA) received by it in connection with the issue or sale of the Shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and

 

  (B) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom.

 

Notice to Prospective Investors in Switzerland

 

This document, as well as any other material relating to the shares which are the subject of the offering contemplated by this prospectus, do not constitute an issue prospectus pursuant to Article 652a and/or 1156 of the Swiss Code of Obligations. The shares will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the shares, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The shares are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the shares with the intention to distribute them to the public. The investors will be individually approached by the issuer from time to time. This document, as well as any other material relating to the shares, is personal and confidential and do not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland.

 

 - 179 -

 

  

Notice to Prospective Investors in the Dubai International Financial Centre

 

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (“DFSA”). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

 

Notice to Prospective Investors in Australia

 

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (“ASIC”), in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

Any offer in Australia of the shares may only be made to persons (the “Exempt Investors”) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.

 

The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.

 

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

Notice to Prospective Investors in Hong Kong

 

The securities have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the securities has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

 - 180 -

 

 

 

Notice to Prospective Investors in Japan

 

The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

 

Notice to Prospective Investors in Singapore

 

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Non-CIS Securities may not be circulated or distributed, nor may the Non-CIS Securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

Where the Non-CIS Securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

  a. a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

  b. a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

 

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Non-CIS Securities pursuant to an offer made under Section 275 of the SFA except:

 

  a. to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

  b. where no consideration is or will be given for the transfer;

 

  c. where the transfer is by operation of law;

 

  d. as specified in Section 276(7) of the SFA; or

 

  e. as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

 

 - 181 -

 

  

VALIDITY OF COMMON STOCK

 

The validity of the common stock offered hereby will be passed upon for us by Venable LLP. In addition, certain legal matters will be passed upon for us by Sullivan & Cromwell LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Vinson & Elkins LLP, Richmond, Virginia.

 

EXPERTS

 

The consolidated and combined financial statements of Clipper Realty Inc. and Predecessor and schedule III as of December 31, 2015 and 2014 and for each of the two years in the period ended December 31, 2015 included in this prospectus and in the registration statement have been so included in reliance on the reports of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.

 

The statement of revenues and certain expenses of the Tribeca House properties for the year ended December 31, 2013 and the related notes to the statement included in this prospectus have been audited by Berdon LLP, independent public accountants, as stated in their report appearing herein.

 

The statement of revenues and certain expenses of the Aspen property for the year ended December 31, 2015 and the related notes to the statement included in this prospectus have been audited by Lipsky Goodkin & Co., P.C., independent public accountants, as stated in their report appearing herein.

 

 - 182 -

 

  

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-11 (including exhibits, schedules, and amendments) under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all the information set forth in the registration statement. For further information about us and the shares of common stock to be sold in this offering, you should refer to the registration statement. Statements contained in this prospectus relating to the contents of any contract, agreement or other document are not necessarily complete and are qualified in all respects by the complete text of the applicable contract, agreement or other document.

 

You may read and copy all or any portion of the registration statement or any other information we file at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the operation of the public reference rooms. Our SEC filings, including the registration statement, are also available to you on the SEC’s website ( http://www.sec.gov ).

 

In connection with this offering we will become subject to the information and periodic reporting requirements of the Exchange Act. Under the Exchange Act, we will file annual, quarterly and current reports, as well as proxy statements and other information with the SEC. These periodic reports, proxy statements, and other information will be available for inspection and copying at the SEC’s Public Reference Room and the website of the SEC referred to above. We intend to make this information available on the investor relations section of our website, www.clipperrealty.com. Information on, or accessible through, our website is not part of this prospectus.

 

 - 183 -

 

 

INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Consolidated and Combined Financial Statements  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated and Combined Balance Sheets as of June 30, 2016 and December 31, 2015 and 2014 F-3
   
Consolidated and Combined Statements of Operations for the six months ended June 30, 2016 and 2015, and for the years ended December 31, 2015 and 2014 F-4
   
Consolidated and Combined Statements of Equity for the six months ended June 30, 2016 and for the years ended December 31, 2015 and 2014 F-5
   
Consolidated and Combined Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and for the years ended December 31, 2015 and 2014 F-6
   
Notes to Consolidated and Combined Financial Statements F-7
   
Schedule III – Real Estate and Accumulated Depreciation F-25
   
Tribeca Properties Financial Statements  
   
Independent Auditors’ Report F-26
   
Statement of Revenues and Certain Expenses for the year ended December 31, 2013 and nine months ended September 30, 2014 (unaudited) F-28
   
Tribeca Properties Notes to Financial Statements F-29
   
Aspen Financial Statements  
   
Independent Auditor’s Report F-33
   
Statement of Revenues and Certain Expenses for the year ended December 31, 2015 and three months ended March 31, 2016 (unaudited) F-34
   
Notes to Aspen Financial Statements F-34

 

 F- 1

 

   

Report of Independent Registered Public Accounting Firm

 

Members of Clipper Realty Inc. and Predecessor
Brooklyn, NY 11219

 

We have audited the accompanying consolidated and combined balance sheets of Clipper Realty Inc. and Predecessor (the “Company”) as of December 31, 2015 and 2014, and the related consolidated and combined statements of operations, equity and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

Opinion

 

In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Clipper Realty Inc. and Predecessor as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Also in our opinion, the financial statements schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

/s/ BDO USA, LLP
New York, NY
March 30, 2016

 

 F- 2

 

   

Clipper Realty Inc. and Predecessor

Consolidated and Combined Balance Sheets

(In thousands, except for share data)

 

    June 30,
2016
    December 31,
2015
    Predecessor
December 31,
2014
 
    (unaudited)              
ASSETS                        
Investment in real estate                        
Land and improvements   $ 434,097     $ 384,437     $ 384,350  
Building and improvements     425,792       376,225       368,598  
Tenant improvements     2,938       2,525       2,485  
Furniture, fixtures and equipment     8,707       7,592       6,321  
Total Investment in real estate     871,534       770,779       761,754  
Accumulated depreciation     (50,869 )     (44,672 )     (33,010 )
Investment in real estate, net     820,665       726,107       728,744  
Cash and cash equivalents     104,059       125,332       9,157  
Restricted cash     9,885       9,962       5,876  
Accounts and other receivable net of allowances for doubtful accounts of $2,759 (unaudited), $2,534, and $2,600, respectively     3,261       1,476       4,111  
Deferred rent receivable     3,900       3,881       3,990  
Deferred costs and intangible assets, net     15,549       5,267       7,258  
Prepaid expense and other assets     8,843       9,093       7,720  
TOTAL ASSETS   $ 966,162     $ 881,118     $ 766,856  
LIABILITIES AND EQUITY                        
Notes payable, net of unamortized loan costs of $7,959 (unaudited), $7,303 and $13,252, respectively   $ 806,930     $ 713,440     $ 708,228  
Accounts payable and accrued liabilities     6,097       5,326       4,944  
Security deposits     6,924       5,558       5,460  
Below-market leases, net     7,718       7,848       9,562  
Other liabilities     3,002       2,569       1,465  
TOTAL LIABILITIES   $ 830,671     $ 734,741     $ 729,659  
EQUITY                        
Preferred stock, $0.01 par value, 12.5% Series A Cumulative Non-Voting Preferred Stock; $137,500 liquidation preference, 132 shares issued and outstanding                  
Common stock, $0.01 par value, 500,000,000 shares authorized, 11,422,606 issued and outstanding     114       114        
Additional paid-in-capital     46,281       46,049        
Accumulated deficit     (5,387 )     (1,860 )      
Predecessor equity (members’ capital)                 37,197  
Total stockholders’ and predecessor equity     41,008       44,303       37,197  
Non-controlling interests     94,483       102,074        
Total Equity     135,491       146,377       37,197  
TOTAL LIABILITIES AND EQUITY   $ 966,162     $ 881,118     $ 766,856  

 

See accompanying notes to these consolidated and combined financial statements.

 

 F- 3

 

 

Clipper Realty Inc. and Predecessor

Consolidated and Combined Statements of Operations

(In thousands)

 

    Six Months Ended
June 30,
    Years Ended
December 31,
 
    2016     2015     2015     2014  
    (unaudited)              
REVENUES                                
Residential rental income   $ 31,738     $ 30,255     $ 61,358     $ 31,938  
Commercial income     8,959       8,553       17,256       12,382  
Tenant recoveries     1,883       1,788       3,477       2,415  
Garage and other income     1,351       1,208       2,513       1,037  
TOTAL REVENUES     43,931       41,804       84,604       47,772  
                                 
OPERATING EXPENSES                                
Property operating expenses     12,684       11,450       23,283       19,673  
Real estate taxes and insurance     8,140       6,800       14,926       6,560  
General and administrative     3,922       1,859       5,296       2,358  
Acquisition costs     407             75       326  
Depreciation and amortization     6,638       6,163       12,521       4,472  
TOTAL OPERATING EXPENSES     31,791       26,272       56,101       33,389  
                                 
INCOME FROM OPERATIONS     12,140       15,532       28,503       14,383  
                                 
Interest expense, net     (18,863 )     (18,481 )     (36,703 )     (9,145 )
                                 
Net (loss) income   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
                                 
Less:                                
Net loss attributable to Predecessor                   3,690          
Net loss attributable to non-controlling interests     4,688               3,145          
Dividends attributable to preferred shares     (7 )                      
Net loss attributable to common stockholders   $ (2,042 )           $ (1,365 )        
Basic and diluted loss per share   $ (0.18 )           $ (0.12 )        

 

See accompanying notes to these consolidated and combined financial statements.

 

 F- 4

 

   

Clipper Realty Inc. and Predecessor

Consolidated and Combined Statements of Equity

(In thousands)

 

    Preferred
Shares
    Number of
common
shares
    Common
Stock
    Additional
paid-in-
capital
    Accumulated
deficit
    Predecessor
Equity
    Total
Stockholders’
and
Predecessor
equity
    Non-
controlling
interests
    Total equity  
Predecessor                                                      
Balance December 31, 2013                                   (4,664 )     (4,664 )           (4,664 )
Contributions                                   104,073       104,073             104,073  
Distributions                                   (67,450 )     (67,450 )           (67,450 )
Net Income                                   5,238       5,238             5,238  
Balance December 31, 2014                                   37,197       37,197             37,197  
                                                                         
Contributions                                   2,357       2,357             2,357  
Distributions                                   (14,233 )     (14,233 )           (14,233 )
Net Loss                                   (3,690 )     (3,690 )           (3,690 )
Balance August 3, 2015                                   21,631       21,631             21,631  
                                                                         
Clipper Realty Inc.                                                                        
Net proceeds from sale of common shares on August 3, 2015   $       10,667     $ 107     $ 130,092     $     $     $ 130,199     $     $ 130,199  
Formation transaction           756       7       (84,043 )           (21,631 )     (105,667 )     105,667        
Amortization of LTIP grants                                               709       709  
Dividends and distributions                             (495 )           (495 )     (1,157 )     (1,652 )
Net loss                             (1,365 )           (1,365 )     (3,145 )     (4,510 )
Balance December 31, 2015           11,423       114       46,049       (1,860 )           44,303       102,074       146,377  
                                                                         
Costs in connection with issuance of common shares   $           $     $ (438 )   $     $     $ (438 )   $     $ (438 )
Proceeds from issuance of 132 preferred shares                       132                   132             132  
Amortization of LTIP grants                                               1,112       1,112  
Dividends and distributions                             (1,492 )           (1,492 )     (3,477 )     (4,969 )
Net loss                             (2,035 )           (2,035 )     (4,688 )     (6,723 )
Reallocation of noncontrolling interest                       538                   538       (538 )      
Balance June 30, 2016 (unaudited)   $       11,423     $ 114     $ 46,281     $ (5,387 )   $     $ 41,008     $ 94,483     $ 135,491  

 

See accompanying notes to these consolidated and combined financial statements.

 

 F- 5

 

   

Clipper Realty Inc. and Predecessor

Consolidated and Combined Statements of Cash Flows 

(In thousands)

 

    Six Months Ended
June 30,
    Years ended
December 31,
 
    2016     2015     2015     2014  
    (unaudited)              
CASH FLOWS FROM OPERATING ACTIVITIES                                
Net (loss) income   $ (6,723 )   $ (2,949 )   $ (8,200 )   $ 5,238  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:                                
Depreciation     6,197       5,733       11,662       4,034  
Amortization of deferred financing costs     3,095       2,997       6,036       753  
Amortization of deferred costs and intangible assets     1,110       1,094       2,187       712  
Amortization of below market leases     (919 )     (857 )     (1,714 )     (1,450 )
Deferred rent receivable     (19 )     12       109       513  
Stock-based compensation     1,112             709        
Change in fair value of interest rate caps     9       446       522       49  
Changes in operating assets and liabilities:                                
Restricted cash     77       (4,009 )     (4,086 )     14,372  
Accounts and other receivables     (1,785 )     2,249       2,635       (3,220 )
Prepaid expenses, other assets and deferred costs     721       3,455       (2,004 )     (3,643 )
Accounts payable and accrued liabilities     771       1,709       382       1,870  
Related party payables                       (14,821 )
Security deposits     914       96       98       3,081  
Other liabilities     431       84       1,104       (16 )
Net cash provided by operating activities     4,991       10,060       9,440       7,472  
                                 
CASH FLOW FROM INVESTING ACTIVITIES                                
Additions to land, buildings, and improvements     (8,539 )     (4,885 )     (9,025 )     (2,542 )
Increase in restricted cash                       (2,000 )
Cash paid in connection with acquisition of real estate     (102,845 )                 (222,280 )
Net cash used in investing activities     (111,384 )     (4,885 )     (9,025 )     (226,822 )
                                 
CASH FLOW FROM FINANCING ACTIVITIES                                
Costs in connection with issuance of common and preferred stock     (438 )           (13,801 )      
Proceeds from sale of common and preferred stock     132             144,000        
Payments of mortgage notes payable     (55,354 )     (398 )     (737 )     (655 )
Proceeds from mortgage notes payable     149,500                   200,000  
Contributions           2,357       2,357       104,073  
Dividends and distributions     (4,969 )     (663 )     (15,884 )     (67,450 )
Loan costs and other     (3,751 )           (175 )     (11,261 )
Net cash provided by financing activities     85,120       1,296       115,760       224,707  
                                 
Net (decrease) increase in cash and cash equivalents     (21,273 )     6,471       116,175       5,357  
Cash and cash equivalents - beginning of period     125,332       9,157       9,157       3,800  
Cash and cash equivalents - end of period   $ 104,059     $ 15,628     $ 125,332     $ 9,157  
                                 
Supplemental cash flow information:                                
Cash paid for interest   $ 16,448     $ 15,301     $ 31,005     $ 7,389  
                                 
Supplemental non cash investing and financing activities:                                
Assumption of loan in connection with acquisition of real estate                       335,000  

 

See accompanying notes to these consolidated and combined financial statements.

 

 F- 6

 

  

Clipper Realty Inc. and Predecessor

Notes to Consolidated and Combined Financial Statements 

(In thousands)

 

1. Organization

 

Clipper Realty Inc. (the “Company” or “We”) was organized in the state of Maryland on July 7, 2015. On August 3, 2015, we completed certain formation transactions and the sale of shares of common stock in a private offering. We contributed the net proceeds of the private offering to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership. The Operating Partnership in turn contributed such net proceeds to the limited liability companies (“LLC’s”) that comprise the Predecessor, as described below, in exchange for class A LLC units in such LLC’s and became the managing member of such LLC’s. The owners of the LLC’s exchanged their interests for class B LLC units and an equal number of special, non-economic, voting stock in the Company. The class B LLC units, together with the special voting shares, are convertible into common shares of the Company and are entitled to distributions.

 

The predecessor to the Company (the “Predecessor”) was a combination of four limited liability companies, including one formed in 2014 in connection with the acquisition of a property on December 15, 2014. The Predecessor did not represent a legal entity. The LLC’s that comprised the Predecessor and the Company at formation were under common control.

 

On December 15, 2014, the Predecessor acquired the properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan, New York. On June 27, 2016, the Operating Partnership acquired the property at 1955 First Avenue in Manhattan, known as the Aspen (“Aspen”), with approximately 186,582 square feet of GLA. As a result, as of June 30, 2016, the properties owned by the Company consist of the following (collectively, the “Properties”):

 

· Tribeca House properties in Manhattan, comprising two buildings, one with 21 stories and one with 12 stories, containing residential and retail space with an aggregate of approximately 480,000 square feet of residential rental Gross Leasable Area (“GLA”) and 77,236 of rental retail and parking GLA;

 

· Flatbush Gardens in Brooklyn, comprised of a 59-building multi-family housing complex with 2,496 rentable units;

 

· 141 Livingston Street in Brooklyn, a 15-story office building with approximately 216,073 square feet of GLA;

 

· 250 Livingston Street in Brooklyn, a 12-story office and residential building with approximately 294,378 square feet of GLA; and

 

· Aspen property in Manhattan, a seven-story building containing residential and retail space with approximately 166,000 square feet of residential rental GLA and approximately 21,000 of rental retail GLA.

 

Following completion of the private offering and the formation transactions, the operations of the Clipper Realty, Inc. and its consolidated subsidiaries (the “Company”) have been carried on primarily through the Operating Partnership. The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code. The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLC’s that comprise the Predecessor.

  

2. Sale of Common Stock and Formation Transactions

 

On August 3, 2015, the Company sold 10,666,667 shares of common stock to private investors at a price of $13.50 per share. The proceeds, net of offering costs, were approximately $130,199.

 

The Company contributed the net proceeds of the common stock offering to the Operating Partnership in exchange for units in the Operating Partnership as described in Note 1. Following the other transactions described in Note 1, substantially all the net proceeds raised were available to the Company.

 

The following is a summary of the Company’s Statement of Operations for the period from August 3, 2015 through December 31, 2015 and the Predecessor’s Statements of Operations for the period from January 1, 2015 through August 2, 2015. These amounts are included in the consolidated and combined statement of operations herein for the year ended December 31, 2015. All balances as of December 31, 2014 are those of the Predecessor.

 

 F- 7

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

    Clipper Realty Inc.     Predecessor  
   

August 3, 2015 -
December 31, 2015

   

January 1, 2015 -
August 2, 2015

 
REVENUES                
Residential rental income   $ 25,099     $ 35,882  
Commercial income     7,091       10,165  
Tenant recoveries     1,433       2,044  
Garage and other income     1,205       1,308  
TOTAL REVENUES     34,828       49,399  
                 
OPERATING EXPENSES                
Property operating expenses     8,862       13,672  
Real estate taxes and insurance     6,774       8,152  
General and administrative     3,233       2,435  
Acquisition costs     75        
Depreciation and amortization     5,292       7,229  
TOTAL OPERATING EXPENSES     24,236       31,488  
                 
INCOME FROM OPERATIONS     10,592       17,911  
                 
Interest expense, net     (15,102 )     (21,601 )
                 
Net loss     (4,510 )     (3,690 )
                 
Less:                
Net loss attributable to non-controlling interests     3,145          
                 
Net loss attributable to stockholders   $ (1,365 )        

 

  3. Significant Accounting Policies

   

Basis of Consolidation and Combination

 

The accompanying consolidated and combined financial statements of the Company and the Predecessor are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The effect of all intercompany balances has been eliminated. The consolidated and combined financial statements include the accounts of all entities in which the Company and the Predecessor have a controlling interest. The ownership interests of other investors in these entities are recorded as noncontrolling interest. The Predecessor entities have been combined on the basis that, for the periods presented, such entities were under common control.

 

Unaudited Interim Financial Information

 

The unaudited combined financial statements for the periods ended June 30, 2016 and 2015 have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

 

 F- 8

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.

 

Investment in Real Estate

 

Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. During the year ended December 31, 2014, the Predecessor wrote off $3,261 of fully depreciated tenant improvements. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.

 

Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commission, legal and other related expenses.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. Management of the Company does not believe that any of its properties within the portfolio are impaired as of June 30, 2016 and December 31, 2015 and 2014.

 

 F- 9

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies (cont.)

 

For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held for sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held for sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for sale properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held for sale.

 

If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).

 

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Building and improvements 30–40 years
Tenant improvements Shorter of useful life or lease term
Furniture, fixtures and equipment 3–15 years

 

The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are defined as cash on hand and in banks plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.

 

Restricted Cash

 

Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs and capital improvements and security deposits.

 

 F- 10

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies (cont.)

 

Tenant and Other Receivables and Allowance for Doubtful Accounts

 

Tenant and other receivables are comprised of amounts due for monthly rents and other charges. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods.

 

Deferred Costs

 

Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.

 

Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated and combined financial statements. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Cost incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.

 

Comprehensive Income

 

Comprehensive income is comprised of net income adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the six months ended June 30, 2016 and the years ended December 31, 2015 and 2014, the Company did not own any financial instruments for which the change in value was not reported in net income accordingly and its comprehensive income was its net income as presented in the consolidated and combined statements of operations.

 

Revenue Recognition

 

Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered into by a resident for an apartment unit are generally for a one year term, renewable upon consent of both parties on an annual or monthly basis. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

 

Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs.

 

 F- 11

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies (cont.)

 

Stock-based Compensation

 

The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718, “Compensation - Stock Compensation.” As such, all equity based awards are reflected as compensation expense in the Company’s consolidated financial statements over their vesting period based on the fair value at the date of grant.

 

The following is a summary of awards during the year ended December 31, 2015 and the six months ended June 30, 2016.

 

Unvested Restricted Shares and LTIP Units   LTIP Units     Weighted
Grant-Date
Fair Value
 
Unvested at December 31, 2014         $  
Granted     378,333       13.50  
Vested            
Forfeited            
Unvested at December 31, 2015     378,333     $ 13.50  
Granted     107,407     $ 13.50  
Vested            
Forfeited            
Unvested at June 30, 2016 (unaudited)     485,740     $ 13.50  

 

As of June 30, 2016 and December 31, 2015, there was $4.9 million and $6.0 million, respectively, of total unrecognized compensation cost related to unvested share- based compensation arrangements granted under share incentive plans. As of June 30, 2016, the weighted average period over which the unrecognized compensation expense will be recorded is approximately 1.9 years.

 

On August 8, 2016, the Company granted 15,741 LTIP units to a non-employee director. The estimated fair value of the LTIPs of approximately $212,000 will be recognized in earnings during the third and fourth quarter of 2016.

 

Income Taxes

 

The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the U.S. Internal Revenue Code (the “Code”) commencing with its taxable year ending December 31, 2015. To qualify as a REIT, the Company is required to distribute dividends equal to at least 90% of the REIT taxable income (computed without regard to the dividends paid deduction and net capital gains) to its stockholders, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative minimum tax. In addition, the Company may not be able to re-elect as a REIT for the four subsequent taxable years. The entities comprising the Predecessor are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made for federal, state or local income or franchise taxes in the accompanying consolidated and combined financial statements.

  

In accordance with the FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its or the Predecessor’s financial position or results of operation. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.

 

The Company has determined that the cash distributed to the stockholders is characterized as follows for Federal income tax purposes:

 

    For the year
ended
December 31,
2015
 
Ordinary income      
Capital gain      
Return of capital     100 %
      100 %

 

 F- 12

 

 

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

Fair Value Measurements

 

Refer to Note 9, “Fair Value of Financial Instruments”.

 

Derivative Financial Instruments

 

The FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by the FASB guidance, the Company records all derivatives on the consolidated and combined balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.

 

Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings.

 

Earnings (Loss) Per Share

 

Basic and diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding. As of June 30, 2016, the Company has unvested LTIP Units (Note 3) which provide for non-forfeitable rights to dividend equivalent payments. Accordingly, these unvested LTIP Units are considered participating securities and are included in the computation of basic and diluted earnings (loss) per share pursuant to the two-class method. The Company does not have diluted securities as of December 31, 2015 or June 30, 2016.

 

The effect of the conversion of the 26,317 OP Units outstanding is not reflected in the computation of basic and diluted earnings (loss) per share, as they are exchangeable for common shares on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated and combined financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings (loss) per share.

  

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated:

 

(dollar in thousands, except per share amounts)   Six Months Ended
June 30, 2016
    Year Ended
December 31, 2015
 
  (unaudited)          
Numerator                
Net loss attributable to common stockholders   $ (2,042 )   $ (1,365 )
Less: net income attributable to participating securities     (56 )     (16 )
      (2,098 )     (1,381 )
                 
Denominator                
Common shares outstanding     11,423       11,423  
                 
Basic and diluted loss per share attributable to common stockholders   $ (0.18 )   $ (0.12 )

 

 F- 13

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies (cont.)

 

Recently Issued Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” The new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor does not convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

 

In October 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, “Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments require adjustments to provisional amounts that are identified during the measurement period, including the cumulative effect of changes in depreciation, amortization, or other income effects to be recognized in the current-period financial statements. Prior periods should no longer be adjusted. The new standard takes effect in 2016 for public companies and early adoption is permitted. ASU 2015-16 is not expected to have a material impact on the Company’s consolidated and combined financial statements.

 

In April 2015, the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 revises Subtopic 835-30 to require that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The amendments also require the amortization of debt issuance costs to be reported as interest expense, which we believe is largely consistent with current practice. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. Applicable disclosures for a change in an accounting principle are required in the year of adoption, including interim periods. On January 1, 2016, the Company adopted ASU 2015-03. Accordingly, deferred financing costs, as of December 31, 2015 and 2014 of $7,303 and $13,252, respectively, have been reclassified from assets to liabilities in the consolidated and combined balance sheets.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation—Amendments to the Consolidation Analysis.” ASU 2015-02 applies to the reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities. Additionally, the amendments eliminate the presumption that a general partner should consolidate a limited partnership. The amendments in ASU 2015-02 affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 will be effective for public business entities for fiscal years, and interim periods within, beginning after December 15, 2015. ASU 2015-02 is not expected to have a material impact on the Company’s consolidated and combined financial statements.

  

During January 2015, the FASB issued ASU 2015-01, “Income Statement—Extraordinary and Unusual Items.” ASU 2015-01 eliminates the concept of extraordinary items. However, the presentation and disclosure requirements for items that are either unusual or in nature or infrequent in occurrence remain and will be expanded to include items that are both unusual in nature and infrequent in occurrence. ASU 2015-01 is effective for periods beginning after December 15, 2015. ASU 2015-01 is not expected to have a material impact on the Company’s consolidated and combined financial statements.

 

During August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern.” ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 is effective for periods beginning after December 15, 2016. ASU 2014-15 is not expected to have a material impact on the Company’s consolidated and combined financial statements.

 

 F- 14

 

 

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

3. Significant Accounting Policies (cont.)

 

During June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 provides explicit guidance on how to account for share-based payments that require a specific performance target to be achieved which may be achieved after an employee completes the requisite service period. ASU 2014-12 is effective for periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively. ASU 2014-12 does not have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. For the real estate industry, leasing transactions are not within the scope of the new standard. A majority of our tenant-related revenue is recognized pursuant to lease agreements. The FASB has subsequently issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. These ASUs are effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption of these ASUs on our consolidated financial statements.

 

Reclassifications

 

Certain amounts included in December 31, 2015 and 2014 consolidated financial statements have been reclassified to conform to the June 30, 2016 presentation. There was no effect on operations or equity related to these reclassifications.

 

 F- 15

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

4. Acquisition

 

On December 15, 2014, the Predecessor acquired the Tribeca House properties for $557,280. The purchase price consisted of the following:

 

Cash paid   $ 222,280  
Mortgage debt assumed     335,000  
    $ 557,280  

 

The purchase price was allocated as follows:

 

Land   $ 273,103  
Buildings     282,015  
Tenant improvements     288  
Furniture, fixtures and equipment     834  
Above-market leases     36  
Below-market leases     (4,911 )
In-place leases     1,562  
Lease origination costs     556  
Interest rate caps     369  
Real estate tax abatements     3,428  
    $ 557,280  

 

On June 27, 2016, the Company acquired the Aspen property for $103,000.

 

The purchase price was allocated as follows (unaudited):

 

Land   $ 49,569  
Buildings     42,226  
Tenant improvements     26  
Site improvements     91  
Furniture, fixtures and equipment     304  
Above-market leases     448  
Below-market leases     (790 )
In-place leases     1,103  
Lease origination costs     800  
Real estate tax abatements     9,223  
    $ 103,000  

 

We have prepared the following unaudited pro forma income statement information for the six months ended June 30, 2016 as if the acquisition had occurred as of January 1, 2015. The pro forma data is not necessarily indicative of the results that actually would have occurred if the acquisition had been consummated on January 1, 2015.

 

    Six Months Ended
June 30, 2016
    Year Ended
December 31, 2015
 
    (unaudited)        
Revenue   $ 47,092     $ 91,085  
Total expenses     (54,239 )     (99,937 )
Net loss   $ (7,149 )   $ (8,852 )

 

 F- 16

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

5. Deferred Costs and Intangible Assets

 

Deferred costs and intangible assets consist of the following:

 

    June 30,
2016
    December 31,
2015
    December 31,
2014
 
    (unaudited)              
Lease origination costs   $ 2,880     $ 2,079     $ 3,318  
In-place lease     7,559       6,254       6,254  
Real estate tax abatements     14,629       5,406       5,406  
Other     63              
      25,131       13,739       14,978  
Less accumulated amortization     (9,582 )     (8,472 )     (7,720 )
Total deferred costs and intangible assets, net   $ 15,549     $ 5,267     $ 7,258  

 

Amortization of lease origination costs and in-place lease intangible assets was $441 and $43 for the six months ended June 30, 2016 and 2015, respectively, and $860 and $438 for the years ended December 31, 2015 and 2014, respectively. Amortization of real estate abatements of $669 and $664 for the six months ended June 30, 2016 and 2015, respectively, and $1,328 and $238 for the years ended December 31, 2015 and 2014, respectively, is included in real estate taxes and insurance in the consolidated and combined statements of operations.

 

Deferred costs and intangible assets as of December 31, 2015 amortize to expenses in future years as follows:

 

  2016     $ 2,101  
  2017       1,838  
  2018       565  
  2019       343  
  2020       103  
  Thereafter       317  
  Total     $ 5,267  

 

6. Above and Below-Market Lease Intangibles

 

The Company’s above-market lease intangibles assets and liabilities are included in prepaid expense and other assets and are as follows:

 

    June 30,
2016
             
    (unaudited)              
Above-market leases   $ 448                  
Less accumulated amortization                      
    $ 448                  

 

The Company’s below-market lease intangibles assets and liabilities are as follows:

 

    June 30,
2016
    December 31,
2015
    December 31,
2014
 
    (unaudited)              
Below-market leases   $ 23,184     $ 22,395     $ 22,400  
Less accumulated amortization     (15,466 )   $ (14,547 )     (12,838 )
    $ 7,718     $ 7,848     $ 9,562  

 

Rental income includes amortization of above and below-market leases of $919 and $857 for the six months ended June 30, 2016 and 2015, respectively, and $1,714 and $1,450 for the years ended December 31, 2015 and 2014, respectively.

 

 F- 17

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

6. Below-Market Lease Intangibles (cont.)

 

The balance of below-market leases as of December 31, 2015 amortize to rental income in future years as follows:

 

2016     $ 1,719  
2017       1,715  
2018       1,715  
2019       1,201  
2020       424  
Thereafter       1,074  
Total     $ 7,848  

 

7. Notes Payable

 

The first mortgages and mezzanine notes payable collateralized by the respective properties, or the Company’s interest in the entities that own the properties and assignment of leases were as follows:

 

Property   Maturity     Interest Rate     June 30,
2016
    December 31,
2015
    December 31,
2014
 
                (unaudited)              
Flatbush Gardens, Brooklyn, NY     10/1/2024       3.88 %   $ 150,000     $ 150,000     $ 150,000  
Flatbush Gardens, Brooklyn, NY     10/1/2024       3.88 %     20,000       20,000       20,000  
250 Livingston Street, Brooklyn, NY     5/6/2023       4.00 %     35,389       35,743       36,480  
141 Livingston Street, Brooklyn, NY     7/9/2016       LIBOR + 3.25 %           55,000       55,000  
141 Livingston Street, Brooklyn, NY     6/1/2028       3.875 %     79,500              
Tribeca House properties, NY     11/9/2016       LIBOR + 3.40 %     360,000       360,000       360,000  
Tribeca House properties, NY     11/9/2016       LIBOR + 7.38 %     100,000       100,000       100,000  
Aspen property, NY     7/1/2028       3.68 %     70,000              
                    $ 814,889     $ 720,743     $ 721,480  
Unamortized debt issuance costs                   $ (7,959 )   $ (7,303 )   $ (13,252 )
Total net debt                   $ 806,930     $ 713,440     $ 708,228  

 

On September 24, 2012, the Predecessor entered into a $150,000 mortgage note agreement with New York Community Bank. The loan matures on October 1, 2024 and bears interest at a fixed-rate of interest of 3.88%. The note requires interest only payments through April 2017 and monthly principal and interest payments thereafter based on a 30-year amortization.

 

On May 1, 2013, the Predecessor entered into a mortgage note agreement with Citigroup Global Markets Realty Corp. for $37,500 that requires monthly principal and interest payments of $179, bears interest of 4.00% and matures on May 6, 2023.

 

On October 31, 2014, the Predecessor entered into an additional $20,000 note with New York Community Bank. This note is coterminous with the above $150,000 mortgage, matures on October 1, 2024 and bears interest at 3.88% through September 2019 and thereafter at prime plus 2.75%, subject to an option to fix the rate. The note requires interest only payments through April 2017, monthly principal and interest payments of $94 from May 2017 through September 2019 based on a 30 year amortization schedule and principal and interest payments thereafter based on the remaining period of the initial 30-year amortization schedule.

 

 F- 18

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

7. Notes Payable (cont.)

 

On December 12, 2014, the Predecessor entered into a $55,000 loan agreement related to the property at 141 Livingston Street, Brooklyn, New York with Citigroup Global Markets Inc. On May 11, 2016, the Company repaid the $55,000 loan from the proceeds of a new $79,500 loan from New York Community Bank. The new loan matures on June 1, 2028, and bears interest at 3.875%. The note requires interest only payments through June 2017, monthly principal and interest payments of $374 from July 2017 through June 2028 based on a 30 year amortization schedule and principal and interest payments thereafter based on the remaining period of the initial 30-year amortization schedule.

 

In connection with the purchase of the Tribeca House properties, on December 15, 2014, the Predecessor assumed a $335,000 mortgage note with Deutsche Bank (“DB”) and entered into additional $25,000 and $100,000 mortgage note and mezzanine note agreements with DB and SL Green Finance, respectively. The mortgage and mezzanine loans mature on November 9, 2016 and bear interest at one-month LIBOR plus 3.40% and 7.38%, respectively (3.731% and 7.572% respectively at December 31, 2015). The notes are subject to three one-year extension options. The Company is in the process of assessing its options with respect to the extension or refinancing of these loans.

 

On June 27, 2016, the Company entered into a $70,000 mortgage note agreement with Capital One Multifamily finance LLC, related to the Aspen property acquisition. The note matures on July 1, 2028 and bears interest at 3.68%. The note requires interest only payments through July 2017, monthly principal and interest payments of $321 from August 2017 through July 2028 based on a 30 year amortization schedule and principal and interest payments thereafter based on the remaining period of the initial 30-year amortization schedule.

 

The following table summarizes principal payment requirements under terms as of December 31, 2015:

 

2016       515,732  
2017       2,788  
2018       3,932  
2019       3,771  
2020       2,314  
Thereafter       192,206  
Total     $ 720,743  

 

8. Rental Income under Operating Leases

 

The Company’s three commercial properties are leased to commercial tenants under operating leases with fixed terms of varying lengths. As of December 31, 2015, the minimum future cash rents receivable (excluding tenant reimbursements for operating expenses) under non-cancelable operating leases for the commercial tenants in each of the next five years and thereafter are as follows:

 

2016     $ 16,817  
2017       15,048  
2018       14,924  
2019       10,039  
2020       5,345  
Thereafter       62,665  
Total     $ 124,838  

 

The Company has commercial leases with the City of New York that comprised 18% and 21%, and 20% and 31% of total revenue for the six months ended June 30, 2016 and 2015, and for the years ended December 31, 2015 and 2014, respectively. In December 2015, the City of New York executed a new 10-year lease at the Company’s property at 141 Livingston Street. Under the lease, the tenant has an option to terminate the lease after five years; however, if it decides to continue to occupy the building at that time, the rent will increase 25% beginning the sixth year of the lease.

 

 F- 19

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

9. Fair Value of Financial Instruments

 

GAAP requires the measurement of certain financial instruments at fair value on a recurring basis. In addition, GAAP requires the measure of other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate 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.

 

When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.

 

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

 

The financial assets and liabilities in the consolidated and combined balance sheets include cash and cash equivalents, restricted cash, receivables, accounts payable and accrued expenses, including interest rate caps, and mortgages. The carrying amount of cash and cash equivalents, restricted cash, receivables, and accounts payable and accrued expenses reported in the consolidated and combined balance sheets approximates fair value due to the short-term nature of these instruments. The fair value of mortgages, which is classified as Level 2, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates.

 

 F- 20

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

9. Fair Value of Financial Instruments (cont.)

 

The carrying amount and fair value of the mortgage notes payable were as follows:

 

    June 30, 2016     December 31, 2015     December 31, 2014  
    (unaudited)              
Carrying amount (excluding unamortized debt issuance costs)   $ 814,889     $ 720,743     $ 721,480  
Fair value   $ 823,163     $ 712,904     $ 700,987  

 

The Predecessor purchased interest rate caps in connection with the mortgage loans on December 12, 2014 and December 15, 2014 with LIBOR strike prices of 2.00%. The interest rate caps have an aggregate notional value of $515 million and expire coterminously with the related debt. Their fair value, which is classified as Level 2, is estimated using market inputs and credit valuation inputs. These instruments were not designated as hedges and accordingly their changes in fair value are recognized in earnings. The fair value of these instruments is $1 at June 30, 2016 and $10 and $532 at December 31, 2015 and 2014, respectively, and the change in fair value of $9 and $446, and $522 and $49 is included in interest expense for the six months ended June 30, 2016 and 2015, and for the years ended December 31, 2015 and 2014, respectively.

 

Disclosures about fair value of financial instruments were based on pertinent information available as of June 30, 2016, December 31, 2015 and December 31, 2014. Although the Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

 

10. Commitments and Contingencies

 

Legal

 

The Company is subject to certain legal proceedings and claims arising in connection with its business. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated and combined results of operations, financial position, or cash flows.

 

Commitments

 

The Company is obligated to provide parking through 2020 under a lease with a tenant at the property on 250 Livingston Street costing approximately $160 per year.

 

Concentrations

 

The Company’s properties are located in the Boroughs of Manhattan and Brooklyn in New York City, which exposes the Company to greater economic risks than if it owned a more geographically dispersed portfolio. For the six months ended June 30, 2016 and 2015, commercial properties accounted for approximately 26% and residential properties accounted for approximately 74% of total revenue. For the year ended December 31, 2015 and 2014, commercial properties accounted for approximately 26% and 32%, respectively, and the residential properties accounted for approximately 74% and 68%, respectively, of total revenue.

 

11. Related-Party Transactions

 

For the six months ended June 30, 2015 and the years ended December 31, 2015 and 2014, the Predecessor recorded management fees of approximately $409, $574 and $410, respectively, to related companies or individuals included in general and administrative expense in the consolidated and combined statements of operations.

 

During the six months ended June 30, 2016, the Company recorded overhead charges related to office expenses of approximately $99 to a related company included in general and administrative expense in the accompanying consolidated and combined statements of operations.

 

 F- 21

 

 

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

12. Segment Reporting

 

The Company has classified its reporting segments into commercial and residential rental properties. The commercial properties include the 141 Livingston Street property and portions of the 250 Livingston Street and Tribeca House properties. The residential reporting segment includes the Flatbush Gardens property and a portion of the 250 Livingston Street and Tribeca House properties. Interest expense related to the commercial and residential segments for the six months ended June 30, 2016 and 2015 is $3,673 and $15,190, and $3,699 and $14,782, respectively, and for the years ended December 31, 2015 and 2014 is $7,346 and $29,357, respectively, and, $1,776 and $7,369, respectively.

 

The Company’s income from operations by segment for the six months ended June 30, 2016 and for the years ended December 31, 2015 and 2014 is as follows:

 

Six months ended June 30, 2016 (unaudited)   Commercial     Residential     Total  
Rental revenues   $ 8,959     $ 31,738     $ 40,697  
Tenant recoveries     1,883             1,883  
Garage and other revenue income     789       562       1,351  
Total revenues     11,631       32,300       43,931  
Property operating expenses     1,895       10,789       12,684  
Real estate taxes and insurance     1,956       6,184       8,140  
General and administrative     330       3,592       3,922  
Acquisition costs           407       407  
Depreciation and amortization     1,284       5,354       6,638  
Total operating expenses     5,465       26,326       31,791  
Income from operations   $ 6,166     $ 5,974     $ 12,140  

 

Six months ended June 30, 2015 (unaudited)   Commercial     Residential     Total  
Rental revenues   $ 8,553     $ 30,255     $ 38,808  
Tenant recoveries     1,788             1,788  
Garage and other revenue income     789       419       1,208  
Total revenues     11,130       30,674       41,804  
Property operating expenses     2,277       9,173       11,450  
Real estate taxes and insurance     1,753       5,047       6,800  
General and administrative     525       1,334       1,859  
Depreciation and amortization     1,234       4,929       6,163  
Total operating expenses     5,789       20,483       26,272  
Income from operations   $ 5,341     $ 10,191     $ 15,532  

 

Year ended December 31, 2015   Commercial     Residential     Total  
Rental revenues   $ 17,256     $ 61,358     $ 78,614  
Tenant recoveries     3,477             3,477  
Garage and other revenue income     1,578       935       2,513  
Total revenues     22,311       62,293       84,604  
Property operating expenses     4,217       19,066       23,283  
Real estate taxes and insurance     3,705       11,221       14,926  
General and administrative     840       4,456       5,296  
Acquisition costs           75       75  
Depreciation and amortization     2,471       10,050       12,521  
Total operating expenses     11,233       44,868       56,101  
Income from operations   $ 11,078     $ 17,425     $ 28,503  

 

Year ended December 31, 2014   Commercial     Residential     Total  
Rental revenues   $ 12,382     $ 31,938     $ 44,320  
Tenant recoveries     2,415             2,415  
Garage and other income     518       519       1,037  
Total revenues     15,315       32,457       47,772  
Property operating expenses     3,810       15,863       19,673  
Real estate taxes and insurance     2,355       4,205       6,560  
General and administrative     537       1,821       2,358  
Acquisition costs     30       296       326  
Depreciation and amortization     1,398       3,074       4,472  
Total operating expenses     8,130       25,259       33,389  
Income from operations.   $ 7,185     $ 7,198     $ 14,383  

 

 F- 22

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

12. Segment Reporting (cont.)

 

The Company’s total assets by segment are as follows as of:

 

      Commercial     Residential     Total  
  June 30, 2016 (unaudited)     $ 285,610     $ 680,552     $ 966,162  
  December 31, 2015     $ 196,563     $ 684,555     $ 881,118  
  December 31, 2014     $ 137,316     $ 629,540     $ 766,856  

 

The Company’s capital expenditures are $8,539 (unaudited) and $4,885 (unaudited) for the six months ended June 30, 2016 and 2015, respectively, and $9,025 and $2,542 for the years ended December 31, 2015 and 2014, respectively. The Company’s capital expenditures were all in the residential segment except for $399 (unaudited) for the six months ended June 30, 2016, and $245 for the year ended December 31, 2015 in the commercial segment.

 

13. Multiemployer Union Agreement and Pension Plan

 

Certain of the Company’s employees are covered by a union sponsored, collectively bargained, multiemployer defined benefit pension, profit sharing, health insurance, legal and training plans. Contributions to the plans are determined in accordance with the provisions of the negotiated labor contract. The Local 32BJ Service Employees International Union (“Local 32BJ”) contract is in effect through December 31, 2015.

 

Contributions to the Local 32BJ are not segregated or otherwise restricted to provide benefits only to the Company’s employees. The risks of participating in a multiemployer pension plan differ from those of a single-employer pension plan in the following aspects: (a) assets contributed to a multiemployer pension plan by one employer may be used to provide benefits to employees of other participating employers; (b) if a participating employer stops contributing to the plan, the unfunded obligation of the plan may be borne by the remaining participating employers and (c) if the Company chooses to stop participating in the multiemployer plan, it may be required to pay the plan an amount based on the unfunded status of the plan, which is referred to as the withdrawal liability. The Company has no intention of withdrawing from the plan.

 

The information for the Union’s multiemployer pension plan is as follows:

 

Legal name Building Services 32BJ Pension Plan
Employer identification number 13-1879376
Plan number 001
Type of plan Defined benefit pension plan
Plan year end date June 30
Certified Zone Status for 2015 and 2014* Red
Funding improvement plan/rehabilitation plan* Implemented
Surcharges paid to plan None

 

 F- 23

 

  

Clipper Realty Inc. and Predecessor
Notes to Consolidated and Combined Financial Statements
(In thousands)

 

13. Multiemployer Union Agreement and Pension Plan (cont.)

 

Pension contribution made for 2015 and 2014, respectively $205 and $197
   
Minimum weekly required pension contribution per employee for 2015 and 2014, respectively (in dollars) $98.75 and $94.75

 

*               Certified pension zone status (as defined by the Pension Protection Act) represents the level at which the pension plan is funded. Plans in the red zone are less than 65% funded; plans in the yellow zone are less than 80% funded; and plans in the green zone are at least 80% funded. The rehabilitation plan may involve a surcharge on employers or a reduction or elimination of certain employee adjustable benefits.

 

The information provided above is from the pension plan’s most current annual report, which for Local 32BJ is for the year ended June 30, 2015. The Pension Protection Act Zone Status, the most recent zone status available, was provided to the Company by the plan and is certified by the plans’ actuary. The Company’s contributions to the pension plan are less than 5% of all the employers’ contribution to the plan. In connection with the acquisition of the Tribeca House properties, the Company increased the number of employees covered by the 32BJ contract.

 

14. Subsequent Events

 

The Company evaluated subsequent events through October 6, 2016, the date of which these consolidated and combined financial statements were available to be issued.

 

 F- 24

 

   

Clipper Realty Inc. and Predecessor

Schedule III – Real Estate and Accumulated Depreciation 

(In thousands)

 

Encumbrances at December 31,         Initial Costs           Gross Amounts At Which Carried at
December 31, 2015
           
Property   Location   Description   Encumbrances     Land     Building and
Improvements
    Cost
Capitalized
Subsequent to
Acquisition
    Land     Building and
Improvements
    Total     Accumulated
Depreciation
    Date Acquired
Tribeca House Properties   Manhattan, NY   Residential/ Commercial   $ 460,000     $ 273,103     $ 283,137     $ 3,037     $ 273,103     $ 286,174     $ 559,277     $ 7,894     Dec-14
Flatbush Gardens   Brooklyn, NY   Residential     170,000       89,965       49,607       15,489       90,052       65,096       155,148       24,522     Oct-05
250 Livingston Street   Brooklyn, NY   Commercial/ Residential     35,743       10,452       20,204       3,814       10,452       24,018       34,470       8,520     May-02
141 Livingston Street   Brooklyn, NY   Commercial     55,000       10,830       12,079       (1,025 )     10,830       11,054       21,884       3,736     May-02
            $ 720,743     $ 384,350     $ 365,027     $ 21,315     $ 384,437     $ 386,342     $ 770,779     $ 44,672      

 

 

(1) The aggregate cost for Federal tax purposes at December 31, 2015 of our real estate assets was $624,902.

 

(2) The following summarized activity for real estate and accumulated depreciation for the year ended December 31, 2015 as follows: Investment in real estate:

 

    2015     2014  
Balance at beginning of period   $ 761,754     $ 206,233  
Acquisition of real estate           556,240  
Additions during period     9,025       2,542  
Writeoff of fully depreciated assets           (3,261 )
Balance at end of year   $ 770,779     $ 761,754  

 

Accumulated depreciation:

 

Balance at beginning of period     33,010       32,237  
Depreciation expense     11,662       4,034  
Writeoff of fully depreciated assets           (3,261 )
Balance at end of year   $ 44,672     $ 33,010  

 

 F- 25

 

  

Independent Auditors’ Report

 

To the Board of Directors of
Clipper Realty Inc.

 

Report on the Statement

 

We have audited the accompanying statement of revenues and certain expenses (the “Statement”) of the properties located at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of New York, New York (“Tribeca Properties”), for the year ended December 31, 2013, and the related notes to the Statement.

 

Management’s Responsibility for the Statement

 

Management is responsible for the preparation and fair presentation of the Statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Statement that is free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on the Statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statement is free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Statement. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the Statement, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the Statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Statement.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the Statement referred to above presents fairly, in all material respects, the revenues and certain expenses described in Note 1 to the Statement of Tribeca Properties for the year ended December 31, 2013, in accordance with accounting principles generally accepted in the United States of America.

 

 F- 26

 

 

Basis of Presentation

 

As described in Note 1 to the Statement, the accompanying Statement has been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended, and is not intended to be a complete presentation of Tribeca Properties’ revenues and expenses. Our opinion is not modified with respect to this matter.

 

  /s/ Berdon LLP
   
  Certified Public Accountants

 

New York, New York
October 9, 2015

 

 F- 27

 

  

Tribeca Properties

Statement of Revenues and Certain Expenses
For the Year Ended December 31, 2013 and Nine Months Ended September 30, 2014 (unaudited) 

(In thousands)

  

    Nine Months
Ended
September 30,
2014
    Year
Ended
December 31,
2013
 
    (Unaudited)        
REVENUES                
Residential rental income   $ 20,108     $ 25,302  
Commercial income     2,317       2,863  
Tenant recoveries     78       177  
Other income     454       618  
TOTAL REVENUES     22,957       28,960  
CERTAIN EXPENSES                
Property operating expenses     4,611       5,252  
Real estate taxes and insurance     3,302       3,136  
TOTAL OPERATING EXPENSES     7,913       8,388  
REVENUES IN EXCESS OF EXPENSES   $ 15,044     $ 20,572  

 

The accompanying notes to this financial statement is an integral part of this statement.

 

1. Basis of Presentation

 

The accompanying statement of revenues and certain expenses include the operations of the residential and retail properties at 50 Murray Street (a/k/a 110-120 Church Street) and 53 Park Place in the Tribeca neighborhood of Manhattan, NY that were owned in 2013 by Lionshead 53 Development LLC and Lionshead 110 Development LLC (the “Tribeca Properties” or “Properties”). On December 15, 2014, the Tribeca Properties were acquired by a predecessor limited liability company of Clipper Realty, Inc.

 

The accompanying statement of revenues and certain expenses relate to the Tribeca Properties and have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, the statement is not representative of the actual operations for the periods presented as revenues and certain operating expenses, which may not be directly attributable to the revenues and expenses expected to be incurred in the future operations of the Tribeca Properties, have been excluded. Such items include depreciation, amortization, management fees, interest expense, interest income and amortization of above- and below-market leases.

 

2. Summary of Significant Accounting Policies

 

Revenue Recognition

 

The Tribeca Properties recognize residential and commercial rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset. Commercial rental income includes revenue from a tenant who operates the garage.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Tribeca Properties are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

 

 F- 28

 

   

Tribeca Properties
Notes to Financial Statement 

(In thousands)

 

2. Summary of Significant Accounting Policies (cont.)

 

Other revenue is revenue that is derived from the tenants’ use of facilities for storage, laundry and common areas and other services and income from an early lease termination. Other revenue is recognized when the related services are utilized by the tenants.

 

Interim Unaudited Financial Information

 

The statement of revenues and certain operating expenses for the nine months ended September 30, 2014, is unaudited; however, in the opinion of management, all adjustments (consisting solely of normal, recurring adjustments) necessary for the fair presentation of the financial statement for the interim period have been included. The results of the interim period are not necessarily indicative of the results to be obtained for a full fiscal year.

 

Use of Estimates

 

Management has made a number of estimates and assumptions relating to the reporting and disclosure of revenues and certain expenses during the reporting periods to present the statements of revenues and certain expenses in conformity with U.S. GAAP. Actual results could differ from those estimates.

 

3. Minimum Future Lease Rentals

 

There are various lease agreements in place with tenants to lease space in the Tribeca Properties. As of September 30, 2014, the minimum future cash rents receivable under non-cancelable operating leases in each of the next five years and thereafter are as follows (unaudited):

 

2014 (three months ending December 31, 2014)     $ 771  
2015       3,135  
2016       3,184  
2017       2,902  
2018       2,373  
Thereafter       8,509  
Total     $ 20,874  

 

In addition, the leases require payments by the tenants of additional rentals based on various escalation clauses. For the year ended December 31, 2013 and the nine months ended September 30, 2014 (unaudited), such additional rents amounted to approximately $177 and $78.

 

4. Tenant concentrations

 

For the year ended December 31, 2013 and the nine months ended September 30, 2014, no tenant comprised more than 5% of the Tribeca Properties’ rental revenues.

 

5. Real estate tax exemption and abatement

 

The Tribeca Properties are eligible for the real estate tax exemption and abatement program, pursuant to Section 421-g of the New York State Real Property Tax Law, as a result of construction whereby the buildings were converted from commercial to mixed-use residential and commercial use.

 

Under the program, the Tribeca Properties received a 100% exemption on the real estate tax assessment attributable to the conversion of the properties through June 2011; the exemption will be phased out during the period from July 2011 through June 2015. Taxes on the nonexempt portion of the properties were abated through June 2013; the abatement will be phased out during the period from July 2013 through June 2017. The commercial portion of the properties is currently subject to real estate taxes on the increased value of the real estate and/or as rates increase.

 

 F- 29

 

 

Tribeca Properties
Notes to Financial Statement
(In thousands)

 

6. Commitments and Contingencies

 

The Tribeca Properties are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Tribeca Properties’ results of operations.

 

The Tribeca Properties contribute to a number of multiemployer benefit plans under the terms of collective bargaining agreements that cover their union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

 

(i) Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

 

(ii) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

 

(iii) If the properties choose to stop participating in some of their multiemployer plans, the properties may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

 

The Tribeca Properties’ participation in these plans for the annual period ended December 31, 2013 is outlined in the following table. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN) and the three-digit plan number, if applicable.

 

The Building Service 32BJ Pension Fund, Building Service 32BJ Supplemental Retirement Savings Plan, and Building Service 32BJ Health Fund were all established under the terms of the collective bargaining agreement between Local 32BJ Service Employees International Union and the Realty Advisory Board on Labor Relations, Inc. (“Realty Advisory Board”), a multiemployer association which is authorized to enter in collective-bargaining agreements on behalf of the Tribeca Properties and its other employer members. The binding agreement in effect as of the balance sheet date expired in April 2014 and a new contract entered into expires April 2018.

 

The most recent Pension Protection Act (PPA) zone status available for defined benefit pension plans, for 2013 for the Building Service 32BJ Pension Fund is for the plan’s year-end at June 30, 2013. The zone status is based on information that the Tribeca Properties received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration dates of the collective bargaining agreements to which the plans are subject.

 

 F- 30

 

  

Benefit Plan   Benefit Plan
Type
  EIN/Pension
Plan Number
  Pension
Protection
Act Zone
Status
  FIP/RP
Status
Pending/
Implemented
  Contributions     Sur-charge
Imposed
  Expiration
Date of
Collective
Bargaining
Agreement
Building Service
32BJ Pension
Fund
  Defined
Benefit
Pension Plan
  13-1879376-001   Red as of 7/21/2013   Yes   $ 133,000     No   4/20/2018
Building Service 32BJ Supplemental Retirement Savings Plan   Defined Contribution Profit Sharing Plan   13-3507075-001   N/A   N/A     14,000         4/20/2018
Building Service 32BJ Health Fund   Welfare Plan   13-2928869-501   N/A   N/A     397,000         4/20/2018
Other funds           N/A   N/A     10,000          
                    $ 554,000          

 

 F- 31

 

  

Tribeca Properties
Notes to Financial Statement
(In thousands)

 

7. Subsequent Events.

 

The Tribeca Properties evaluated subsequent events through October 9, 2015, the date the financial statements were available to be issued.

 

 F- 32

 

   

Independent Auditor’s Report

 

Board of Directors
Clipper Realty Inc.
Brooklyn, NY 11219

 

We have audited the accompanying statement of revenues and certain expenses of the Aspen (hereinafter referred to as the “Company”) for the year ended December 31, 2015.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the statement of revenues and expenses in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the statement of revenues and certain expenses that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on the statement of revenues and certain expenses based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenues and certain expenses is free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the statement of revenues and certain expenses. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the statement of revenues and certain expenses, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the statement of revenues and certain expense in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the statement of revenues and certain expenses. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Opinion

 

In our opinion, the accompany statement of revenues and certain expenses presents fairly, in all material respects, the revenues and certain expenses of the Company for the year ended December 31, 2015 in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

We draw attention to Note 1 to the Statements, which describes that the accompanying statement was prepared for the purpose of complying with provisions of Rule 3-14 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) (for inclusion in the Registration Statement on Form S-11 of Clipper Realty Inc.), and were not intended to be a complete presentation of the Company’s revenues and expenses. Our opinion is not modified with respect to this matter.

 

/s/ Lipsky Goodkin & Co., P.C.
New York, New York
March 29, 2016

 

 F- 33

 

  

Aspen

Statement of Revenues and Certain Expenses
For the Year Ended December 31, 2015 and Three Months Ended March 31, 2016 (unaudited)
(In thousands)

  

    Three Months
Ended March
31, 2016
    Year Ended
December 31,
2015
 
REVENUES                
Residential rental income   $ 1,304     $ 5,107  
Commercial income     171       1,228  
Tenant recoveries           37  
Other income     164       88  
TOTAL REVENUES     1,639       6,460  
CERTAIN EXPENSES                
Property operating expenses     376       1,572  
Real estate taxes and insurance     52       234  
TOTAL OPERATING EXPENSES     428       1,806  
REVENUES IN EXCESS OF EXPENSES   $ 1,211     $ 4,654  

 

The accompanying notes to this financial statement is an integral part of this statement.

 

1. Basis of Presentation

 

The accompanying statement of revenues and certain expenses include the operations of the residential and retail property at 1955 1st Avenue in Manhattan, NY that was owned in 2015 by 100 Street Tri Venture LLC (the “Property” or “Aspen”).

 

The accompanying statement of revenues and certain expenses relate to the Property and have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, the statement is not representative of the actual operations for the periods presented as revenues and certain operating expenses, which may not be directly attributable to the revenues and expenses expected to be incurred in the future operations of the Property, have been excluded. Such items include depreciation, amortization, management fees, interest expense, interest income and amortization of above- and below-market leases.

 

2. Summary of Significant Accounting Policies

 

Revenue Recognition

 

The Property recognizes residential and commercial rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset. Commercial rental income includes revenue from a tenant who operates the garage.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Property is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

 

Other revenue is revenue that is derived from the tenants’ use of facilities for laundry and common areas and other services. Other revenue is recognized when the related services are utilized by the tenants.

 

 F- 34

 

 

Use of Estimates

 

Management has made a number of estimates and assumptions relating to the reporting and disclosure of revenues and certain expenses during the reporting periods to present the statements of revenues and certain expenses in conformity with U.S. GAAP. Actual results could differ from those estimates.

 

3. Minimum Future Lease Rentals

 

There are various lease agreements in place with tenants to lease space in the Property. As of December 31, 2015, the minimum future cash rents receivable under non-cancelable operating leases in each of the next five years and thereafter are as follows (unaudited):

 

  2016     $ 1,191  
  2017       1,215  
  2018       1,243  
  2019       1,243  
  2020       948  
  Thereafter       10,448  
  Total     $ 16,288  

 

In addition, the leases require payments by the tenants of additional rentals based on various escalation clauses. For the year ended December 31, 2015, such additional rents amounted to approximately $37.

 

4. Tenant concentrations

 

For the three months ended March 31, 2016 and the year ended December 31, 2015, no tenant comprised more than 10% of the Property’s rental revenues.

 

5. Real estate tax exemption and abatement

 

The Property is eligible for the real estate tax exemption and abatement program, pursuant to Section 421-a of the New York State Real Property Tax Law.

 

Under the program, the Property receives a 100% exemption on the real estate tax assessment attributable to the increase in property value that results from new construction. The commercial portion of the properties is currently subject to real estate taxes on the increased value of the real estate and/or as rates increase.

 

6. Commitments and Contingencies

 

The Property is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Property’s results of operations.

 

7. Subsequent Events.

 

The Property evaluated subsequent events through September 28, 2016, the date the financial statements were available to be issued.

 

 F- 35

 

    

Until          ,           all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

Clipper Realty Inc.

 

 

Shares Common Stock

 

PROSPECTUS

 

FBR

 

               , 2016

  

 

 

  

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 31. Other Expenses of Issuance and Distribution.

 

The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered (excluding the underwriting discount). Except for the SEC registration fee and the Financial Industry Regulatory Authority (“FINRA”), filing and NYSE listing fee, all amounts are estimates.

 

    Amount Paid
or to be Paid
 
SEC registration fee   $ 11,590  
FINRA filing fee     15,500  
NYSE listing fee     *  
Legal fees and expenses     *  
Accounting fees and expenses     *  
Printing expenses     *  
Transfer agent and registrar fee     *  
Miscellaneous     *  
         
Total        

 

* To be completed by amendment.

 

Item 32. Sales to Special Parties

 

The information in Item 33 is herein incorporated by reference.

 

Item 33. Recent Sales of Unregistered Securities

 

On August 3, 2015 we issued an aggregate of 10,666,667 shares of our common stock to various institutional investors, accredited investors and offshore investors at an offering price of $13.50 per share in reliance on the exemptions from registration under Rule 144A, Regulation S and Rule 506(b) of Regulation D of the Securities Act. 1,000,000 of the shares in the private offering were sold directly by us to members of our management and board of directors, and their friends, family members and affiliates. We received approximately $130.2 million of net proceeds, after expenses, from the private offering.

 

In connection with the private offering, we consummated a series of investment and other formation transactions described in this registration statement, whereby, among other things, the continuing investors had their LLC interests in the predecessor entities converted into class B LLC units in the predecessor entities. In addition, we issued to one continuing investor, Trapeze Inc., 755,939 shares of our common stock based on the private offering price of $13.50 per share. An aggregate of 26,317,396 class B LLC units were issued in connection with the formation transactions and an equal number of shares of our special voting stock was issued to our continuing investors. Each of these transactions was made in reliance on Section 4(a)(2) of the Securities Act in that it did not involve any public offering.

 

Each limited partner of our operating partnership has the right, subject to the terms and conditions set forth in the partnership agreement to require our operating partnership to redeem all or a portion of the OP units held by such limited partner in exchange for a cash amount equal to the number of tendered OP units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the partnership agreement), unless the terms of such OP units or a separate agreement entered into between the operating partnership and the holder of such OP units provide that the holder is not entitled to a right of redemption or impose conditions on the exercise of such right of redemption. On or before the close of business on the fifth business day after we receive a notice of redemption, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered OP units from the tendering person in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each OP unit (subject to anti-dilution adjustments provided in the partnership agreement).

 

  II- 1  

 

  

Each non-managing member of the LLC subsidiaries has the right, subject to the terms and conditions set forth in the LLC agreements, to require the operating partnership to exchange all or a portion of the class B LLC units held by such non-managing member, together with the same number of shares of our special voting stock, for a cash amount equal to the number of tendered class B LLC units multiplied by the price of a share of our common stock (determined in accordance with, and subject to adjustment under, the terms of the LLC agreements), unless the terms of such class B LLC units or a separate agreement entered into between an LLC subsidiary and the holder of such class B LLC units provides that the holder is not entitled to a right of exchange or imposes conditions on the exercise of such right of exchange. On or before the close of business on the fifth business day after we and the operating partnership receive a notice of exchange, we may, in our sole and absolute discretion, but subject to the restrictions on the ownership of our stock imposed under our charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered class B LLC units from the tendering non-managing member in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each class B LLC unit (subject to anti-dilution adjustments provided in the LLC agreements).

 

On August 3, 2015, we also granted to members of our senior management team a total of 273,335 LTIP units, and to our non-employee directors a total of 105,001 LTIP units. In 2016, we granted to a non-employee director an additional 15,741 LTIP units. In 2016, we made a special additional one-time grant of 16,667 LTIP units to an executive officer and a total of 16,666 LTIP units to two key employees, all of which are subject to certain vesting requirements. The LTIP units represent profits interests in our operating partnership, which, subject to certain conditions, are exchangeable for units of limited partnership, or OP units, in our operating partnership, which, in turn, may be submitted for redemption in exchange, at our option, for common stock or cash in an amount equal to the value of our common stock.

 

On January 29, 2016, we issued an aggregate of 132 shares of our 12.5% Series A Cumulative Non-Voting Preferred Stock at an offering price of $1,000 per share in a private offering pursuant to Rule 506(b) of Regulation D of the Securities Act. We received net proceeds of $109,500 from this private offering, which will be used for general corporate purposes.

 

Item 34. Indemnification of Directors and Officers.

 

Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from: (i) actual receipt of an improper benefit or profit in money, property or services; or (ii) active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. Our charter contains a provision that eliminates the liability of our directors and officers to us and our stockholders to the maximum extent permitted by Maryland law.

 

Maryland law requires a Maryland corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:

 

  · the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty;

 

  · the director or officer actually received an improper personal benefit in money, property or services; or

 

  · in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

 

Under Maryland law, a Maryland corporation also may not indemnify a director or officer in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or for a judgment of liability on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct; however, indemnification for an adverse judgment in a suit by or on behalf of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

 

  II- 2  

 

  

In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:

 

  · a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and

 

  · a written undertaking by the director or officer or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that he or she did not meet the standard of conduct necessary for indemnification by the corporation.

 

To the maximum extent permitted by Maryland law in effect from time to time, our charter authorizes us to indemnify any individual who serves or has served, and our bylaws obligate us to indemnify any individual who is made or threatened to be made a party to or witness in a proceeding by reason of his or her service:

 

  · as a present or former director or officer; or

 

  · while a director or officer and at our request, as a director, officer, partner, manager, member or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, limited liability company, employee benefit plan or other enterprise

 

from and against any claim or liability to which he or she may become subject or that he or she may incur by reason of his or her service in any of these capacities. Our charter authorizes us, and our bylaws require us, without requiring a preliminary determination of such individual’s ultimate entitlement to indemnification, to pay or reimburse any such individual’s reasonable expenses in advance of final disposition of a proceeding. We have entered into indemnification agreements with each of our directors and executive officers that provided for indemnification and advance of expenses to the maximum extent permitted by Maryland law.

 

Item 35. Treatment of Proceeds from Stock Being Registered

 

None of the proceeds will be contributed to an account other than the appropriate capital account.

 

Item 36. Exhibits and Financial Statement Schedules.

 

(a) Financial Statements

 

See page F-1 for an index to the financial statements included in this registration statement.

 

(b) Exhibits

 

The list of exhibits filed with or incorporated by reference in this registration statement is set forth in the exhibit index following the signature page herein.

 

Item 37. Undertakings.

 

  A. The undersigned registrant hereby undertakes:

 

  (1) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

  II- 3  

 

  

  (2) To file a sticker supplement pursuant to Rule 424(c) under the Securities Act during the distribution period describing each property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing stockholders. Each sticker supplement should disclose all compensation and fees received by the operating partnership and its affiliates in connection with any such acquisition. The post-effective amendment shall include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X only for properties acquired during the distribution period.

 

  (3) To file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of 10% or more (on a cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to the stockholders at least once each quarter after the distribution period of the offering has ended.

 

  (4) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (5) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  B. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

  II- 4  

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, New York on October 7, 2016.

 

  Clipper realty inc.
     
  By: /s/ David Bistricer
    David Bistricer
    Co-Chairman and Chief Executive Officer

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Bistricer and Sam Levinson his or her true and lawful attorneys-in-fact (with full power to each of them to act alone), with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this registration statement on Form S-11, and to file the same, with the exhibits thereto, and other documents in connection herewith, including any related registration statement filed pursuant to Rule 462(b) of the Securities Act of 1933, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power and authority to do and perform each and every act and thing required and necessary to be done in and about the foregoing as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement on Form S-11 has been signed by the following persons in the capacities and on the dates indicated.

 

Name   Title   Date
         
 /s/ David Bistricer   Co-Chairman of the Board and Chief Executive Officer   October 7, 2016
David Bistricer   (Principal Executive Officer)    
         
 /s/ Lawrence E. Kreider, Jr.   Chief Financial Officer   October 7, 2016
Lawrence E. Kreider, Jr.   (Principal Financial Officer and Principal Accounting Officer)    
         
 /s/ Sam Levinson   Co-Chairman of the Board   October 7, 2016
Sam Levinson        
         
 /s/ Howard M. Lorber   Director   October 7, 2016
Howard M. Lorber        
         
/s/  Robert J. Ivanhoe   Director   October 7, 2016
Robert J. Ivanhoe        
         
 /s/ Roberto A. Verrone   Director   October 7, 2016
Roberto A. Verrone        

 

 

 

  

Exhibits

 

Exhibit
Number
  Description
1.1*   Form of Underwriting Agreement
     
3.1**   Articles of Amendment and Restatement
     
3.2**   Bylaws
     
3.3   Articles Supplementary
     
5.1*   Opinion of Venable LLP
     
8.1*   Opinion of Sullivan & Cromwell LLP as to tax matters
     
10.1**   Amended and Restated Limited Liability Company Agreement of Berkshire Equity LLC
     
10.2**   Amended and Restated Limited Liability Company Agreement of 50/53 JV LLC
     
10.3**   Second Amended and Restated Limited Liability Company Agreement of Renaissance Equity Holdings LLC
     
10.4**   Amended and Restated Limited Liability Company Agreement of Gunki Holdings LLC
     
10.5**   Registration Rights Agreement, made and entered into as of August 3, 2015, between Clipper Realty Inc. and FBR Capital Markets & Co.
     
10.6**   Registration Rights Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc. and each of the Holders from time to time party thereto.
     
10.7†**   Employment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc. and David Bistricer
     
10.8†**   Employment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc. and Lawrence Kreider
     
10.9†**   Employment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc. and Jacob Schwimmer
     
10.10†**   Employment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc. and JJ Bistricer
     
10.11†**   Clipper Realty Inc. 2015 Omnibus Incentive Compensation Plan
     
10.12†**   Clipper Realty Inc. 2015 Non-Employee Director Plan
     
10.13†**   Clipper Realty Inc. 2015 Executive Incentive Compensation Plan
     
10.14†**   Clipper Realty Inc. 2015 Omnibus Incentive Compensation Plan Restricted LTIP Unit Agreement
     
10.15†**   Clipper Realty Inc. 2015 Non-Employee Director Plan Restricted LTIP Unit Agreement
     
10.16**   Investment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty L.P. and Renaissance Equity Holdings LLC

 

 

 

  

Exhibit
Number
  Description
10.17**   Investment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty L.P. and Berkshire Equity LLC
     
10.18**   Investment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty L.P. and Gunki Holdings LLC
     
10.19**   Investment Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty L.P. and 50/53 JV LLC
     
10.20**   Tax Protection Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P., Renaissance Equity Holdings LLC, Berkshire Equity LLC, Gunki Holdings LLC, 50/53 JV LLC, and each of the Continuing Investors listed on Schedules A-D thereto
     
10.21**   Shared Services Agreement, made and entered into as of August 3, 2015, by and among Clipper Equity LLC and Clipper Realty L.P.
     
10.22**   Shared Services Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty L.P. and Clipper Equity LLC
     
10.23**   Loan Indemnification Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P. and the Guarantor defined therein
     
10.24**   Loan Indemnification Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P. and the Guarantor defined therein
     
10.25**   Loan Indemnification Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P. and the Guarantor defined therein
     
10.26**   Loan Indemnification Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P. and the Guarantor defined therein
     
10.27**   Loan Indemnification Agreement, made and entered into as of August 3, 2015, by and among Clipper Realty Inc., Clipper Realty L.P. and the Guarantor defined therein
     
10.28**   Indemnification Agreement, made and entered into as of August 3, 2015, by and among David Bistricer, Trapeze Inc., Clipper Realty Inc., Clipper Realty L.P., and Berkshire Equity LLC
     
10.29**   Amended and Restated Loan Agreement, made and entered into as of December 15, 2014, by and among 50 Murray Street Acquisition LLC, German American Capital Corporation, and Deutsche Bank AG, New York Branch
     
10.30**   Joinder, Reaffirmation and Ratification of Guaranty of Recourse Obligations and Environmental Indemnity Agreement, made and entered into as of August 3, 2015, by and among David Bistricer, Trapeze Inc., Clipper Realty L.P., and Deutsche Bank AG, New York Branch
     
10.31**   First Mezzanine Loan Agreement, made and entered into as of December 15, 2014, by and among 50 Murray Mezz LLC, 50 Murray Mezz Funding LLC, and 50 Murray Mezz Funding LLC
     
10.32**   Joinder, Reaffirmation and Ratification of First Mezzanine Guaranty of Recourse Obligations and First Mezzanine Environmental Indemnity Agreement, made and entered into as of August 3, 2015, by and among David Bistricer, Trapeze Inc., Clipper Realty L.P., and 50 Murray Mezz Funding LLC

 

 

 

  

Exhibit
Number
  Description
10.33**   Loan Agreement, made and entered into as of December 12, 2014, by and among 141 Livingston Owner LLC and Citibank, N.A.
     
10.34**   First Amendment to Loan Agreement, Guaranty, Environmental Indemnity and other Loan Documents, made and entered into as of August 3, 2015, by and among 141 Livingston Owner LLC, Citibank, N.A., Clipper Realty L.P., David Bistricer, and Sam Levinson
     
10.35**   Loan Agreement, made and entered into as of May 1, 2013, by and among 250 Livingston Owner LLC and Citigroup Global Markets Realty Corp.
     
10.36**   Consolidation, Modification, Extension and Spreader Agreement, Assignment of Lease and Rents and Security Agreement, made and entered into as of September 24, 2012, by and among Renaissance Equity Holdings LLC A, Renaissance Equity Holdings LLC B, Renaissance Equity Holdings LLC C, Renaissance Equity Holdings LLC D, Renaissance Equity Holdings LLC E, Renaissance Equity Holdings LLC F, Renaissance Equity Holdings LLC G, and New York Community Bank
     
10.37**   Mortgage, Assignment of Leases and Rents, and Security Agreement, made and entered into as of October 31, 2014, by and among Renaissance Equity Holdings LLC A, Renaissance Equity Holdings LLC B, Renaissance Equity Holdings LLC C, Renaissance Equity Holdings LLC D, Renaissance Equity Holdings LLC E, Renaissance Equity Holdings LLC F, Renaissance Equity Holdings LLC G, and New York Community Bank
     
10.38   Lease, made and entered into as of December 17, 2015, by and between Berkshire Equity LLC and the City of New York.
     
10.39   Lease, made and entered into as of January 1, 1997, by and between NPMM Realty Inc. and the City of New York
     
10.40   Letter Regarding Option to Renew Lease, dated as of December 28, 2010, from the City of New York to Berkshire Equity LLC
     
10.41   Lease, made and entered into as of July 30, 1999, by and between Livingston Acquisition, LLC and the City of New York
     
10.42   Consent Agreement, made and entered into as of December 7, 2015, by and among Deutsche Bank Trust Company Americas, as trustee on behalf of the registered holders of GS Mortgage Securities Corporation II, Commercial Mortgage Pass Through Certificates, Series 2013-GCJ12, and 250 Livingston Owner LLC
     
10.43   Amendment No. 1 to Registration Rights Agreement, made and entered into as of July 7, 2016, between Clipper Realty Inc. and FBR Capital Markets & Co.
     
10.44   Multifamily Loan and Security Agreement (Non-Recourse), dated as of June 27, 2016, by and between Aspen 2016 LLC and Capital One Multifamily Finance, LLC
     
10.45*   Consolidation, Modification and Extension Agreement, Assignment of Leases and Rents and Security Agreement, made as of May 11, 2016, between 141 Livingston Owner LLC and New York Community Bank
     
10.46*   Guaranty of Recourse Obligations, dated as of May 11, 2016, made by Clipper Realty Inc. to and in favor of New York Community Bank
     
10.47*   Guaranty, dated as of May 11, 2016, made by Clipper Realty Inc. to and in favor of New York Community Bank

 

 

 

   

21.1*   List of subsidiaries
     
23.1*   Consent of Venable LLP (included in Exhibit 5.1)
     
23.2*   Consent of Sullivan & Cromwell LLP (included in Exhibit 8.1)
     
23.3   Consent of BDO USA, LLP
     
23.4   Consent of Berdon LLP
     
23.5   Consent of Lipsky Goodkin & Co., P.C.
     
24.1   Power of Attorney (included on the signature page to this registration statement)

 

  * To be filed by amendment
  ** Previously filed
  Indicates management contract or compensation plan

 

 

 

 

Exhibit 3.3

 

EXECUTION VERSION

 

Clipper Realty Inc.
 
Articles Supplementary
 
140 Shares
 
12.5% Series A Cumulative Non-Voting Preferred Stock

 

Clipper Realty Inc., a Maryland corporation (the “Corporation”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:

 

FIRST: Under a power contained in Article VI of the charter of the Corporation (the “Charter”), the Board of Directors of the Corporation (the “Board”), by duly adopted resolutions, reclassified and designated 140 authorized but unissued shares of preferred stock of the Corporation, $0.01 par value per share (the “Preferred Stock”), as shares of 12.5% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share, with the following preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption, which, upon any restatement of the Charter, shall become part of Article VI of the Charter, with any necessary or appropriate renumbering or relettering of the sections or subsections hereof:

 

12.5% Series A Cumulative Non-Voting Preferred Stock

 

(1)          DESIGNATION AND NUMBER . A series of Preferred Stock, designated as “12.5% Series A Cumulative Non-Voting Preferred Stock” (the “Series A Preferred Stock”), is hereby established. The total number of authorized shares of Series A Preferred Stock shall be One Hundred and Forty (140).

 

(2)          RANK . The Series A Preferred Stock shall, with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the Corporation, rank senior to all classes or series of shares of common stock, $0.01 par value per share (the “Common Stock”), of the Corporation and to all other equity securities issued by the Corporation from time to time (together with the Common Stock, the “Junior Securities”). The term “equity securities” shall not include convertible debt securities.

 

 - 1

 

 

(3)        DIVIDENDS .

 

(a)          Each holder of the then outstanding shares of Series A Preferred Stock shall be entitled to receive, when and as authorized by the Board and declared by the Corporation, out of funds legally available for the payment of dividends, cumulative preferential cash dividends per share of Series A Preferred Stock at the rate of 12.5% per annum of the total of $1,000.00 plus all accumulated and unpaid dividends thereon, subject to Section 5(c) below. Such dividends shall accrue on outstanding shares of Series A Preferred Stock on a daily basis and be cumulative from the first date on which any share of Series A Preferred Stock is issued, such issue date to be contemporaneous with the receipt by the Corporation of subscription funds for the Series A Preferred Stock (the “Original Issue Date”), and shall be payable semi-annually in arrears on or before June 30 and December 31 of each year (each, a “Dividend Payment Date”) or, if not a business day, the next succeeding business day. Any dividend payable on the Series A Preferred Stock for any partial dividend period will be computed on the basis of a 360- day year consisting of twelve 30-day months (it being understood that the dividend payable on June 30, 2016 will be for less than a full dividend period). A “dividend period” shall mean, with respect to the first “dividend period,” the period from and including the Original Issue Date to and including the first Dividend Payment Date, and with respect to each subsequent “dividend period,” the period from but excluding a Dividend Payment Date to and including the next succeeding Dividend Payment Date or other date as of which accrued dividends are to be calculated. Subject to Section 5(c) below, dividends will be payable to holders of record as they appear in the stock transfer records of the Corporation at the close of business on the applicable record date, which shall be the fifteenth day of the calendar month in which the applicable Dividend Payment Date falls or on such other date designated by the Board for the payment of dividends that is not more than 30 days prior to such Dividend Payment Date (each, a “Dividend Record Date”).

 

(b)          No dividends on shares of Series A Preferred Stock shall be declared by the Corporation or paid or set apart for payment by the Corporation at such time as the terms and provisions of any written agreement between the Corporation and any party that is not an affiliate of the Corporation, including any agreement relating to its indebtedness, prohibit such declaration, payment or setting apart for payment or provide that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law. For purposes of this Section 3(b), “affiliate” shall mean any party that controls, is controlled by or is under common control with the Corporation.

 

(c)          Notwithstanding the foregoing, dividends on the Series A Preferred Stock shall accrue whether or not the terms and provisions set forth in Section 3(b) hereof at any time prohibit the current payment of dividends, whether or not the Corporation has earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are authorized or declared. Furthermore, dividends will be declared and paid when due in all events to the fullest extent permitted by law and except as provided in Section 3(b) above. Accrued but unpaid dividends on the Series A Preferred Stock will accumulate as of the Dividend Payment Date on which they first become payable.

 

(d)          Unless full cumulative dividends on all of the outstanding shares of Series A Preferred Stock have been or contemporaneously are paid or declared and a sum sufficient for the payment thereof is set apart for payment for all past dividend periods, no dividends (other than in Junior Securities) shall be paid or declared and set apart for payment, nor shall any other distribution be declared or made upon any Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such Junior Securities) by the Corporation (except by conversion into or exchange for other Junior Securities and except for transfers, redemptions or purchases made pursuant to the provisions of Article VII of the Charter).

 

(e)          When dividends are not paid in full (or a sum sufficient for such full payment is not set apart) on the Series A Preferred Stock, all dividends declared upon the Series A Preferred Stock shall be declared and paid pro rata based on the number of shares of Series A Preferred Stock then outstanding.

 

 - 2

 

 

(f)          Any dividend payment made on shares of the Series A Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to such shares which remains payable. Holders of the Series A Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or shares, in excess of full cumulative dividends on the Series A Preferred Stock as described above.

 

(4)       LIQUIDATION PREFERENCE .

 

(a)          Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of Series A Preferred Stock then outstanding will be entitled to be paid, or have the Corporation declare and set apart for payment, out of the assets of the Corporation legally available for distribution to its stockholders, before any distribution of assets is made to holders of any Junior Securities, a liquidation preference per share of Series A Preferred Stock equal to the sum of the following (collectively, the “Liquidation Preference”): (i) $1,000.00, (ii) all accrued and unpaid dividends thereon through and including the date of payment and (iii) if the Redemption Premium (as defined below) would then be payable upon the redemption of shares of Series A Preferred Stock on the date of payment in accordance with Section 5(a) below, the per share Redemption Premium. In the event that the Corporation elects to set apart the Liquidation Preference for payment, the Series A Preferred Stock shall remain outstanding until the holders thereof are paid the full Liquidation Preference therefor, which payment shall be made no later than immediately prior to the Corporation making its final liquidating distribution on shares of Common Stock. In the event that the Redemption Premium would be payable on the date that the Liquidation Preference was set apart for payment but no Redemption Premium would be payable on the payment date, the Corporation may make a corresponding reduction to the funds set apart for payment of the Liquidation Preference.

 

(b)          In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Corporation are insufficient to pay the full amount of the Liquidation Preference on all outstanding shares of Series A Preferred Stock, then the holders of the Series A Preferred Stock shall share ratably in any such distribution of assets in proportion to the full Liquidation Preference to which they would otherwise be respectively entitled.

 

(c)          After payment of the full amount of the Liquidation Preference to which they are entitled, the holders of Series A Preferred Stock will have no right or claim to any of the remaining assets of the Corporation.

 

(d)          Upon the Corporation’s provision of written notice as to the effective date of any such liquidation, dissolution or winding up of the Corporation, accompanied by a check in the amount of the full Liquidation Preference to which each record holder of the Series A Preferred Stock is entitled, the Series A Preferred Stock shall no longer be outstanding shares of stock of the Corporation and all rights of the holders of such shares will terminate. Such notice shall be given by first class mail, postage pre-paid, to each record holder of the Series A Preferred Stock at the respective mailing addresses of such holders as the same shall appear on the stock transfer records of the Corporation.

 

 - 3

 

 

(e)          The consolidation or merger of the Corporation with or into any other business enterprise or of any other business enterprise with or into the Corporation, or the sale, lease or conveyance of all or substantially all of the assets or business of the Corporation, shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation.

 

(5)       REDEMPTION .

 

(a)           Right of Optional Redemption . The Corporation, at its option, may redeem shares of the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price per share of Series A Preferred Stock (the “Redemption Price”) equal to $1,000.00 plus all accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium of $100 per share (the “Redemption Premium”) if the date fixed for redemption of shares of Series A Preferred Stock (the “Redemption Date”) is on or before December 31, 2017. If less than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the shares of Series A Preferred Stock to be redeemed may be selected by any equitable method determined by the Corporation provided that such method does not result in the creation of fractional shares.

 

(b)           Limitations on Redemption . Unless full cumulative dividends on all shares of Series A Preferred Stock shall have been, or contemporaneously are, paid or declared and a sum sufficient for the payment thereof is set apart for payment for all past dividend periods, no shares of Series A Preferred Stock shall be redeemed or otherwise acquired, directly or indirectly, by the Corporation unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed or acquired, and the Corporation shall not purchase or otherwise acquire, directly or indirectly, any Junior Securities of the Corporation (except by exchange for Junior Securities); provided, however, that the foregoing shall not prevent the purchase by the Corporation of shares transferred to a Charitable Beneficiary (as defined in the Charter) pursuant to Article VII of the Charter or the purchase or acquisition of shares of Series A Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Stock.

 

(c)           Rights to Dividends on Shares Called for Redemption . Immediately prior to or upon any redemption of Series A Preferred Stock, the Corporation shall pay, in cash, any accrued and unpaid dividends to and including the Redemption Date. If the Redemption Date for any shares of Series A Preferred Stock called for redemption falls after a Dividend Record Date and prior to the corresponding Dividend Payment Date, each holder of record as of the effective time of such redemption of the shares of Series A Preferred Stock so called for redemption shall be entitled to receive only the accrued and unpaid dividends to and including the Redemption Date and, provided that the full amount of the Redemption Price (including all accrued and unpaid dividends thereon to and including the Redemption Date and any applicable Redemption Premium) has been paid or set apart pursuant to Section 5(d)(iii) below, holders of record of such shares of Series A Preferred Stock so called for redemption as of the Dividend Record Date for such a dividend shall not be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date.

 

 - 4

 

 

(d)         Procedures for Redemption .

 

(i)          Upon the Corporation’s provision of written notice as to the effective date of the redemption, accompanied by a check in the amount of the full Redemption Price through such effective date to which each record holder of shares of Series A Preferred Stock to be redeemed is entitled or, if the shares of Series A Preferred Stock to be redeemed are represented by certificates, the setting apart of such amount pursuant to Section 5(d)(iii) below, shares of the Series A Preferred Stock shall be redeemed and shall no longer be deemed outstanding shares of stock of the Corporation and all rights of the holders of such shares will terminate. Such notice shall be given by first class mail, postage prepaid, to each record holder of shares of Series A Preferred Stock to be redeemed at the respective mailing addresses of such holders as the same shall appear on the stock transfer records of the Corporation. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder to whom notice was defective or not given.

 

(ii)         In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (A) the Redemption Date and, if the effective time for such redemption is to be other than the close of business on such Redemption Date, the effective time of such redemption; (B) the Redemption Price; (C) the place or places where the Series A Preferred Stock are to be surrendered (if so required in the notice) for payment of the Redemption Price (if not otherwise included with the notice); and (D) that dividends on the shares to be redeemed will cease to accrue on such redemption date. If less than all of the shares of Series A Preferred Stock held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of shares of Series A Preferred Stock held by such holder to be redeemed.

 

(iii)        If notice of redemption of any shares of Series A Preferred Stock has been given and if the funds necessary for such redemption have been set apart by the Corporation for the benefit of the holders of any shares of Series A Preferred Stock so called for redemption, then, from and after the redemption date, dividends will cease to accrue on such shares of Series A Preferred Stock, such shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights of the holders of such shares will terminate, except the right to receive the Redemption Price therefor. If the Corporation shall so require and the notice of redemption shall so state, holders of Series A Preferred Stock to be redeemed shall surrender the certificates representing such Series A Preferred Stock, to the extent that such shares are certificated, at the place designated in such notice and, upon surrender in accordance with said notice of the certificates representing shares of Series A Preferred Stock so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares of Series A Preferred Stock shall be redeemed by the Corporation at the Redemption Price. In case less than all of the shares of Series A Preferred Stock represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares of Series A Preferred Stock without cost to the holder thereof. In the event that the shares of Series A Preferred Stock to be redeemed are uncertificated, such shares shall be redeemed in accordance with the notice and no further action on the part of the holders of such shares shall be required.

 

 - 5

 

 

(iv)      The deposit of funds with a bank or trust company for the purpose of redeeming Series A Preferred Stock shall be irrevocable except that:

 

(A)         the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and

 

(B)         any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series A Preferred Stock entitled thereto at the expiration of two years from the applicable redemption dates shall be repaid, together with any interest or other earnings thereon, to the Corporation, and, after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment of the Redemption Price without interest or other earnings.

 

(e)           Application of Article VII . The shares of Series A Preferred Stock are subject to the provisions of Article VII of the Charter, including, without limitation, the provision for the redemption of shares transferred to the Charitable Beneficiary.

 

(f)           Status of Redeemed Shares . Any shares of Series A Preferred Stock that shall at any time have been redeemed or otherwise acquired by the Corporation shall, after such redemption or acquisition, have the status of authorized but unissued shares of Series A Preferred Stock.

 

(6)        VOTING RIGHTS . Except as provided in this Section, the holders of Series A Preferred Stock shall not be entitled to vote on any matter submitted to the stockholders of the Corporation for a vote. Notwithstanding the foregoing, the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, shall be required for (a) authorization or issuance of any equity security of the Corporation senior to or on a parity with the Series A Preferred Stock, (b) any reclassification of the outstanding Series A Preferred Stock or (c) any amendment to the Charter or the terms of the Series A Preferred Stock, whether by merger, consolidation, transfer or conveyance of all or substantially all of the assets of the Corporation or otherwise (an “Event”), which amendment materially and adversely affects any right, preference, privilege or voting power of the Series A Preferred Stock or which increases the number of authorized shares of Series A Preferred Stock to a number greater than 140; provided, however , with respect to the occurrence of any Event, so long as the Series A Preferred Stock remains outstanding with the terms thereof materially unchanged or the holders of shares of Series A Preferred Stock receive equity securities of the successor or survivor of such Event with substantially identical rights as the Series A Preferred Stock, taking into account that, after the occurrence of an Event, the Corporation may not be the surviving entity or the surviving entity may not be a corporation, the occurrence of such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the Series A Preferred Stock and in such case the holders of shares of Series A Preferred Stock shall not have any voting rights with respect to the occurrence of such Event unless the number of authorized shares of Series A Preferred Stock is increased to a number greater than 140.

 

 - 6

 

 

(7)        CONVERSION . The shares of Series A Preferred Stock are not convertible into or exchangeable for any other property or securities of the Corporation.

 

SECOND: The Series A Preferred Stock has been classified and designated by the Board under the authority contained in the Charter.

 

THIRD: These Articles Supplementary have been approved by the Board in the manner and by the vote required by law.

 

FOURTH: The undersigned President of the Corporation acknowledges these Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury.

 

[SIGNATURE PAGE FOLLOWS]

 

 - 7

 

 

IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be signed in its name and on its behalf by its President and attested to by its Secretary as of the 27th day of January 2016.

 

ATTEST: CLIPPER REALTY INC.
   
By: /s/ Lawrence Kreider   By: /s/ David Bistricer
Name: LAWRENCE KREIDER   Name:  
Title: Secretary   Title: President

 

 - 8

 

Exhibit 10.38

 

LEASE NO. 8221

 

LEASE BETWEEN

 

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, NEW YORK 10007

 

&

 

BERKSHIRE EQUITY LLC
4611 12 th AVENUE

BROOKLYN, NEW YORK 11219

 

Premises: 141 Livingston Street (Block 154, Lot 28)

Borough of Brooklyn

Approximately 206,084 rentable square feet of space

to be used by the Office of Court Administration

 

 

****

  

 

 

 

  

INDEX

 

    PAGES
     
ARTICLE 1 TERM AND USE 3
     
ARTICLE 2 RENT 3
     
ARTICLE 3 OPTION TO TERMINATE 4
     
ARTICLE 4 TAX AND OPERATING EXPENSE ESCALATIONS 6
     
ARTICLE 5 LANDLORD’S INTEREST IN PREMISES 19
     
ARTICLE 6 A ALTERATIONS AND IMPROVEMENTS, LANDLORD’S WORK 19
     
ARTICLE 6 B ALTERATIONS AND IMPROVEMENTS- TENANT’S WORK 27
   
ARTICLE 7 CERTIFICATE OF OCCUPANCY; COMPLIANCE WITH LAWS 44
     
ARTICLE 8 REAL ESTATE TAXES, ASSESSMENTS, WATER RATES, SEWER RENTS 46
     
ARTICLE 9 LANDLORD’S AND TENANT’S SERVICES 47
     
ARTICLE 10 TENANT’S ELECTRICTY 50
     
ARTICLE 11 ALTERATIONS BY TENANT 51
     
ARTICLE 12 END OF TERM 54
     
ARTICLE 13 REPAIRS 54
     
ARTICLE 14 CONDEMNATION 57
     
ARTICLE 15 DESTRUCTION BY FIRE OR OTHER CASUALTY 59
     
ARTICLE 16 NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE 62
     
ARTICLE 17 QUIET ENJOYMENT 63
     
ARTICLE 18 INTENTIONALLY DELETED 63
     
ARTICLE 19 SUBORDINATION AND NON-DISTURBANCE 63
     
ARTICLE 20 HOLDOVER TENANT 64
     
ARTICLE 21 NOTICE 65
     
ARTICLE 22 FORCE MAJEURE 66
     
ARTICLE 23 SAVE HARMLESS 67

 

i

 

 

 

INDEX CONTINUED

    PAGES
     
ARTICLE 24 INVESTIGATIONS 6 7
     
ARTICLE 25 SIGNIFICANT RELATED PARTY TRANSACTIONS 71
     
ARTICLE 26 ASBESTOS 72
     
ARTICLE 27 LANDLORD’S REPRESENTATIONS 76
     
ARTICLE 28 EXCULPATORY CLAUSE 77
     
ARTICLE 29 NO WAIVER 77
     
ARTICLE 30 BROKERAGE 78
     
ARTICLE 31 TENANT’S DEFAULT 7 8
     
ARTICLE 32 ESTOPPEL CERTIFICATE 80
     
ARTICLE 33 WAIVER OF TRIAL BY JURY AND COUNTERCLAIMS 81
     
ARTICLE 34 ASSIGNMENT, SUBLETTING OR MORTGAGING 81
     
ARTICLE 35 LEASE ENTIRE AGREEMENT 82
     
ARTICLE 36 APPICABLE LAW 82
     
ARTICLE 37 NUISANCE; HAZARDOUS MATERIALS 82
     
ARTICLE 38 VAULTS 84
     
ARTICLE 39 ACCESS TO PREMISES 84
     
ARTICLE 40 ATTORNEYS’ FEES 85
     
ARTICLE 41 EXCAVATION AND SHORING; BRIDGE OR SCAFFOLDING 86
     
ARTICLE 42 RULES AND REGULATIONS 86

 

EXHIBITS  
   
EXHIBIT A- OPERATING EXPENSE FORM  
EXHIBIT B- SCOPE OF WORK  
EXHIBIT C- AFTER HOURS SERVICE CHARGES  
EXHIBIT D- PREVENTATIVE MAINTENANCE SCHEDULE  
EXHIBIT E- FORM OF SUBORDINATION AND NON-DISTURBANCE AGREEMENT  
EXHIBIT F- RULES AMD REGULATIONS  

 

ii

 

  

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

ASSET MANAGEMENT

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, NEW YORK 10007

 

AGREEMENT OF LEASE made the 17th day of December 2015, by and between BERKSHIRE EQUITY LLC , whose address is 4611 12 th Avenue, Brooklyn, New York 11219, hereinafter designated as Landlord, and THE CITY OF NEW YORK, a municipal corporation, acting through the Department of Citywide Administrative Services ( “DCAS” ), with an address at 1 Centre Street, 20th Floor North, New York, New York 10007, hereinafter designated as Tenant.

 

WITNESSETH :

 

WHEREAS, Landlord is the owner of the premises located at 141 Livingston Street (Block 154, Lot 28) (“Land”) , in the Borough of Brooklyn (the land, building and other improvements comprising such premises are hereinafter collectively referred to sometimes as the (“Property”) ; and

 

WHEREAS, the parties hereto have previously entered into that certain License Agreement dated of as of November 25, 2014 between Landlord, as “Licensor” and Tenant as “Licensee” (the “License Agreement” or “License”) for the entire building exclusive of the existing garage, existing newsstand located of the first floor of the Building and existing Beis Din located on the mezzanine floor of the Building ( “Excluded Space”) located on the Property (“Building”) ; and

 

WHEREAS, the parties hereto desire to enter into a Lease of the Licensed Premises; and

 

 

 

WHEREAS, the City Planning Commission has approved the acquisition of the aforesaid premises on October 29 2015, (Calendar no. 2 ) pursuant to Section l97c of the New York City Charter, and the City Council did not disapprove the proposed acquisition of the aforesaid premises; and

 

W HEREAS, this Lease is subject to public hearing and Mayoral approval pursuant to Section 824(a) of the New York City Charter, said hearing to be scheduled subsequent to the execution by the Landlord of this Lease ; and

 

WHEREAS, this Lease may he executed by the Deputy Commissioner of DCAS after public hearing, Mayoral approval pursuant to Section 824 (a) and approval as to form by the Corporation Counsel of the City of New York; and

 

WHEREAS, the undersigned signatory of Landlord is duly authorized to execute this Lease on behalf of Landlord.

 

NOW, THEREFORE, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the following described premises (hereinafter referred to as the “Demised Premises” ): the Licensed Premises containing approximately 206,084 rentable square feet of space consisting of the entire Building (comprising the ground floor, and floors two (2) through (15) exclusive of the Excluded Space) to be used by the Office of Court Administration (“OCA”) courtroom and for general and administrative offices, or for such other similar purposes as DCAS may determine, upon the terms and conditions hereinafter set forth.

 

  2  

 

  

ARTICLE 1

 

TERM AND USE

 

Section 1.01         The Demised Premises shall be used by the OCA for court rooms and office space and ancillary story space or for such other reasonably similar lawful purposes as the Commissioner of DCAS may reasonably determine, in compliance with all applicable Requirements (as hereinafter defined) and upon the terms and conditions hereinafter set forth.

 

Section 1.02        The term of this Lease is for approximately ten (10) years and shall commence upon the exercise of the Option to Lease as defined in the License Agreement (which shall occur ten (10) days following the Option Notice, as defined in the License Agreement) (the “Commencement Date”) and shall expire at midnight on the day immediately preceding the tenth (10 th ) anniversary of the Commencement Date (“Expiration Date”).

 

ARTICLE 2

 

RENT

 

Section 2.01           (a)        The “Base Rent” payable by Tenant to Landlord shall be (i) Eight Million Two Hundred Forty Three Thousand Three Hundred Sixty Dollars and 00/100 ($8,243,360.00) per annum ($686,946.67 per month) for the period beginning of the Commencement Date and ending on the date immediately preceding the fifth (5 th ) anniversary of the Commencement Date, both dates inclusive; and (ii) Ten Million Three Hundred Four Thousand Two Hundred Dollars and 00/100 ($10,304,200.00) per annum ($858,683,33 per month) for the period beginning on the fifth (5 th ) anniversary of the Commencement Date and ending on the Expiration Date.

 

  3  

 

 

 

(b)          All payments due to Landlord from Tenant under this Lease, other than Base Rent, shall be considered “Additional Rent” . Base Rent and Additional Rent shall be referred sometimes as “rent” in this Lease and any failure to pay any such amount shall be subject to the rights and remedies of Landlord hereunder, including without limitation the addition of late charges thereto as provided in Section 31.02 hereof. Base Rent shall be payable in equal monthly installments at the end of each calendar month; provided that with respect to the months in which the Commencement Date and the Expiration Date of this Lease occur, Tenant shall pay only a pro rata share of the monthly installment for the period of the Term falling within such month and such installment for the month in which the Expiration Date occurs shall be due on the Expiration Date. All rent (Base Rent and Additional Rent) shall be payable at Landlord’s address hereinbefore set forth or at such othe address as may be designated by Landlord from time to time, by notice in the manner provided in Article 21 hereof.

 

Section 2.02          All bills sent by Landlord to Tenant shall have clearly reflected thereon the property, address, and block and lot for which the bill is being sent. All bills must be legible and must contain the address to which the payment should be sent. The name, address, and telephone number of the Landlord’s contact person for billing inquiries must be provided to Tenant in the manner designated in Article 21 hereof.

 

ARTICLE 3

 

OPTION TO TERMINATE

 

Section 3.01         Tenant shall have the right to terminate this Lease in its entirety at any time after the fifth (5 th ) anniversary of the Commencement Date (“Early Termination Date ”), by giving Landlord at least twelve (12) months’ prior written notice of such election and no later than the fourth (4 th ) anniversary of the Commencement Date. For purposes hereof, Tenant’s written notice described in this Section 3.01 shall be deemed to be the “ Tenant’s Termination Notice .”

 

  4  

 

 

 

Section 3.02        The foregoing right to terminate shall not require the payment of a penalty, provided, however, if this Lease is terminated by Tenant, in whole, as provided in Section 3.01 above, Tenant shall pay to Landlord an amount equal to the sum of the then remaining unamortized portion of the Landlord’s Work only (as defined in Article 6A), as hereinafter provided (the “Termination Fee” ).

 

Section 3.03        Tenant shall pay Landlord the Termination Fee on or before the later of (i) the Tenant’s Termination Notice and (ii) the thirtieth (30th) business day after Tenant shall have received from Landlord written certification of the Landlord’s Work Cost. For purposes of this Article, the Landlord’s Work cost shall be deemed to be amortized on a straight-line basis over a seven (7) year period commencing on the date of Substantial Completion of the Work (as defined in Article 6A). Landlord shall provide Tenant with a statement certified by Landlord of the Landlord’s Work Cost (as defined below) together with reasonably detailed backup documentation, within thirty (30) days after Tenant’s giving of any such notice of termination.

 

For the purposes hereof, the “Landlord’s Work Cost” shall mean the aggregate costs and expenses (excluding construction loan interest and related financing costs) directly related to the Landlord’s Work (as defined in Article 6) incurred by Landlord for the following:

 

(i)          the expediter’s fees and filing fees for the submission of the Final Plans related solely to Landlord’s Work to the appropriate governmental authorities for approval, as required;

 

(ii)         the performance of all items of the Landlord’s Work (labor and materials) in accordance with the Final Plans; and

 

(iii)        one (1) general contractor’s general condition’s fee and one (1) general contractor’s overhead and profit; Landlord shall not be entitled to be paid an administrative or management fee for the performance of the Landlord’s Work. There shall be no double payments in any items included in the Landlord’s Work Cost including the components of overhead and profit and general contractor’s fees.

 

  5  

 

  

Section 3.04        The Termination Fee shall be subject to audit by DCAS and/or its authorized representative and post-audit by the Comptroller for the City of New York for the purpose of verifying the applicable costs.

 

Section 3.05        Notwithstanding any termination of this Lease pursuant to the terms and provisions of this Article 3, each party hereto shall remain liable after any such termination of this Lease for the performance of all obligations on such party’s part to be performed, and payment of all liabilities incurred, pursuant to the terms and conditions of this Lease up to and including the effective date of termination.

 

Section 3.06        TIME IS OF THE ESSENCE with respect to the giving of the Tenant’s Termination Notice and the payment of the Termination Fee. If Tenant shall fail to pay the Termination Payment (subject to Landlord’s obligation to provide the Landlord’s Work Cost in accordance with Section 3.03 above), then this Lease shall continue in full force and effect and rent shall accrue as if the Tenant’s Termination Notice had not been sent. Or before the Early Termination Date, Tenant shall vacate, quit and surrender possession of the Demised Premises in accordance with Article 12 hereof. If Tenant fails so do so, the provisions of Article 20 hereof shall apply.

 

ARTICLE 4

 

TAX AND OPERATING EXPENSE ESCALATIONS

 

Section 4.01        The Landlord and the Tenant agree that in addition to the annual Base Rent provided for in the preceding paragraphs of this Lease, Additional Rent shall be payable, consisting of Real Estate Tax escalations and direct Operating Expense escalations as those terms are hereinafter defined. Tenant shall pay (i) its pro-rata share, ninety- eight percent (98 %), of Operating Expense escalations ( “Tenant’s Expense Share” ) and (ii) its pro-rata share, ninety- eight percent (98%) of Real Estate Tax escalation ( “Tenant’s Tax Share” ). Landlord and Tenant accept such pro- rate share calculations as final and binding upon the parties throughout the term of this Lease.

 

  6  

 

 

Section 4.02           OPERATING EXPENSE ESCALATIONS

 

With respect to each calendar year of the term hereof subsequent to 2014 (hereinafter referred to as the “Operating Expense Base Year” ) including the calendar year in which this Lease terminates, Landlord shall deliver to Tenant, no later than thirty (30) days prior to the commencement of each such calendar year, a written estimate (hereinafter referred to as the “Estimate” ) signed by an officer or agent of the Landlord, wherein is set forth Landlord’s good faith estimate of the extent by which Operating Expenses for the particular calendar year will exceed Operating Expenses for the Operating Expense Base Year and an amount (hereinafter referred to as the “Amount” ) equal to Tenant’s Expense Share of such excess. The parties agree that the amount of Operating Expenses for the Operating Expense Base Year shall be $250,000.00.

 

Operating Expenses shall be defined as all reasonable costs and expenses, without duplication, paid or incurred by Landlord, in the reasonable exercise of Landlord’s business judgment with respect to the following:

 

I.            Items included in Operating Expenses

 

(1) Actual labor costs and expenses (including fringe benefits, provided that such fringe benefits are no greater than those paid under comparable union contracts, and workers compensation insurance covering Building employees), for the services of the following classes of employees performing services required in connection with the operation, repair and maintenance of the Building:

 

(i) the Building manager who works full time on the Building; and

 

  7  

 

 

(ii) engineers, mechanics, electricians, plumbers, porters, janitors and security personnel engaged on a full or part-time basis in the actual operation, repair and maintenance of any part of the Building, and the heating, air conditioning, ventilating, plumbing, electrical and elevator systems of the Building, but excluding cleaning; provided that in the case of such part-time employees only the costs attributable to the Building shall be included.

 

(2) (i) The commercially reasonable cost of materials and supplies used in the operation, repair and maintenance of the Building, including, but not limited to, snow removal, painting and decorating, lighting, rubbish removal, removal of graffiti excluding cleaning.

 

(ii) The competitive cost of independent contractors performing services required for the operation and maintenance of the Building, including extermination services, but excluding cleaning services.

 

(iii) The costs of electricity, sewer, gas, water, fuel oil, and all other utilities for the common areas of the Building.

 

(3) The cost of fire and casualty insurance (all risk or extended coverage) that a prudent owner of a building comparable to the Building would maintain.

 

(4) Management fees paid to third parties, provided that said management fee shall be no higher than that which is ordinary and customary in the real estate management industry in New York City at comparable buildings to the Building (taking into account the level of services being provided at the Building) which shall not exceed one and one half percent (1 1/2 %) of the Building’s rent roll.

 

(5) Energy Efficient Capital Improvement(s) defined in subsection III b elow to the extent and in the manner specified therein but not if said Energy Efficient Capital Improvement(s) are part of the Work performed under Article 6 as stated in subsection III (iii ) below.

 

II.           Items Excluded from Operating Expenses

 

(1) The cost of correcting defects in the construction of the Building or in the Building equipment, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear shall not be deemed defects for the purpose of this category;

 

(2) Cost of any repair made by Landlord to remedy damage caused by or resulting from the negligence of Landlord, its agents, servants or employees;

 

(3) Labor costs in respect to executives of Landlord not assigned to the Building as part of the normal Building operation staff;

 

(4) Taxes and Real Estate Taxes as defined below;

 

  8  

 

  

(5) Legal, accounting or other professional fees (including without limitation, brokerage, and finder’s and advertising fees incurred to attract, lease to, or procure new tenants), other than auditing fees incurred for the preparation of annual audited operating expense statements;

 

(6) Any insurance premium, other than as set forth in subsection I (3) above;

 

(7) Interest for late payments of water and sewer rents;

 

(8) The cost of any items for which Landlord is reimbursed by insurance or which are reimbursable by insurance;

 

(9) The cost of extraordinary services provided for other tenants within the premises respectively demised to such tenants;

 

(10) The costs attributable to the correction or remedying of any act or omission of any tenant in the Building where such tenant is liable for the correction or remedying of any such act or omission under its lease with Landlord;

 

(11) Any cost (of electricity or any other item) for which Landlord is reimbursed by any tenant of the Building;

 

(12) The cost of repair or rebuilding caused by fire or other casualty or condemnation;

 

(13) The cost of any alterations, additions, changes, replacements and other items which under generally accepted accounting principles consistently applied(“GAAP”) are properly classified as capital expenditures, excepting only (A) Energy Efficient Capital Improvements(s) as defined and permitted in subsection III below and (B) such other capital expenditures which shall be made for replacements of Building equipment and property, the repair cost of which would exceed fifty percent (50%) of the cost of replacement and, accordingly, the Landlord reasonably determined the cost of repair warrants replacement thereof in lieu of repair, and such allowable expenditures shall be included on a straight line basis to the extent such items are amortized over their useful life in accordance with GAAP. Landlord shall furnish Tenant with reasonable evidence confirming both the repairs and the replacement cost referred to herein;

 

(14) The cost of any alterations to prepare space for occupancy of any tenant in the Building;

 

(15) Expenses resulting from any violations by Landlord of the terms of this Lease or any other lease in the Building;

 

  9  

 

 

 

(16) Refinancing costs and mortgage interest and amortization payments;

 

(17) Cost of paintings and sculptures considered to be of the quality and nature of fine art as opposed to merely decorative art;

 

(18) Cost of maintenance, repair and alteration to, and costs of operation of, the Building’s parking garage, if any, and of any other retail space except that leased under this Lease;

 

(19) Any item otherwise indicated in this Lease to be performed at Landlord’s sole cost and expense; and

 

(20) Any item otherwise indicated in this Lease to be performed by Landlord but paid for by Tenant as additional rent or otherwise.

 

III.   Capital Improvement(s) Intended to Improve Energy Efficiency , as defined in (i)(a)  of this subsection III and to the extent permitted in (ii)  of this subsection III, shall also be included in Operating Expenses, as follows.

 

(i)  For the purposes of this subsection III  only, the following definitions shall apply:

 

(a) “Energy Efficient Capital Improvement(s)” or “EECI” shall mean any alteration, addition, change, repair or replacement (whether structural or nonstructural) made by Landlord in or to the Building or the common areas or equipment or systems thereof which, under generally accepted accounting principles consistently applied, is properly classified as a capital expenditure; and which capital expenditure, as certified in writing by the Independent Engineers defined in paragraph (d) below, will reduce the Building’s consumption of electricity, oil, natural gas, steam, water or other utilities. The aggregate costs of any Energy Efficient Capital Improvement shall be deemed to include, without limitation, architectural, engineering and expediting fees, legal, consulting, inspection and commissioning fees actually incurred in connection therewith, but shall be deemed to exclude actual or imputed financing costs in connection therewith; provided, however, the costs of such Energy Efficient Capital Improvement shall be deemed reduced by the amount of any NY SERDA or similar government incentives for energy efficiency improvements actually received by Landlord to defray the costs of such Energy Efficient Capital Improvement, and shall further be reduced by any energy efficiency tax credits or similar energy efficiency-based tax incentives actually accruing to Landlord as a result of such Energy Efficient Capital Improvement.

 

  10  

 

  

(b) “EECI Base Year ” means the calendar year in which the EECI is completed and placed in service by Landlord.

 

(c) Comparison Year ” means each calendar year subsequent to the EECI Base Year.

 

(d) Independent Engineers ” means two (2) engineers selected by Landlord from a pre-approved list. From time to time, but not more than once during any period of twelve (12) consecutive months, Landlord and Tenant may each recommend two or more independent professional engineers, licensed by the State of New York, for inclusion on the pre-approved list. Any such recommendations by Landlord or Tenant shall be subject to the written approval of the other party, which approval shall not be unreasonably withheld.

 

(e) Simple Payback Period ” shall mean the length of time (expressed in months) obtained by dividing (x) the aggregate costs of any such Energy Efficient Capital Improvement by (y) the anticipated annual savings in utility costs (which shall be the average of the determinations by the two Independent Engineers of such annual savings) includable in Operating Expenses (the “ Projected Annual Savings ”). By way of example, if the aggregate costs of such Energy Efficient Capital Improvement is $2,000,000 and the Projected Annual Savings are $500,000 per annum, then the Simple Payback Period for such Energy Efficient Capital Improvement is forty-eight (48) months. The Projected Annual Savings and the Simple Payback Period shall be certified in writing by the Independent Engineers.

 

(ii) Commencing with the first Comparison Year following the EECI Base Year and for each Comparison Year thereafter for the duration of the Simple Payback Period, Landlord may include in Operating Expenses a portion of the aggregate costs of such Energy Efficient Capital Improvement equivalent to eighty percent (80%) of the Projected Annual Savings, so that the aggregate costs of such Energy Efficient Capital Improvement will be fully amortized over one hundred twenty-five percent (125%) of the Simple Payback Period. By way of example, if the aggregate costs of such Energy Efficient Capital Improvement is $2,000,000, the Projected Annual Savings are $500,000 and the Simple Payback Period for such Energy Efficient Capital Improvement is forty-eight (48) months, then Landlord may include $400,000 of the aggregate costs of such Energy Efficient Capital Improvement (i.e., an amount equivalent to 80% of the Projected Annual Savings) in Operating Expenses for five consecutive Comparison Years (i.e., sixty (60) months or 125% of the Simple Payback Period).

 

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(iii) Notwithstanding anything to the contrary contained herein or elsewhere in this Article 4 or the Lease, in no event shall any of Landlord’s Work performed under Article 6A, even if otherwise deemed to be an Energy Efficient Capital Improvement(s), be included in Operating Expenses.

 

Notwithstanding anything contained hereinabove to the contrary, the cost of any repair required to be performed by Landlord pursuant to Articles 9 and/or 13 of the Lease shall only be included as Operating Expenses in the applicable calendar year in which Tenant shall have given notice to Landlord (or Landlord shall have otherwise received actual notice) of the need for such repair. The cost of any repair not performed in such calendar year shall not be carried forward to the next or any subsequent calendar year; provided , however , if Tenant shall have given notice to Landlord of a repair during the last quarter of the applicable calendar year and such repair is not capable of being performed by the end of such quarter, provided that Landlord shall have commenced to perform such repair during such final quarter and thereafter diligently prosecute such repair to completion, the costs of same shall be included as an Operating Expense for the calendar year in which the repair is completed.

 

Tenant’s Expense Share of such estimated increase in Operating Expenses shall be paid in twelve (12) equal monthly installments on the same dates as the annual base rental is payable. The first installment shall be due on the rent payment date coinciding with or following the rendering of the escalation statement, provided, however, that if this Lease terminates for any reason before the entire amount of estimated additional rent has been paid for the previous or current year, the balance shall become due and payable to the date of termination and may be based upon a reasonable estimate for the current year.

 

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If the Estimate is delivered to Tenant prior to the commencement of the particular calendar year, then Tenant agrees to pay to Landlord on the last day of each month occurring during such calendar year, as Additional Rent, one-twelfth (1/12 th ) of the Amount stated in the Estimate. If such Estimate is delivered to Tenant subsequent to the commencement of the particular year, then (i) Tenant shall pay to Landlord on the last day of each month of such calendar year one-twelfth (1/12 th ) of the Amount stated in the immediately preceding calendar year Estimate, (ii) Tenant shall pay to Landlord on the last day of each month during such calendar year following the forty-fifth (45 th ) day after the delivery of such Estimate to Tenant, one-twelfth (1/12 th ) of the Amount stated in such Estimate, and (iii) promptly following the delivery of such Estimate to Tenant, Landlord shall refund to Tenant, or Tenant shall pay to Landlord, as appropriate, the difference between (x) the amounts actually paid to Landlord by Tenant for the months prior to the delivery of the Estimate and (y) the amounts that Tenant would have paid to Landlord during such months if Landlord had delivered the Estimate prior to the commencement of the particular calendar year. However, actual payment of any increase shall not start until after January 1, 2015.

 

Notwithstanding anything to the contrary, if any new expense, not listed as an expense in the Operating Expense Base Year (the “Additional Operating Expense”), and which Operating Expense may be listed as an Operating Expense under this Article, is included in the Tenant’s calculation of the Operating Expense escalation in a calendar year subsequent to the Base Year, such Additional Operating Expense must also be included in the Operating Expense Base Year and all subsequent years based on the following formula. The Base Year Operating Expenses will be revised to include the Additional Operating Expense which is calculated by dividing the current year’s cost by the fraction, the denominator of which shall be the Consumer Price Index (“CPI”) for the Base Year and the numerator of which shall be the CPI for the current year. As used herein, the term Consumer Price Index” shall mean the United States Department of Labor’s Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, All Items, New York/Northeastern, NJ (1982 - 84 equals 100), or the successor of that index.

 

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Landlord shall be required to disclose and notify Tenant of any significant related party transactions the cost of which are passed on, in whole or in part, as rent. When such transactions occur prices of same must be in line with normal industry practice in New York City. Failure to notify Tenant of such related party transactions shall result in a disallowance of such costs that would otherwise be passed along as an Operating Expense. If such related party transactions occurred and were disclosed but it is found by the Tenant that the cost thereof was excessive, then such charges shall be disallowed to the extent they exceed normal industry prices in New York City.

 

Within ninety (90) days after the expiration of the Operating Expense Base Year, Landlord shall furnish to Tenant a schedule of Operating Expenses for said Operating Expense Base Year. Within ninety (90) days after the expiration of each calendar year subsequent to the Operating Expense Base Year (including the calendar year in which this Lease terminates), Landlord shall furnish to Tenant a schedule of Operating Expenses for said calendar year and a schedule of additional rent resulting from escalations in Operating Expenses. Such schedules of Operating Expenses must be prepared in a format no less detailed than that shown in Exhibit A hereto.

 

Such schedules of Operating Expenses must include a statement signed by the chief executive, chief operating, or chief financial officer of Landlord that:

 

(a)          discloses fully any significant changes in the method of calculation of Operating Expenses from the Operating Expense Base Year to said calendar year and/or from the previous calendar year to said calendar year, or, in the absence of significant changes, states that there have been no significant changes in the method of calculation of Operating Expenses with respect to the aforementioned periods; and

 

(b)          avers that there is adequate and accurate documentation in Landlord’s files to support each and every charge included in Operating Expenses.

 

Landlord must have supporting documents for each and every Operating Expense or it will be disallowed.

 

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At the time each such schedule of Operating Expenses is furnished to Tenant, appropriate adjustment shall then be made between the parties, i.e., if Tenant has paid on account of such calendar year more than Tenant’s Expense Share of the actual amount by which Operating Expenses for such calendar year exceeded Operating Expenses for the Operating Expense Base Year, Landlord shall refund such overpayment to Tenant at the time of giving such notice; if Tenant has paid on account of such calendar year less than Tenant’s Expense Share of the amount by which Operating Expenses for such calendar year exceeded Operating Expenses for the Operating Expense Base Year, then Tenant shall pay the difference to Landlord within sixty (60) days after receiving the certified Operating Expenses statement, provided, however, that Tenant shall be required to pay to Landlord only the difference between (a) Tenant’s Expense Share of the excess of the undisputed actual Operating Expenses for the calendar year over actual Operating Expenses for the Operating Expense Base Year and (b) the Estimate; payment of any amounts on account of Operating Expenses other than the aforementioned undisputed amount shall be withheld by Tenant until Tenant is satisfied that the change in question is valid or until any dispute is otherwise resolved. Appropriate pro rata adjustment shall be made for the last calendar year in which this Lease terminates.

 

If Landlord fails to timely furnish any of the foregoing statements, Tenant may, upon thirty (30) days’ written notice, withhold additional rent due and owing to Landlord for the particular Additional Rent charge(s) for which Landlord failed to furnish a statement, including but not limited to Real Estate Tax escalations and Operating Expense escalations, until Landlord furnishes the foregoing statements. Tenant’s liability for additional rent due pursuant to this Article and/or Landlord’s liability for refunding any overpayment shall survive the expiration of the Term hereof.

 

Pending any audit by the Tenant or Comptroller of direct operating expenses for any calendar and/or fiscal year, including the Operating Expense Base Year, Tenant shall pay Additional Rent pursuant to the foregoing provisions hereof for such year as billed by Landlord; and upon completion of such audit and resolution by Landlord and Tenant of any matters in contention, appropriate refund or credit shall be allowed Tenant against the next installments of rent and Additional Rent becoming due hereunder if required thereby.

 

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With respect to any partial calendar year occurring at the beginning or the expiration of the term hereof or termination of this Lease, additional rent payable by Tenant for such partial calendar year on account of Operating Expenses shall be equitably adjusted.

 

Tenant shall have the right to copy, examine and audit any of Landlord’s statements including the Base Year operating statement.

 

Section 4.03    REAL ESTATE TAX ESCALATIONS

 

(a)          The term “Taxes” and “Real Estate Taxes” as used herein, shall mean the real estate taxes and assessments (including special assessments) on or with respect to the Building and the Land, assessed, levied, or imposed by any governmental authority having jurisdiction, including, without limitation, (i) assessments made upon or with respect to any “air” and “development” rights now or hereinafter appurtenant to or affecting the Land; (ii) any fee, tax or charge imposed by any governmental authority for any vaults, vault space or other space within or outside the boundaries of the Land; and (iii) any taxes or assessments levied after the date of this Lease in whole or in part for the public benefits to the Land or the Building, including, without limitation, Business Improvement District taxes and assessments; without taking into account any discount that Landlord may receive by virtue of any early payment of Taxes, in ease case, calculated as if the Land and Building were the only asset of Landlord; provided, that if because of any change in the taxation of real estate, any other tax or assessment however denominated (including without limitation any franchise, income, profit, sales, use, occupancy, gross receipts or rental tax) is imposed upon Landlord or the owner of the Land or the Building, or the occupancy, rents or income therefrom, in substitution for any of the foregoing taxes, such other tax or assessment shall be deemed part of Taxes computed as if Landlord’s sole asset were the Land and Building. Excluded from the foregoing enumerations of Taxes and Real Estate Taxes will be (i) any income, franchise, inheritance, capital stock, excise, excess profits, occupancy or rent, gift, estate, payroll or stamp taxes or foreign ownership or control taxes or any capital gains tax, deed tax or transfer tax, and mortgage recording tax imposed on Landlord by municipal, state or federal law, (ii) any Taxes resulting from an increase of the assessed value of the Building attributable to additions to the Building which increase the square footage of the Building. The foregoing notwithstanding, Tenant shall be responsible for any increase in Taxes which result from an increase in the assessed value of the building attributable to Landlord’s Work and Tenant’s Work and any replacements. As of the date hereof, to the best of Landlord’s knowledge, the only Taxes affecting the building and/ or Land are the real estate taxes payable to the City of New York.

 

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(b)          Tenant covenants and agrees that commencing as of July 1, 2015, Tenant shall pay to Landlord as Additional Rent, an annual sum (the “Tax Payment” ) equal to the product of (x) Landlord’s Pro- Rata Share, and (y) the amount by which the annual Real Estate Taxes for the current July 1- June 30 period (each such period, a “Tax Year” ) exceed the amount of Real Estate Taxes finally imposed or assessed on the Land and Building for the 2013/2014 Tax Year ( “Base Taxes” ). Tenant shall pay the Tax Payment is two (2) equal installments, each of which shall be due within thirty (30) days after Landlord presents to Tenant a copy of an official Real Estate Tax bill from the applicable governmental authority. The Tax Payment payable for the Tax Year during which the term of this Lease expires shall be prorated based on the number of day of the Term which falls within such Tax Year.

 

(c)          Appropriate credit shall be given for any refund obtained by reason of a reduction in the assessed valuation made by the assessors or the courts for any period falling within the Term, including with respect to Base Taxes. In calculating the amount of such refund. Landlord may deduct therefrom, before crediting Tenant, any expenses incurred by Landlord, or Landlord’s estate, including payment to consultants, attorneys and appraisers, in contesting, or otherwise seeking a reduction of, the Taxes and Real Estate Taxes or assessed value of the Land or Building by tax certiorari proceedings or otherwise; provided, however, that Landlord shall not deduct payments to any consultant, attorney or appraiser for performing the same function as another consultant, attorney or appraiser for such which Landlord is deducting the same. The original computations, as well as payment of Additional Rent, if any, under the provision of this Article, shall be based on the original assessed valuation with adjustments to be made if and when the Tax refund, if any, has been paid to Landlord, All rights and obligations of the parties hereto respect any Tax Payments shall survive the expiration or earlier termination of the Term hereof.

 

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(d)          If the Base Taxes shall be reduced or increased as a result of protest or proceedings filed therefor, then the Base Taxes shall be amended to the amount actually collectible by the City of New York, and all retroactive Tax Payments or credits and refunds shall be due and payable within thirty (30) days after billed or credited by Landlord. Landlord shall use commercially reasonable efforts to promptly notify Tenant in writing each time a tax assessment is challenged, but Landlord’s failure to do so shall not affect the parties’ rights or obligations hereunder.

 

Section 4.04 RIGHT TO AUDIT

 

Tenant and its authorized representative, at Tenant’s sole cost and expense, shall have the right to examine and copy and, with respect to computation of Operating Expense Escalations and Tax Payment, audit any and all books and records of Landlord, for the purpose of verifying the accuracy of any Statement furnished by Landlord to Tenant. All such Statements are subject to verification of the occupying agency or its representative and post-audit by the Office of the Comptroller. Landlord shall be required to retain the books and records required herein, at its main office or such other location within New York City as it may designate, for six (6) years after the period to which they relate.

 

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ARTICLE 5

 

LANDLORD’S INTEREST IN PREMISES

 

Section 5.01          Landlord warrants and represents that it is the owner in fee of the Building, the Demised Premises, and the real property on which they are located and is empowered and authorized to lease said premises as provided herein.

 

ARTICLE 6 A

 

ALTERATIONS AND IMPROVEMENTS,

 

LANDLORD’S WORK

 

Section 6A.01       (a) Landlord and Landlord’s agents and representatives have made no representation or promises with respect to the Building, the Land, or the Demised Premises, except as otherwise expressly set forth herein, and no rights, easement, or licenses are acquired by Tenant by implication or otherwise except as expressly set forth herein. Tenant shall accept possession of the Demised Premises in the condition which shall exist on the Commencement Date “as- is”; and Landlord shall have no obligation to perform any work or make any installations in order to prepare the Demised Premises for Tenant occupancy, except that, following the Commencement Date, Landlord shall perform the Landlord’s Work in accordance with provisions of this Article 6A and the work set forth in Section 6A.01 (b) below.

 

(b)           All the terms of Article 5 of the License between the parties hereto shall carry over into this Lease and shall be incorporated into Article 6A of the Lease by reference, mutatis mutandis, including, but not limited to, the provisions for liquidated damages.

 

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Section 6A.02      Landlord agrees at Landlord’s sole cost and expense, prior to the “ Substantial Completion Date (as defined in this Article 6A), to perform the alterations and improvements to the Demised Premises in accordance with Final Plans (as defined in Article 5 of the License) subject to Tenant’s approval in connection with the “Lease- Base Building Scope of Work” attached hereto and made a part hereof as item #5 of Exhibit B (the “ Landlord’s Work ”); for the purposes of clarification, the Lease- Base Building Scope of Work Final Plans are being prepared by Design Urbanism Architectural, LLC pursuant to the terms of Article 5 of the License.

 

Within ten (10) business days following D & PM’s approval of the Final Plans (as defined in Article 5 of the License), Landlord shall file the Final Plans with the New York City Department of Buildings (the “Buildings Department”), the New York City Fire Department (the “Fire Department”) and all other governmental authorities having jurisdiction over the Work (collectively, the “Governmental Authorities”). Landlord shall commence performance of the Landlord’s Work within thirty (30) business days from the Lease Commencement Date (“Construction Commencement Date”).

 

Section 6A.03 (a)           Landlord represents and warrants that it has the financial capability and/or adequate financing to complete the Landlord’s Work in the time frames set forth herein. Within ten (10) Business Days of Tenant’s approval of the Final Plans for Landlord’s Work, Landlord shall deliver to Tenant evidence and assurances satisfactory to Tenant of Landlord’s financial capability to complete the Landlord Work. Landlord’s misrepresentation with regard to its ability to provide or obtain financing in an amount sufficient to complete the Landlord’s Work shall constitute material breach of the terms of this Lease.

 

(b)          Landlord shall have a continuing obligation to make regular periodic payments to its contractors at approximately thirty (30) day intervals in amounts reasonably commensurate with the amount of progress towards Substantial Completion of the Landlord’s Work from the start of work up to the Substantial Completion Date of the Landlord’s Work, to ensure diligent and timely completion of the Landlord’s Work.

 

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Section 6A.04      (a) The Landlord’s Work shall be deemed “Substantially Complete” and “Substantial Completion” of the Landlord’s Work shall occur on the date (the “Substantial Completion Date” ) upon which all of the following shall have occurred: (i) all of the Landlord’s Work (including the ACM Work), shall have been completed except for completion of minor aspects of construction or mechanical adjustment which do not materially interfere with Tenant’s use of the Demised Premises; and (ii) Landlord shall have delivered to Tenant all of the Final Sign-Offs (as hereinafter defined). Landlord shall, prior to the Substantial Completion Date of the Landlord’s Work, endeavor to remove all Building Code and Fire Code violations now pending or which may be placed against the Demised Premises, except those violations caused by Tenant’s breach of the terms of the Lease, which violations Tenant shall have the responsibility to remove.

 

(b)          Landlord shall send Tenant written notice (the “Substantial Completion Notice” ) including the Final Sign-Offs setting forth the date upon which Landlord reasonably anticipates that the Substantial Completion Date of the Landlord’s Work will occur. In the event that Landlord shall have given Tenant the Substantial Completion Notice including the Final Sign-Offs, D&PM shall use reasonable efforts to certify or deny certification of the Substantial Completion of the Landlord’s Work within seven (7) Business Days after D&PM receives written notice from Landlord of Landlord’s determination that Substantial Completion of the Landlord’s Work has been achieved. If D&PM shall determine that Substantial Completion of the Landlord’s Work not been achieved, Tenant shall send Landlord notice thereof which notice shall include a complete and detailed list of reasons Substantial Completion of the Landlord’s Work has not been achieved. Thereafter, upon the correction of the deficiencies in the Landlord’s Work described in such Tenant’s notice, the foregoing procedure for determining the Substantial Completion Date for the Landlord’s Work shall be repeated.

 

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(c)          For purposes of this subsection 6A.04, “Final Sign-Offs” shall mean: (i) all applicable Buildings Department and Fire Department inspection sign-offs for the Landlord’s Work (including but not limited to Buildings Department Post Permit TR-1, Equipment Use Permits, elevator use permits, electrical and plumbing sign-offs, Fire Department and elevator inspections and sign-offs) and compliance with the terms and provisions of Article 26 of this Lease regarding ACM) which may be necessary in connection with the of the Landlord’s Work; (ii) a temporary or final new or amended Certificate of Occupancy; (iii) “as built” the Landlord’s Work construction drawings for Lease Work in both hard copy and Auto Cad versions; and (iv) a certified air balancing report for the Demised Premises has been approved by Landlord’s engineer as being in conformance with the Final Plans.

 

(d)          D&PM shall fully cooperate with Landlord in order to facilitate Landlord’s obtaining the timely inspections for Final Sign-Offs, as the case may be, provided Landlord has made timely filings. In the event that any Certificate of Occupancy and/or other sign-offs which may be delivered by Landlord to Tenant in connection with the Landlord’s Work are temporary in nature, Landlord will keep such sign-offs all in full force and effect and will be solely liable for all costs in connection therewith until Landlord obtains any necessary final Certificates of Occupancy or other final sign-offs, as the case may be.

 

Section 6A.05      In the event Landlord (i) fails to commence construction of the Landlord’s Work or before the Construction Commencement Date and/or pursue completion of same diligently and in a continuous manner, then Tenant shall give Landlord written notice (hereinafter referred to as “Delay Notice” ) advising Landlord of its failure. If Landlord does not cure its failure within ten (10) Business Days from the date of the Delay Notice, or if such default cannot be completed within such ten (10) Business Day period and Landlord fails to act diligently, and continuously without interruption to cure such default, Tenant, in addition to any other remedy it may have, at its option may: (i) as agent of the Landlord commence and/or perform the Landlord’s Work and deduct the reasonable cost thereof from the rent to become due and payable pursuant to Article 2 hereof; or (ii) terminate this Lease on ten (10) Business Days written notice to Landlord; provided, however, if Landlord shall thereafter commence and diligently pursue completion of the Landlord’s Work prior to the expiration of such ten (10) Business Day period, Tenant’s termination notice shall be deemed null and void. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant elects to perform the Landlord’s Work as Landlord’s agent, it shall receive a rent credit within twenty (20) Business Days from the date that Landlord receives such Delay Notice equivalent to one (1) day of free rent for the Demised Premises for each day the commencement the Landlord’s Work was delayed or Landlord failed to pursue diligent completion of the Landlord’s Work in a continuous manner.

 

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Section 6A.06     In the event Landlord, after commencing the Landlord’s Work, fails to achieve Substantial Completion of the Landlord’s Work within one (1) year and six (6) months subject to Force Majeure and Tenant Delay, Tenant may give Landlord written notice (hereinafter referred to as the “Completion Delay Notice” ) advising the Landlord of its failure to achieve Substantial Completion of the Landlord’s Work. If Landlord fails to achieve Substantial Completion of the Landlord’s Work, within thirty (30) Business Days from the date that Landlord receives such Completion Delay Notice, or if such Landlord’s Work cannot be completed within said thirty (30) Business Days and Landlord fails to act diligently, and continuously without interruption to complete the Landlord’s Work within a reasonable time thereafter, Tenant, in addition to any other remedy it may have, may: (i) perform the Landlord’s Work and deduct the reasonable cost thereof from the rent to become due and payable pursuant to Article 2 hereof or (ii) terminate the Lease on ten (10) Business Days written notice to Landlord; provided, however, if Landlord shall thereafter commence and diligently pursue completion of the Landlord’s Work prior to the expiration of such ten (10) Business Day period, Tenant’s termination notice shall be deemed null and void. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant provides written Completion Delay Notice or elects to perform the Landlord’s Work as Landlord’s agent, it shall receive a rent credit within twenty (20) Business Days from the date that Landlord receives such Completion Delay Notice equivalent to one (1) day of free rent for each day Landlord has delayed the Substantial Completion Date of the Landlord’s Work. Either party may refer a dispute under this Section 6A.06 to expedited arbitration in accordance with the procedures set forth in Section 6A.13. For purposes of this Article 6A, a “Tenant Delay” shall mean any delay of one or more days (not due to unavoidable delays) that continues after written notice from Landlord and Tenant’s failure to cure within a five (5) business day period, which results in Landlord’s inability to (x) timely meet any applicable time frames under this Lease, (y) timely commence the performance of Landlord’s Work, or (z) timely Substantially Complete the Landlord’s Work due to any of the following: (1) any written request by Tenant that delays Landlord in proceeding with any segment or part of the Landlord’s Work; (3) any material changes or requests for material changes by Tenant to the approved Final Plans; (4) any failure by Tenant to respond reasonably and in good faith or within the time frames set forth herein or to respond with reasonable specificity where required herein; or (5) interference or delay in the performance of the Landlord’s Work by Landlord or its contractor, subcontractor, vendor, supplies or materialmen attributable to the performance of any work in the Demised Premises by Tenant or Tenant’s contractors and/or vendors. Tenant Delay (s) shall extend the time for Landlord’s performance of said obligations by the amount of time equal to said Tenant Delays on a day for day basis.

 

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Section 6A.07      In the event Substantial Completion Date of the Landlord’s Work has occurred, then with respect, to minor details of construction or decoration which do not materially, adversely affect Tenant’s use of a Floor or the entire Demised Premises, as applicable, Tenant shall submit to Landlord a written list of such minor details and any as-built drawings which it deems to be incomplete (hereinafter the “Punch List” ). Landlord shall within thirty (30) days of receipt of the Punch List, commence performance and diligently proceed with continuity to complete the incomplete Landlord’s Work. In the event Landlord fails to commence and complete said Landlord’s Work within thirty (30) days of receipt of the Punch List, or if the item cannot reasonably be commenced or completed within said thirty (30) day period, if Landlord shall not commence and complete performance as promptly as practicable thereafter, Tenant, in addition to any other remedy it may have, may on at least ten (10) Business Days’ prior written notice to Landlord (i) as agent for the Landlord, perform said work and deduct the reasonable cost thereof from the Base Rent due or that may become due and owing under this Lease or (ii) may withhold from Base Rent an amount equal to 200% of the good faith estimated cost to repair and/or complete such Punch List item until Landlord performs such Landlord’s Work to the reasonable satisfaction of Tenant.

 

Section 6A. 08     With respect to Tenant’s repair obligations, upon completion of the Landlord’s Work, Landlord shall assign to Tenant the beneficial interest in all warranties and guarantees received by Landlord from contractors and materialmen engaged in the performance of the Landlord’s Work as well as the right to enforce any contracts made with such contractors and materialmen. Landlord hereby appoints Tenant as its attorney-in-fact to institute suit in Landlord’s name and for Tenant’s benefit and agrees to cooperate fully with Tenant in the event that Tenant seeks to enforce its rights with respect to the warranties and guarantees.

 

Section 6A.09      Notwithstanding anything to the contrary in Article 13 hereof, Landlord shall be solely responsible for the performance and cost of all repairs resulting from defects of materials and workmanship in construction and/or alterations and improvements of the Demised Premises or of the Property.

 

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Section 6A.10      Landlord acknowledges that portions of the Demised Premises may be occupied and used by Tenant, its employees and invitees during the performance of the Landlord’s Work. Accordingly, Landlord shall, and shall cause it contractors, to use best efforts to minimize noise, dust and other conditions which may adversely affect Tenant, its invitees, employees, and workers, to take every reasonable precaution against injuries to persons or damage to property, and to provide for the safety of persons at the Demised Premises. Landlord shall be responsible for the initiation, maintenance and supervision of reasonable safety precautions and programs in connection with the performance of the Lease Work. Landlord and Tenant agree to cooperate with each other in accordance with good construction practice and scheduling to permit the performance of the Landlord Work while Tenant shall be occupying the Demised Premises. If reasonably required by Tenant, Landlord shall perform necessary portions of the Landlord Work during other than business hours on business days, at Landlord’s sole cost and expense. Landlord shall initiate, maintain and coordinate with Tenant reasonable safety precautions in connection with the performance of the Landlord’s Work, which Tenant agrees it shall obey and follow.

 

Section 6A.11.       Landlord agrees to name, or cause its contractors to name, the City of New York as an additional insured on their respective policies of public liability insurance, and furnish the Tenant with certificates of insurance to that effect.

 

Section 6A.12      Landlord and Tenant shall each designate a representative who shall serve as its representative during the design and construction (each, a “Construction Rep”) of the Landlord’s Work. Landlord’s Construction Rep shall initially be Mr. Jacob Schwimmer, and Tenant’s Construction Rep shall initially be Mr. Glenn Pymento. All written consents and approvals given by Tenant’s Construction Rep, on behalf of Tenant, or by Landlord’s Construction Rep, on behalf of Landlord, concerning the design and construction of the Landlord’s Work shall be valid and binding on Landlord or Tenant, as applicable.

 

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Notices to Tenant during the design and construction phases, and correspondence to Tenant’s Construction Rep, shall be sent to:

 

Mr. Glenn Pymento

Assistant Commissioner

Design and Project Management, Asset Management

Department of Citywide Administrative Services

1 Centre Street, 20th Floor

New York, NY 10007

Tel. No. (212) 386-0290

Fax. No. (212) 313-3489 with a copy to:

 

Mr. Christopher Nesterczuk

Acting Assistant Commissioner

Acquisitions and Leasing, Asset Management

Department of Citywide Administrative Services

1 Centre Street, 20th Floor

New York, New York 10007

Tel. No. (212) 386-0363

Fax. No. (646) 350-6204

 

Notices to Landlord during the design and construction phases, and correspondence to Landlord’s Construction Rep, shall be sent to:

 

Michael Conard, AIA

Design & Urbanism Architectural, LLC

2 West 67st Street

New York, New York 10023

Tel. No. (212) 580-2123

Fax. No. (212) 580-3190, with a copy to

 

Mr. Jacob Schwimmer

Security Equity LLC

4611 12 th Avenue

Brooklyn, New York 11219

Tel. No. (212) 795-9300

Fax No. (718) 504-4324

jschwimmer@heightsmgmt.com

 

Section 6A.13      (a)    If Landlord and Tenant are unable to agree whether or not the Landlord’s Work has been Substantially Completed and such dispute is referred to arbitration pursuant to Section 6A.06, the dispute may be resolved by arbitration conducted in the City of New York in accordance with the provisions of Section 6A.13(b), and judgment upon the award rendered may be entered in any court of competent jurisdiction.

 

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(b)          The party hereto desiring to arbitrate a dispute pursuant to this Section 6A.13 shall give notice (the “Dispute Notice” ) to that effect to the other party, and such dispute shall be submitted to a single disinterested arbitrator selected in accordance with the then prevailing expedited commercial arbitration rules of the American Arbitration Association ( “AAA” ), provided that the arbitrator selected shall have at least fifteen (15) years of recent experience in the management of comparable interior construction projects in New York City. The arbitration shall be conducted at the offices of the AAA in Manhattan in accordance with the then prevailing expedited commercial arbitration rules of the AAA. The decision of the arbitrator shall be conclusive upon the parties. The arbitrator’s fee shall be borne equally by the parties and each party shall bear the costs of its own counsel, witnesses and presentation of evidence. The arbitrator shall have no power to vary or modify any of the provisions of this Lease.

 

ARTICLE 6 B

 

ALTERATIONS AND IMPROVEMENTS- TENANT’S WORK

 

Section 6B.01      Landlord and Landlord’s agents and representatives have made no representation or promises with respect to the Building, the Land, or the Demised Premises, except as otherwise expressly set forth herein, and no rights, easement, or licenses are acquired by Tenant by implication or otherwise except as expressly set forth herein. Tenant shall accept possession of the Demised Premises in the condition which shall exist on the Commencement Date “as- is”; and Landlord shall have no obligation to perform any work or make any installations in order to prepare the Demised Premises for Tenant occupancy, except that, following the Commencement Date, Landlord shall perform the Tenant’s Work in accordance with provisions of this Article 6B.

 

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Section 6B.02       Upon Tenant’s written request to Landlord ( “Tenant’s Request for Lease Work” ), Landlord agrees, prior to the Construction Commencement Date (as defined in Article 6B), to prepare Final Plans (as defined in this Article 6B) and, prior to the “Substantial Completion Date (as defined in this Article 6B), to perform the alterations and improvements to the Demised Premises and the Building. The work shall be based upon (i) preliminary plans (“ Preliminary Plans ”) prepared by the Architect (as hereinafter defined) based upon preliminary program information provided by Tenant (“Preliminary Program Information” ), and shall consist of alterations and improvements described in the scope of work (“ Tenant’s Scope of Work ”) to be prepared by D&PM (the “Tenant’s Work ”). Landlord shall perform and initially pay for the Tenant’s Work, subject to Tenant’s reimbursement of such costs as hereinafter described.

 

Section 6B.03       Within fifteen (15) business days after Landlord’s receipt of (1) Tenant’s request for Tenant’s Work, and (2) the Preliminary Program Information, Landlord shall solicit and deliver bids from three (3) architects (subject to written pre- approval by Tenant, not be unreasonably withheld) for the cost of providing all the required architectural and engineering services (in accordance with the professional services requirement document in the DCAS Guide for Design Consultant, July 2000 rev. and Appendix revised October 2009 (the “Guide for Design Consultant” ), a copy of which Landlord acknowledges having received, for the Tenant’s Work. The bids shall set forth the cost and the itemization of the selected architect’s (hereinafter the “Architect” ) work as described below. Within five (5) business days thereafter, D& PM shall submit to Landlord either written (a) approval of one of the three (3) bids or (b) disapproval of all bids and the reasons therefor. As part of the review process, D& PM shall, within five (5) business days, meet with the proposed architects and their subconsultants to resolve discrepancies in their scope of services and unit prices. In case of disapproval of all three bids, Landlord shall solicit bids from at least three (3) new architects, reasonable acceptable to D& PM, in which case the procedures and time frames with respect to the initial bids shall apply to such additional bids and bidders. The process above shall be repeated until a selection of an architect is made.

 

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Section 6B.04      (a) Within forty (40) business days from D&PM’s written approval of Landlord’s Architect, Landlord shall cause the Architect to prepare the Preliminary Plans and thereafter to prepare final architectural and engineering plans and specifications (the “Final Plans ). The Preliminary Plans must be (i) engineering and architecturally complete; (ii) clearly distinguish Landlord’s Work from Tenant’s Work; (iii) coordinated with existing Building conditions and facilities; (iv) conform to all New York City codes and all other applicable federal, state and local laws, regulations, codes and requirements (including, but not limited to, the terms of the Guide for Design Consultant; and (v) based upon the Preliminary Program Information provided by Tenant in order to create a complete set of construction documents. In addition, Landlord’s Architect shall prepare a phasing plan for the Tenant’s Work which schedules the Tenant’s Work in phases to suit both Landlord and Tenant ( Phasing Plan ). Landlord and Tenant agree to cooperate with each other in accordance with good construction practice and scheduling to permit the performance of the Tenant Work while Tenant shall be occupying the Demised Premises. If reasonably required by Tenant, Landlord shall perform necessary portions of the Tenant’s Work during other than business hours on business days. Landlord shall initiate, maintain and coordinate with Tenant reasonable safety precautions in connection with the performance of the Tenant’s Work, which Tenant agrees it shall obey and follow. The Phasing Plan must (i) allow for existing personnel in the Demised Premises to experience minimal interference while Landlord’s contractor commences and completes construction of the Tenant’s Work; (ii) provide a legal means of egress for all building occupants during the construction of the Lease Work; and (ii) maintain all Building services to the Demised Premises during the construction of the Tenant’s Work.

 

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(b)           Within fifteen (15) business days after receipt by D & PM of the Preliminary Plans, D & PM will review and either approve or disapprove the Preliminary Plans. In the event D & PM shall not approve such Preliminary Plans, it shall indicate in writing the corrections to the Preliminary Plans required, before such approval can be furnished. Thereafter, Landlord shall resubmit revised Preliminary Plans within fifteen (15) business days, and D & PM shall approve or disapprove such revised Preliminary Plans and indicate whatever corrections it requires within ten (10) business days after its receipt thereof; following which Landlord shall within ten (10) business days of its receipt of corrections required by D & PM fully complete the revision of the Preliminary Plans based on the requested corrections and furnish D & PM with a complete set thereof for its approval. If the revision of the Preliminary Plans does not meet D &PM’s approval, then the process set forth in the preceding sentence shall repeat until all revisions have been fully corrected. After the second round of approvals, any comments shall be limited to Tenant’s initial comments with respect to each submission or revision by the Architect unless the Architect has not addressed Tenant’s earlier comments or has submitted corrections when addressing Tenant’s previous comments that gave rise to Tenant’s additional comments.

 

(c)           Within ten (10) business days following D & PM’s approval the Preliminary Plans (the “Final Plans” ), Landlord shall file the Final Plans with the New York City Department of Buildings (the “Buildings Department” ), the New York City Fire Department (the “Fire Department” ) and all other governmental authorities having jurisdiction over the Work (collectively, the “Governmental Authorities” ).

 

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Section 6B.05      Within twenty (20) Business Days after D&PM’s approval of the Final Plans, Landlord shall obtain and submit to D&PM copies of properly completed D&PM supplied cost estimate forms, and prior to the commencement of the Tenant’s Work, Landlord shall submit to D&PM a copy of the building permit and any such other Building Department administrative approvals. The cost estimate forms shall be completed by the bidders from the list of bidders reasonably pre-approved by D&PM, which cost estimates in the aggregate shall not exceed a maximum dollar amount to be determined by Tenant upon Tenant’s Request for Lease Work (the “Not to Exceed Amount” ). Landlord shall indicate in detail the proposed cost of the Tenant’s Work (the “Estimated Tenant Work Cost” ), after Landlord shall have (i) obtained three (3) competitive sealed bids from three (3) general contractors from a list of preapproved bidders (that are subject to D&PM’s reasonable prior approval) to be opened in the presence of D± and (ii) selected the lowest, responsive bid. If the Estimated Tenant Work Cost is estimated by any general contractor to be in excess of the Not to Exceed Amount, Tenant shall have the right to engage in value engineering and revise the scope of work and/or the selected materials and finishes to be performed and incorporated into the Demised Premises, so as to cause the Estimated Tenant Work Cost not be in excess of the Not to Exceed Amount, or, in the alternative, may secure additional funds to cover the overage.

 

The actual Tenant Work Cost shall consist of all costs and expenses (excluding construction loan interest and related financing costs) charged to Landlord for:

 

(a)          Architect’s services fees and/or expediters fees to the extent authorized in a writing signed by D & PM for preparation of the Final Plans for;

 

(b)          the filing fees for the submission of the Final Plans relating solely to the Tenant Work to the appropriate governmental authorities for approval;

 

(c)          the performance of all items of Tenant Work in accordance with the Final Plans; and

 

(d)          one (1) general contractor’s general conditions fee and one (1) contractor’s over-head and profit to the extent indicated in contractor’s bid only; Landlord shall not be entitled to be paid an administrative or management fee for the performance of the Tenant Work. There shall be no double payment by Tenant of any items included in the Tenant Work Cost, including any components of overhead and profit and general contractors’ fees.

 

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The Tenant Work Cost shall not include the preparation of plans and specifications for the Landlord’s Work, “as built” drawings relating to the Landlord’s Work or the expediters’ fees and filing fees for submissions to the appropriate governmental authorities for approval relative to the Landlord’s Work.

 

Notwithstanding the foregoing, the Estimated Tenant Work Cost may be further modified at a later date by Tenant requesting changes beyond the Final Plans, provided that with respect to such changes Tenant and Landlord shall have agreed as to nature, amount and cost thereof; provided, however, in no event shall the Estimated Tenant Work Cost be greater than the Not to Exceed Amount.

 

D&PM may, within ten (10) Business Days of its receipt of Landlord’s notice of the Estimated Tenant Work Cost, approve or disapprove of the Estimated Tenant Work Cost. If C&PM disapproves, it will meet with Landlord within five (5) Business Days to determine an agreed upon Estimated Tenant Work Cost. As part of that process D&PM will meet with the lowest bidder to resolve any discrepancies in unit prices and quantities. In the event Landlord and D&PM are unable to resolve their differences and agree upon the Estimated Tenant Work Cost, Landlord shall solicit bids from at least three (3) new general contractors designated by D&PM in which case the procedures and time frames with respect to the bids shall apply to such additional bids and bidders. Within five (5) Business Days from approval of the Estimated Tenant Work Cost and prior to commencing construction. Landlord will submit a copy of the Building Permit to D&PM.

 

Section 6B.06 (a)          Landlord represents and warrants that it has the financial capability and/or adequate financing to complete the Tenant’s Work in the time frames set forth herein. Within ten (10) Business Days of Tenant’s approval of the Estimated Tenant Work, Landlord shall deliver to Tenant evidence and assurances satisfactory to Tenant of Landlord’s financial capability to complete the Tenant’s Work. Landlord’s misrepresentation with regard to its ability to provide or obtain financing in an amount sufficient to complete the Tenant’s Work shall constitute material breach of the terms of this Lease.

 

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(b)          The actual Tenant Work up to the Not to Exceed Amount shall be paid for initially by Landlord. Landlord shall have a continuing obligation to make regular periodic payments to its contractors at approximately thirty (30) day intervals in amounts reasonably commensurate with the amount of progress towards Substantial Completion of the Work from the start of work up to the Final Substantial Completion Date of the Lease, to ensure diligent and timely completion of the Tenant’s Work.

 

Section 6B.07 Landlord agrees, within ten (10) Business Days after its receipt of Tenant’s approval of the Estimated Tenant Work Cost, to commence the Tenant’s Work (the “Construction Commencement Date”).

 

(1)         Landlord and Tenant hereby acknowledge that it is the intent of the parties that Landlord will perform the Tenant’s Work in phases (each, a “Phase”) which shall be done on a floor-by- floor or partial floor basis, including that portion of the Tenant’s Work that is necessary to be completed for initial occupancy or the re-occupancy by Tenant of such Phase, as applicable, all in accordance with the Phasing Plan.

 

(2)         Landlord shall give Tenant at least thirty (30) days advance notice of the date (a “Phase Vacate Date”) that the Landlord desires Tenant to vacate a Floor or portion of the Floor constituting a Phase of the Demised Premises, if such Floor is being occupied by Tenant, so that Landlord may perform such Phase of the Tenant’s Work. Tenant shall vacate such floor or partial floor and remove all personal property, furniture, movable equipment and all other property of Tenant from such floor or partial floor on or before the relevant Phase Vacate Date. From the date that Tenant actually vacates each floor or partial floor, Landlord shall Substantially Complete (as defined herein below) the relevant Phase within the construction time period provided in the Phasing Plan.

 

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(3)         Each Phase of the Tenant’s Work shall be deemed “Substantially Complete” and Substantial Completion” shall be deemed to have occurred on the date upon which all of the following shall have occurred with respect to the relevant Phase (the “Phase Substantial Completion Date” ): (i) the relevant Tenant’s Work as indicated in the Final Plans such Phase shall have been completed to the extent that Tenant may occupy and use the floor or partial floor in that Phase, as intended by this Lease, except for completion of minor aspects of construction or mechanical adjustment which do not materially interfere with Tenant’s use of the floor or partial floor in that Phase, as intended by this Lease; and (ii) Landlord shall have delivered to Tenant all of the Phase Sign-Offs (as hereinafter defined) for such Phase, The Phase Substantial Completion Date for the final Phase of the Tenant’s Work shall be the Final Substantial Completion Date (as hereinafter defined) of the Tenant’s Work.

 

(4)         Landlord shall send Tenant written notice (a “Phase Substantial Completion Notice” ) setting forth the date upon which Landlord reasonably anticipates that the Phase Substantial Completion Date will be achieved for such Phase. Such notice from Landlord must include all items listed under subsection (7) (a) below. In the event that Landlord shall have given a Phase Substantial Completion Notice, D&PM shall use reasonable efforts to certify or deny certification of the Substantial Completion of that Phase within seven (7) Business Days after D&PM receives written notice from Landlord of Landlord’s determination that such Phase is Substantially Complete, If D&PM shall determine that Substantial Completion of such Phase has not been achieved, Tenant shall send Landlord notice thereof which notice shall include a complete and detailed list of reasons that the Substantial Completion of such Phase has not been achieved. Thereafter, upon the correction of the deficiencies in the Lease Work described in such Tenant’s notice, the foregoing procedure for determining Substantial Completion of such Phase shall be repeated.

 

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(5)         The final Phase of Work and the entire Tenant’s Work shall be deemed “ Substantially Complete ” and “ Substantial Completion ” of the Tenant’s Work shall occur on the date (the “ Final Substantial Completion Date ”) upon which all of the following shall have occurred: (i) all of the Tenant’s Work (including the ACM Work), shall have been completed to the extent that Tenant may occupy and use the entire Demised Premises, as intended by the Lease, except for completion of minor aspects of construction or mechanical adjustment which do not materially interfere with Tenant’s use of the Demised Premises; and (ii) Landlord shall have delivered to Tenant all of the Final Sign-Offs (as hereinafter defined). Landlord shall, prior to the Final Substantial Completion Date of the Tenant’s Work, remove all Building Code and Fire Code violations now pending or which may be placed against the Demised Premises, except those violations caused by Tenant’s breach of the terms of the Lease, which violations Tenant shall have the responsibility to remove.

 

(6)         Landlord shall send Tenant written notice (the “ Final Substantial Completion Notice ”) including the Final Sign-Offs (as hereinafter defined) setting forth the date upon which Landlord reasonably anticipates that the Final Substantial Completion Date of the Tenant’s Work will occur. In the event that Landlord shall have given Tenant the Final Substantial Completion Notice including the Final Sign-Offs, D&PM shall use reasonable efforts to certify or deny certification of the Substantial Completion of the Tenant’ s Work within seven (7) Business Days after D&PM receives written notice from Landlord of Landlord’s determination that Substantial Completion of the Tenant’s Work has been achieved. If D&PM shall determine that Substantial Completion of the Tenant’s Work not been achieved, Tenant shall send Landlord notice thereof which notice shall include a complete and detailed list of reasons Substantial Completion of the Tenant’s Work has not been achieved. Thereafter, upon the correction of the deficiencies in the Tenant’s Work described in such Tenant’s notice, the foregoing procedure for determining the Final Substantial Completion Date for the Tenant’s Work shall be repeated.

 

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(7)         For purposes of this subsection 6B.07, the following terms shall have the following meanings:

 

(a)          “ Phase Sign-Offs shall mean; (i) all applicable Buildings Department inspection sign-offs (including but not limited to Buildings Department Post Permit TR-1, Equipment Use Permits, elevator inspections and sign-offs, and plumbing sign-offs, and compliance with the terms and provisions of Article 26 of this Lease regarding ACM insofar as the same relate to the Phase or Phases in question) which may be necessary in connection with the relevant Phase; provided, however, that Landlord shall not be required to obtain the Buildings Department electrical sign-off or Fire Department inspection sign-offs in connection with any Phase of the Tenant’s Work, provided that (x) Landlord has timely applied for such sign-offs and timely responded to any objections raised, and (y) the Architect or Landlord’s engineer certifies to the best of its knowledge, having exercised due diligence, the Phase of the Lease complies with the Buildings Department and the Fire Department requirements (with respect to items for which Buildings Department and Fire Department shall accept self- certification) and that the fire alarm system is operational as designed in the Final Plans insofar as it relates to the Phase(s) in question (provided, however, Landlord shall remain responsible for a fully functioning fire alarm system until Landlord receives final Fire Department sign- offs); and (ii) a certified air balancing report for the Phase(s) in question has been approved by Landlord’s engineer as being in conformance with the Final Plans.

 

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(b)          “ Final Sign-Offs ’” shall mean: (i) all applicable Buildings Department and Fire Department inspection sign-offs for all phases of the Tenant’s Work (including but not limited to Buildings Department Post Permit TR-1, Equipment Use Permits, elevator use permits, electrical and plumbing sign-offs, Fire Department and elevator inspections and sign-offs) and compliance with the terms and provisions of Article 26 of this Lease regarding ACM) which may be necessary in connection with the of the Tenant’s Work (and not previously obtained by Landlord in connection with the completion of any Phase); (ii) a temporary or final new or amended Certificate of Occupancy, if and to the extent required as a result of the Tenant’s Work; (iii) “as built” construction drawings for Tenant’s Work in both hard copy and Auto Cad versions; (iv) a certified air balancing report for the Demised Premises has been approved by Landlord’s engineer as being in conformance with the Final Plans; and (iv) a certification from the Architect or engineering consultant that a direct meter to the Demised Premises has been correctly installed.

 

(8)         D&PM shall each fully cooperate with Landlord in order to facilitate Landlord’s obtaining the Phase Sign-Offs and the Final Sign-Offs, as the case may be, provided Landlord has made timely filings. In the event that any Certificate of Occupancy and/or other sign-offs which may be delivered by Landlord to Tenant in connection with the Tenant’s Work are temporary in nature, Landlord will keep such sign-offs all in full force and effect and will be solely liable for all costs in connection therewith until Landlord obtains any necessary final Certificates of Occupancy or other final sign-offs, as the case may be.

 

Section 6B.08         Within ten (10) Business Days after the Final Substantial Completion Date of the Tenant’s Work, Landlord shall provide Tenant with an invoice (the “Tenant’s Work Invoice” ) for the Tenant’s Work Cost, as hereinafter defined. The Tenant’s Work Cost shall be repaid in full by Tenant to Landlord within forty-five (45) days after the later to occur of (i) the Final Substantial Completion Date of the Tenant’s Work or (ii) Tenant’s receipt of Landlord’s invoice for the Tenant Work Cost. The Tenant Work Cost may, in the discretion of the Comptroller of the City of New York, also be post-audited by the Comptroller.

 

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Section 6B.09      In the event Landlord (i) fails to commence construction of the Tenant’s Work or before the Construction Commencement Date and/or pursue completion of same diligently and in a continuous manner subject to Tenant Delay, then Tenant shall give Landlord written notice (hereinafter referred to as “ Delay Notice ”) advising Landlord of its failure. If Landlord does not cure its failure within ten (10) Business Days from the date of the Delay Notice, or if such default cannot be completed within such ten (10) Business Day period and Landlord fails to act diligently, and continuously without interruption to cure such default, Tenant, in addition to any other remedy it may have, at its option may; (i) as agent of the Landlord commence and/or perform the Tenant’s Work and deduct the reasonable cost thereof from the rent to become due and payable pursuant to Article 2 hereof and/or the reimbursable Tenant Work Cost; or (ii) terminate this Lease on ten (10) Business Days written notice to Landlord; provided, however, if Landlord shall thereafter commence and diligently pursue completion of the Tenant’s Work prior to the expiration of such ten (10) Business Day period, Tenant’s termination notice shall be deemed null and void. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant elects to perform the Tenant’s Work as Landlord’s agent, it shall receive a rent credit within twenty (20) Business Days from the date that Landlord receives such Delay Notice equivalent to one (1) day of free rent for the Demised Premises for each day the commencement (prorated for the Phase(s) to which it applies) of each Phase of the Tenant’s Work was delayed or Landlord failed to pursue diligent completion of the Tenant’s Work in a continuous manner.

 

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Section 6 B.10         In the event Landlord, after commencing the Tenant’s Work, fails to complete each Phase of the Work, within the construction time period provided in the Phasing Plan, fails to achieve Substantial Completion of the Tenant’s Work in its entirety within the time period set forth in the Phasing Plan for completion of the Tenant’s Work, subject to Force Majeure and Tenant Delay, Tenant may give Landlord written notice (hereinafter referred to as the “Completion Delay Notice ”) advising the Landlord of its failure to achieve timely Substantial Completion of a Phase, or Substantial Completion of the Tenant’s Work. If Landlord fails to achieve Substantial Completion of a Phase, or Substantial Completion of the Tenant’s Work, within thirty (30) Business Days from the date that Landlord receives such Completion Delay Notice, or if such Tenant’s Work cannot be completed within said thirty (30) Business Days and Landlord fails to act diligently, and continuously without interruption to complete the Tenant’s Work within a reasonable time thereafter, Tenant, in addition to any other remedy it may have, may: (i) perform the Tenant’s Work and deduct the reasonable cost thereof from the rent to become due and payable pursuant to Article 2 hereof and/or the reimbursable Tenant Work Cost; or (ii) terminate the Lease on ten (10) Business Days written notice to Landlord; provided, however, if Landlord shall thereafter commence and diligently pursue completion of the Tenant’s Work prior to the expiration of such ten (10) Business Day period, Tenant’s termination notice shall be deemed null and void. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant provides written Completion Delay Notice or elects to perform the Tenant’s Work as Landlord’s agent, it shall receive a rent credit within twenty (20) Business Days from the date that Landlord receives such Completion Delay Notice equivalent to one (1) day of free rent (prorated for the Phase(s) to which it applies) for each day Landlord has delayed the applicable Phase Substantial Completion Date, the Final Substantial Completion Date of the Tenant’s Work. Either party may refer a dispute under this Section 6B.10 to expedited arbitration in accordance with the procedures set forth in Section 6B.18. For purposes of this Article 6B, a “Tenant Delay” shall mean any delay of one or more days (not due to unavoidable delays) that continues after written notice from Landlord and Tenant’s failure to cure within a five (5) business day period, which results in Landlord’s inability to (x) timely meet any applicable time frames under this Lease, (y) timely commence the performance of Tenant’s Work, or (z) timely Substantially Complete the Tenant’s Work due to any of the following: (1) the unreasonable disapproval by Tenant of bids from contractors more than three (3) times; (2) any written request by Tenant that delays Landlord in proceeding with any segment or part of the Tenant’s Work; (3) any material changes or requests for material changes by Tenant to the approved Final Plans; (4) any failure by Tenant to timely respond to submissions and timely complete its review and reasonable approval of Final Plans pursuant to the time frames (provided that Final Plan submission is complete) and other provisions set forth herein or to timely deliver any other approvals or other information required to be delivered by Tenant to Landlord or its agents as provided in this Lease; (5) any delay in the selection of materials to be made by Tenant; (6) any failure by Tenant to respond reasonably and in good faith or within the time frames set forth herein or to respond with reasonable specificity where required herein; or (7) interference or delay in the performance of the Tenant’s Work by Landlord or its contractor, subcontractor, vendor, supplies or materialmen attributable to the performance of any work in the Demised Premises by Tenant or Tenant’s contractors and/or vendors. Tenant Delay (s) shall extend the time for Landlord’s performance of said obligations by the amount of time equal to said Tenant Delays on a day for day basis.

 

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Section 6B.11      In the event the applicable Phase Substantial Completion Date, Final Substantial Completion Date of the Tenant’s Work has occurred, then with respect to minor details of construction or decoration which do not materially, adversely affect Tenant’s use of a Floor or the entire Demised Premises, as applicable, Tenant shall submit to Landlord a written list of such minor details and any as-built drawings which it deems to be incomplete (hereinafter the “Punch List ”). Landlord shall within thirty (30) days of receipt of the Punch List, commence performance and diligently proceed with continuity to complete the incomplete Lease Work. In the event Landlord fails to commence and complete said Tenant’s Work within thirty (30) days of receipt of the Punch List, or if the item cannot reasonably be commenced or completed within said thirty (30) day period, if Landlord shall not commence and complete performance as promptly as practicable thereafter, Tenant, in addition to any other remedy it may have, may on at least ten (10) Business Days’ prior written notice to Landlord (i) as agent for the Landlord, perform said work and deduct the reasonable cost thereof from the Base Rent due or that may become due and owing under this Lease or (ii) may withhold from Base Rent an amount equal to 200% of the good faith estimated cost to repair and/or complete such Punch List item until Landlord performs such Tenant’s Work to the reasonable satisfaction of Tenant.

 

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Section 6B.12       Prior to Substantial Completion of the Lease Work, upon reasonable prior written notice from Tenant to Landlord, Landlord shall permit Tenant to (i) inspect the progress of construction of the Tenant’s Work (ii) have its telephone and electronic data equipment installed in the Demised Premises and (iii) do such work as Tenant may require including moving its furniture, provided any of the above does not substantially interfere with Landlord’s contractors making improvements to the Demised Premises.

 

Section 6B.13       With respect to Tenant’s repair obligations, upon completion of the Tenant’s Work, Landlord shall assign to Tenant the beneficial interest in all warranties and guarantees received by Landlord from contractors and materialmen engaged in the performance of the Tenant’s Work as well as the right to enforce any contracts made with such contractors and materialmen. Landlord hereby appoints Tenant as its attorney-in-fact to institute suit in Landlord’s name and for Tenant’s benefit and agrees to cooperate fully with Tenant in the event that Tenant seeks to enforce its rights with respect to the warranties and guarantees.

 

Section 6B.14      Notwithstanding anything to the contrary in Article 13 hereof, Landlord shall be solely responsible for the performance and cost of all repairs resulting from defects of materials and workmanship in construction and/or alterations and improvements of the Demised Premises or of the Property.

 

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Section 6B.15      Landlord acknowledges that portions of the Demised Premises may be occupied and used by Tenant, its employees and invitees during the performance of the Tenant’s Work. Accordingly, Landlord shall, and shall cause it contractors, to use best efforts to minimize noise, dust and other conditions which may adversely affect Tenant, its invitees, employees, and workers, to take every reasonable precaution against injuries to persons or damage to property, and to provide for the safety of persons at the Demised Premises. Landlord shall be responsible for the initiation, maintenance and supervision of reasonable safety precautions and programs in connection with the performance of the Tenant’s Work.

 

Section 6B.16.          Landlord agrees to name, or cause its contractors to name, the City of New York as an additional insured on their respective policies of public liability insurance, and furnish the Tenant with certificates of insurance to that effect.

 

Section 6B.17      Landlord and Tenant shall each designate a representative who shall serve as its representative during the design and construction (each, a “Construction Rep ”) of the Work. Landlord’s Construction Rep shall initially be Mr. Jacob Schwimmer, and Tenant’s Construction Rep shall initially be Mr. Glenn Pymento. All written consents and approvals given by Tenant’s Construction Rep, on behalf of Tenant, or by Landlord’s Construction Rep, on behalf of Landlord, concerning the design and construction of the Lease Work shall be valid and binding on Landlord or Tenant, as applicable.

 

Notices to Tenant during the design and construction phases, and correspondence to Tenant’s Construction Rep, shall be sent to:

 

Mr. Glenn Pymento

Assistant Commissioner

Design and Project Management, Asset Management

Department of Citywide Administrative Services

1 Centre Street, 20th Floor

New York, NY 10007

Tel. No. (212) 386-0290

Fax. No. (212) 313-3489 with a copy to:

 

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Mr. Christopher Nesterczuk

Acting Assistant Commissioner

Acquisitions and Leasing, Asset Management

Department of Citywide Administrative Services

1 Centre Street, 20th Floor

New York, New York 10007

Tel No. (212)386-0363

Fax. No. (646) 350-6204

 

Notices to Landlord during the design and construction phases, and correspondence to Landlord’s Construction Rep, shall be sent to:

 

Michael Conard, AIA

Design & Urbanism Architectural, LLC

2 West 67st Street

New York, New York 10023

Tel. No. (212)580-2123

Fax. No. (212) 580-3190, with a copy to

 

Mr. Jacob Schwinmer

Security Equity LLC

4611 12 th Avenue

Brooklyn, New York 11219

Tel. No. (212) 795-9300

Fax No. (718) 504-4324

j schwimmer @ hei ghtsmgmt. com

 

Section 6B.1 8 (a)    If Landlord and Tenant are unable to agree whether or not the Tenant’s Work has been Substantially Completed and such dispute is referred to arbitration pursuant to Section 6B.10, the dispute may be resolved by arbitration conducted in the City of New York in accordance with the provisions of Section 6B. 18(b), and judgment upon the award rendered may be entered in any court of competent jurisdiction.

 

(b)    The party hereto desiring to arbitrate a dispute pursuant to this Section 6B.18 shall give notice (the “Dispute Notice ”) to that effect to the other party, and such dispute shall be submitted to a single disinterested arbitrator selected in accordance with the then prevailing expedited commercial arbitration rales of the American Arbitration Association (“AAA”), provided that the arbitrator selected shall have at least fifteen (15) years of recent experience in the management of comparable interior construction projects in New York City. The arbitration shall be conducted at the offices of the AAA in Manhattan in accordance with the then prevailing expedited commercial arbitration rules of the AAA. The decision of the arbitrator shall be conclusive upon the parties. The arbitrator’s fee shall be borne equally by the parties and each party shall bear the costs of its own counsel, witnesses and presentation of evidence. The arbitrator shall have no power to vary or modify any of the provisions of this Lease.

 

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ARTICLE 7

 

CERTIFICATE OF OCCUPANCY; COMPLIANCE WITH LAWS

 

Section 7.01              Landlord shall deliver to DC AS a Certificate of Occupancy or other sufficient indicia of legality for use of the Demised Premises for the purposes set forth in this Lease. If the Certificate of Occupancy is not a permanent Certificate of Occupancy, such temporary Certificate of Occupancy shall be timely renewed by Landlord, at Landlord’s sole cost and expense, without lapse, until a permanent Certificate of Occupancy has been issue and filed.

 

Section 7.02 (a)      Landlord, at its expense, agrees to obtain all permits necessary to perform and complete Landlord Work and the Tenant Work and to comply with comply with all requirements, including, without limitation, rules, laws, regulations and orders of Federal, State and local authorities and of any board of fire underwriters having jurisdiction over the Demised Premises, the Building, or the Land, including, without limitation, the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq., as amended, (“ ADA ”) (collectively, the “Requirements” ) during the Term hereof or renewal term, if any, With respect to the ADA and regulations promulgated pursuant thereto, Landlord shall comply with and perform both the Landlord’s obligations, if any, as a public accommodation pursuant to Title III of the ADA and the Tenant’s obligation as a public entity pursuant to Title II of the ADA for the Demised Premises as set forth in the Landlord’s Work performed in accordance with Article 6A hereof. Landlord shall. Landlord’s sole cost and expense, remove all violations which may be placed against the Demised Premises or the real property of which they form a part, including but not limited to Building Code and Fire Code violations, within a commercially reasonable time following discovery of same, and subject to Force Majeure, and except those violations caused by Tenant’s breach of the terms of this Lease or those Tenant is required to comply with under the terms of this Lease.

 

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(b)           In the event Tenant violates any Requirements and fails to cure such violations, Landlord may, in its sole discretion, cure such violations at Tenant’s sole cost and expense, as Additional Rent, which shall be payable by Tenant within thirty (30) days after receipt of Landlord’s bill therefor supported by appropriate documentation. In order to avail itself of the foregoing right (other than in the event of any emergency or hazardous condition), Landlord must give Tenant thirty (30) days’ written notice of its intention to cure during which period Tenant may cure such violations. Notwithstanding the foregoing, either party may contest by appropriate proceedings prosecuted diligently and in good faith, the legality or applicability of any Requirement for which such party is responsible under this Article, provided such contest does not subject either party to prosecution for criminal offense, civil liability for damages or constitute a default under any Superior Lease or Superior Mortgage (as such terms are defined in Article 19 hereof) or cause the Demised Premises or any part thereof to be condemned or vacated. Landlord shall, within a reasonable time, remove all violations which are the Landlord’s responsibility to cure and which may be placed against the Demised Premises, the Building, or the Land, including, but not limited to Building Code and Fire Code violations, except those violations caused by Tenant’s breach of the terms of this Lease. In the event Landlord fails to comply with any of the provisions of this Article, Tenant, in addition to any other remedy it may have, shall have the same remedies available to it as set forth in Section 9.02 hereof, subject to the same conditions set forth in Section 9.02. Notwithstanding the foregoing. Tenant shall not be allowed to invoke any of the remedies set forth in Section 9.02 hereof if Landlord: (a) shall have commenced and is diligently and continuously performing its obligations under this Article, or (b) shall be contesting, in good faith, the legality or applicability of such Requirements with which Landlord shall not have complied. In the event of such contest, Landlord may defer such compliance with the particular Requirement so long as: (i) such deferral does not result in Landlord’s failure to provide the services to Tenant required under this Lease (other than a temporary disruption not lasting more than two business days) or otherwise breach Landlord’s covenants set forth in this Lease; and (ii) such contests do not subject Tenant or any of its agents or employees to civil liability for damages or criminal liability.

 

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(c)          In any governmental license or permit shall be required for the proper and lawful conduct of Tenant’s business, then Tenant, at its own cost and expense, shall promptly procure the same and thereafter (i) maintain such license or permit, (ii) submit the same for inspection by Landlord, and (ii) at all times comply with its terms and conditions.

 

ARTICLE 8

 

REAL ESTATE TAXES, ASSESSMENTS, WATER RATES,

 

SEWER RENTS

 

Section 8.01 (a)      Landlord shall pay all real estate taxes, assessments, water rates and sewer rents levied against the Building and Land for the tax lot where the Demised Premises is located or that may be liens thereon. Landlord shall provide Tenant with receipted bills, payment receipts or other back up information reasonably satisfactory to Tenant evidencing Landlord’s payment thereof within ten (10) business days after Tenant shall give notice to Landlord requesting such evidence of payment. Should Landlord fail to pay said taxes, assessments, water rates and sewer rents for a period in excess of thirty (30) days after the City of New York (the “City”) has sent Landlord notice of such nonpayment, then (for so long as Tenant is the City), Tenant, in addition to any and all other remedies it may have, may apply any rent due or that may become due and payable under this Lease to the payment of said taxes, assessments, water rates and sewer rents and so long as any of such items are unpaid and Tenant is the City, no action or process may be maintained by Landlord against Tenant for nonpayment of rent up to the amount due to the City.

 

(b)          If Landlord is in any other arrears on the Land, Building and/or Demised Premises, including but not limited to rents, mortgage payments and other payments or obligations, all of which are payable to the City, for a period in excess of thirty (30) days after the City has sent Landlord notice of such nonpayment, then (for so long as Tenant is the City) Tenant may apply any rent due or that may become due and payable under this Lease to the payment of such arrears and as long as such arrears are unpaid and Tenant is the City, no action or process may be maintained by Landlord against Tenant for nonpayment of rent up to the amount of such arrears.

 

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ARTICLE 9

 

LANDLORD’S AND TENANTS SERVICES

 

Section 9.01 (a)      Landlord shall provide hot and cold water, maintain in good working order and repair (including replacement, if necessary in Landlord’s reasonable opinion) existing elevator service, maintain the exterior and structure of the Building, the Building- wide- electrical, plumbing and mechanical systems, and the public entrances, public passageways, pubic doorways, public corridors, elevators (except as otherwise provided in this Lease), stairs, toilets (including supply and cleaning thereof) (expect as otherwise provided in this Lease) or other public parts of the Building, in each case exclusive of the Demised Premises and the hallways and waiting areas on floors of the Building on which there are no tenants other than Tenant (collectively, the “common areas” ) and perform regular monthly extermination services to the Demised Premises and the common areas. In addition, Landlord shall renovate the base Building heating, ventilating and air- condition systems ( “HVAC System” ) and maintain the HVAC System in good working order and repair (and if necessary replace) so as to provide to each floor of the Building sufficient HVAC capacity so as to, assuming all ductwork on each floor is in fully functional good working order and repair: (x) provide air conditioning during the summer months, with blinds drawn and windows closed, at an average inside temperature of seventy- five (75) degrees Fahrenheit dry bulb and a room relative humidity of fifty (50%) when the outside temperature is ninety-five (95) degrees Fahrenheit dry bulb coincident with a wet bulb temperature of seventy- five (75) degrees Fahrenheit; and (y) provide hearing during the winter months at an average inside design temperature of seventy- two (72) degrees Fahrenheit dry bulb when the outside temperature is zero (0) degrees Fahrenheit dry bulb with a wind velocity of fifteen (15) miles per hour; provided that: (i) occupancy does not exceed the proposed occupancy permissible under the Certificate of Occupancy, as it may be amended; (ii) there is no alteration of the current layout of the proposed new layout of the Demised Premises under Article 6 hereof; and (iii) Tenant complies with all other technical requirements of the HVAC System, of which Tenant has notice, and with all Fire Department regulations currently existing. Landlord’s only obligation hereunder shall be to provide HVAC service to each floor, it being understood and agreed that Landlord shall bear no responsibility for the distribution of HVAC throughout the floor. Temperatures supplied shall not exceed the New York State Energy Conservation Code with respect to the conservation of energy. Landlord shall not be liable to Tenant for any failure of any supplemental unit for any reason unless attributable to the negligence or wilful misconduct of Landlord, its agents, contractors and employees.

 

(b)          Tenant shall supply its own cleaning and rubbish removal services.

 

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(c)          The forgoing Landlord’s services shall be provided during the hours of 8:00 a.m. to 6:00 p.m., Monday through Friday inclusive, with New York City holidays, Federal holidays and union holidays excluded, except that passenger elevator service and access to the Demised Premises shall be provided twenty- four (24) hours per day, seven (7) days per week. Tenant shall be responsible for operating expenses related to Tenant’s requested after- hours services, as Additional Rent, which after- hours costs are set forth on Exhibit C attached hereto and made a part hereof. Such expenses shall consist of a direct pass- through of Landlord’s costs for heating, air- conditioning, elevator services and labor for on- site Building personnel outside normal business hours. Tenant shall reimburse Landlord therefor within thirty (30) days after receiving Landlord’s bill and supporting documentation.

 

(d)          Subject to the provisions of this Subsection (d), within sixty (60) days after the Commencement Date, Landlord, at its sole cost and expense, shall enter into a separate agreement for the maintenance of the roof and each of the Building Systems (hereinafter defined) of the Demised Premises (including, but not limited to, the HVAC System and elevators). Such agreement shall remain in effect during the Term. The maintenance agreement shall provide that the contractor perform all of the preventive maintenance measures set forth in Exhibit D , attached hereto and made a part hereof. The contractor shall adhere to industry wide standards in performing its obligation under the maintenance agreement. The maintenance agreement shall further provide that, within ten (10) business days after inspecting the roof or Building Systems, the contractors shall prepare a written report, at Landlord’s sole cost and expense, which report (a) summarize the contractor’s findings and reco m mendations for maintenance services, and (b) state where maintenance service has been rendered. The contractor shall submit a copy of the report to Landlord within fifteen (15) days after it is completed. Notwithstanding anything to the contrary contained herein, Landlord shall have the option, at its sole discretion, to not enter into a preventive maintenance contract so long as Landlord is maintaining the Building systems and roof in accordance with standards consistent with the prevailing industry practice in preventive maintenance. If Tenant reasonably believes that Landlord is not so maintaining the Building Systems or roof, Tenant shall send Landlord a thirty (30) business day notice specifying which industry standard it believes Landlord is not complying with. If Landlord disagrees with Tenant, Landlord shall notify Tenant within such thirty (30) business day period and Landlord and Tenant shall meet within five (5) business days thereafter to resolve their disagreement. If Landlord and Tenant fail to reach agreement within five (5) business days after such meeting, either party may submit the dispute to arbitration in accordance with Section 6.18. If the arbitration is favorable to Tenant and Landlord shall fail to comply within thirty (30) business days after the arbitration determination (or if the same cannot be complied with during such thirty (30) business day period and Landlord shall not be diligently and continuously prosecuting completion of such compliance), Tenant may send Landlord a written directive demanding that Landlord enter such preventative maintenance contract in accordance with Exhibit D with an outside contractor within thirty (30) business days thereafter. If Landlord fails to enter into any such preventative maintenance contract within such additional thirty (30) business day period, Tenant shall have the right to withhold one and one- half (1 1 / 2 ) times the average annual reasonable cost of such contract allocable to the Demised Premises from any Base Rent due and owing to Landlord until Landlord complies with Tenant’s directive to Tenant’s reasonable satisfaction, at which time all amounts so withheld shall be remitted to Landlord within thirty (30) business days.

 

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Section 9.02 (a)      In the event Landlord fails to commence, within three (3) business days after receipt of written notice by Tenant (subject to Force Majeure), and diligently prosecute to completion any work required by the provisions of this Article, Tenant may (i) perform the same and the deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease; provided that such work shall not affect any electrical, plumbing, HVAC, mechanical, elevator, life safety or other system serving the Building (collectively, the “ Building Systems ”) and shall be of a non-structural nature; or (ii) withhold an amount of rent due and owing Landlord in an amount equal to one and one- half (1 1 / 2 ) times the reasonably estimated cost of curing such default until Landlord shall have cured such default, at which time Tenant shall promptly pay to Landlord all such withheld rent.

 

(b)          Anything to the contrary notwithstanding, in the event the repairs to be performed by the Landlord are required to correct a hazardous condition or to end an emergency which renders the Demised Premises unsuitable for the use set forth herein, Tenant shall give Landlord, its agent, superintendent or the person designated to receive such notice, immediate notice in writing, personally or by certified mail, and Landlord, within twenty-four (24) hours of giving said notice, subject to Force Majeure, shall commence the repairs and diligently proceed with continuity to complete said work.

 

(c)          Subject to Force Majeure, in the event Landlord fails to commence within one (1) business day after Tenant has notified Landlord of said repairs (and thereafter diligently and continuously prosecute the same to completion) necessary to provide heat in the winter or air-conditioning in the summer, as the case may be, water or elevator service, and such failure shall be the result solely of the negligence or willful misconduct of Landlord, Landlord’s servants, agents, employees, or contractors after said notice, as aforesaid, Tenant may: (i) perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (ii) may withhold all rent due and owing to Landlord until Landlord performs such repairs to the reasonable satisfaction of Tenant, at which time Tenant shall promptly pay to Landlord all withheld rent.

 

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(d)          Notwithstanding anything in this Article to the contrary, in the event Tenant is unable to use any part or all of the Demised Premises in substantially the same manner as prior to such failure and ceases to use such part (or all) of t he Demised Premises for not less than seven (7) consecutive business days due to Landlord’s failure to perform such work as set forth in the three preceding paragraphs hereof (other than by reason of Force Majeure), the rent shall be reduced, on a per diem basis in the proportion in which the area of the portion of the Demised Premises which is so unusable and not used bears to the total area of the Demised Premises for each such day subsequent to the aforesaid seven (7) business days that such portion of the Demised Premises remains so unusable.

 

ARTICLE 10

 

TENANT’S ELECTRICTY

 

Section 10.01           Upon request by Tenant, Landlord shall, at Tenant’s sole cost and expense, install a direct electricity meter and any necessary wiring for such meter into the Demised Premises. If such direct meter in installed, Tenant shall pay for its electricity directly to the utility company. Until said direct meter is operable, Tenant shall pay Landlord for electricity on a rent inclusion basis at the rate of $3.50 per rentable square foot, subject to adjustment up or down as a result of any rate increases or decreases from the public utility company, or resulting from a survey conducted as follows: Either party shall have the right to conduct a survey by an independent electrical engineer or consultant and shall present the results to the other party. If the other party disputes the results of such survey, such party may retain another independent electric engineer or consultant, within thirty (30) days after receipt of such results, to conduct a survey and shall present the results to the other party within ten (10) days after receipt. If the party that does not conduct the first survey fails to conduct a survey and deliver the results within said timeframe, it shall be deemed to have accepted the first party’s results. If the parties shall be unable to agree on an adjustment after both parties have conducted a survey, either party may submit the dispute to arbitration in accordance with the procedures outlined in Section 6A.13 (b). All such surveys shall be based on the total square footage of 206,084. Tenant’s electricity payment provided for in this Article 10 shall be payable as an additional rent over and above the Base Rent and the parties agree that the amount thereof is not included in the Base Rent.

 

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ARTICLE 11

 

ALTERATIONS BY TENANT

 

Section 11.01 (a)    Provided Tenant complies with all Requirements, Tenant may make all alterations, decorations, installations, additions and improvement in and to the Demised Premises (collectively, “ Tenant’s Alterations ”) which are nonstructural and which do not impact on the Building Systems, do not materially adversely affect the value or utility of the Building, do affect the Certificate of Occupancy for the Building or the Demised Premises (as it may be amended), and do not affect any part of the Building other than the Demised Premises or require any alterations to be performed in or made to any portion of the Building or the Land other than the Demised Premises. If Tenant desires to make a structural alterations or one that impacts the Building Systems, it must submit to Landlord detailed plans thereof and obtain Landlord’s prior written consent and approval, which consent shall not be unreasonably withheld, conditioned or delayed; if Landlord consents, such alterations shall also be considered Tenant’s Alterations for all purposes of this Lease. Landlord may, as a condition to permitting a structural Tenant Alteration, require that upon termination of this Lease, Tenant shall, on Landlord’s request, restore the Demised Premises to their condition prior to the making of any “specialty items” of Tenant Alterations of which notice designating such alteration as a specialty item shall have been given by Landlord to Tenant upon the request for approval thereof. For purposes of this Lease, “specialty items” shall mean improvement to the Demised Premises that will not, in Landlord’s reasonable judgment, be useable by subsequent tenants of the Demised Premises but shall not include any of the work performed pursuant to Article 6.

 

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(b)          All property of whatever kind or nature in or on the Demised Premises owned, installed or paid for by Tenant, including, but not limited to, personal property, furniture, equipment, furnishings and trade fixtures (collectively, “Tenant’s Property” ) shall be and remain the property of Tenant. Upon the expiration or earlier termination of this Lease, Tenant shall have the option to either remove Tenant’s Property at Tenant’s sole cost and expense on or prior to the Expiration Date, or to surrender such property (including partition systems and/or furniture located in the Demised Premises) to Landlord at the end of the Term, in which case Tenant shall reimburse Landlord for its reasonable out- of – pocket expenses for the removal thereof within thirty (30) days after demand by Landlord and, in either event, Tenant shall restore (or pay Landlord the cost to restore) any damage to the Demised Premises caused by such removal to the condition as prior to such removal. Tenant shall exercise its option by giving written notice to Landlord within thirty (30) days prior to termination or expiration of this Lease. If Tenant shall fail to give such notice or shall fail to remove such property upon the expiration or earlier termination of this Lease, the property shall be deemed to be surrendered. Tenant’s obligations under this subsection shall survive the termination or expiration of this Lease.

 

Section 11.02 (a)    Prior to performing any Tenant’s Alterations, Tenant shall, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall delivered promptly duplicates of all such permits, approvals and certificates to Landlord. Tenant agrees to cause Tenant’s contractors and subcontractors to carry such workers’ compensation, general liability, personal and property damage insurance as Landlord may reasonably require. For so long as Tenant is the City of New York when the Tenant is using its own employees to perform any Alterations, there shall be no such insurance requirement as set forth in the preceding sentence except for worker’s compensation insurance in statutory amounts. As permitted by applicable law, Tenant agrees to obtain and deliver to Landlord written and unconditional waivers of mechanics’ liens upon the Land and the Building, for all work, labor and services performed to the date of such waiver and all materials to be furnished to date in connection with such work, signed by the general contractor and all subcontractors involved in such work. Notwithstanding the foregoing, if any mechanic’s lien is filed against the Demised Premises, the Land or the Building, for work claimed to have been done for, or materials furnished to, Tenant, it shall be discharged by Tenant within thirty (30) days after notice from Landlord to Tenant of the filing (or such shorter period if required by the terms of any Superior Lease or Mortgage) at Tenant’s expense. In no event shall Tenant be responsible for mechanic’s liens in connection with the performance of Landlord’s Work or Tenant Work under Article 6 above.

 

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(b)          Tenant shall pay to Landlord from time to time during the performance of any Tenant’s Alterations, within thirty (30) days after demand therefor, as Additional Rent, a fee equal to Landlord’s or Landlord’s agents reasonable and actual out- of- pocket costs and expenses incurred in connection with review of Tenant’s Plans (as hereinafter defined) and in connection with the review, approval and inspection of any structural Tenant’s Alterations.

 

(c)(1)      Tenant hereby agrees that, prior to Tenant commencing any structural Tenant’s Alterations, Tenant shall submit to Landlord four (4) sets of complete working plans, drawing and specifications (collectively, “ Tenant’s Plans ”), including, but not limited to, all mechanical, electrical and other utility systems and facilities fur Alterations, prepared by an architect or engineer licensed as such in the State of New York who maintains at least $2,000,000.00 of professional liability insurance (“ Tenant’s Architect ”) (which insurance requirement shall not apply if the architect is an employee of the City of New York), and shall not commence any structural Tenant’s Alterations without first obtaining Landlord’s approval of such Tenant Plans, which approval shall not be unreasonably withheld, conditioned or delayed. Within thirty (30) business days following Landlord’s receipt of Tenant’s Plans, Landlord shall review or cause the same to be reviewed and shall thereupon return to Tenant one (1) set of Tenant’s Plans with Landlord’s approval or disapproval (including, which Tenant’s Alterations, if any, must be removed upon the expiration or earlier termination of this Lease) noted thereon, and if same shall be disapproved in any respect, Landlord shall state the reason for such disapproval. If Landlord disproves Tenant’s Plans in any respect, Tenant shall cause Tenant’s Architect to make such changes to Tenant’s Plans as Landlord shall require and shall thereupon resubmit the same to Landlord for its approval. Following the approval of Tenant’s Plans, as aforesaid, the same shall be final and shall not be materially changed by Tenant without the prior approved of Landlord. Tenant acknowledges and agrees that Landlord’s approval of Tenant’s Plans shall be conditioned upon Tenant employing licensed persons and firms (where required by law) and such labor for the performance of Tenant’s Alterations so as not to cause any jurisdictional or other labor disputes in the Building. Landlord reserves the right to disapprove any plans and specifications in part, to reserve approval of items shown thereon pending its review and approval of other plans and specifications, and to condition its approval upon Tenant making revisions to the plans and specifications or supplying additional information. Any review or approval by Landlord of any plans and/or specifications or any preparation or design of any plans by Landlord’s architect or engineer (or any preparation or design by Landlord) with respect to any Tenant’s Alterations shall be without any representation or warranty whatsoever to Tenant or other person with respect to the compliance thereof with any Requirements, the adequacy, correctness or efficiency thereof or otherwise.

 

(2)         Unless Tenant is using New York City employees exclusively for the performance of the subject Tenant’s Alterations, Tenant shall enter into a construction contract with a construction manager or general contractor for all Tenant’s Alterations for which the estimated cost of labor and material, on a per project basis, exceed Five Hundred Thousand Dollars ($500,000.00).

 

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(3)         All Tenant Alterations shall be performed in accordance with the Requirements. At reasonable times, upon reasonable notice, Tenant shall permit Landlord, its architect and other representatives of Landlord access to the Demised Premises for the purpose of inspecting same, verifying conformance of the Tenant’s Alterations with Tenant’s Plans and otherwise reviewing the progress of Tenant’s Alterations.

 

(4)         Tenant shall be able to erect sign within and outside the Demised Premises without Landlord’s prior consent.

 

ARTICLE 12

 

END OF TERM

 

Section 12.01           Upon the expiration or other termination of the term of this Lease, Tenant shall quit and surrender the Demised Premises in good order and condition with ordinary wear and tear, and, except to the extent of Tenant’s repair or restoration obligations hereunder, damage by the elements, including fire or other casualty, excepted.

 

ARTICLE 13

 

REPAIRS

 

Section 13.01 (a)     Landlord shall make all exterior and structural repairs, including the maintenance, repair or replacement of the roof, exterior windows and window glass, replacement of exterior and common areas (which term, for purposes of this Article 13 shall have the definition given it in Section 9.01 hereof) light bulbs and fluorescent lamps, plumbing, and electrical, heating and air conditioning systems (other than Tenant’s supplementary units), common areas, elevators (except as otherwise provided in this Lease), removal of graffiti from the exterior and interior common areas of the Building, and all repairs needed because of Landlord’s negligence or due to defective materials or workmanship in the construction and/or improvement of the Demised Premises (other than those improvements performed by Tenant or its contractors or agents) or of the Building, unless such repairs, (structural or non- structural) are necessitated by the negligence of Tenant or its agents, subtenants, licensees, employees, contractors, or invitees or resulting from Tenant’s Alterations. Landlord shall repair and maintain any sidewalks, curbs and passageways adjoining and/or appurtenant to the Demised Premises in good, clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstruction.

 

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(b)          Tenant, at its sole cost and expense, agrees to take good care of the Demised Premises and the fixtures, equipment and appurtenances therein and the distribution systems and shall (i) make all interior non- structural repairs in the Demised Premises including but not limited to replacement of light bulbs and fluorescent lamps, (ii) remove graffiti from the Demised Premises and the hallways, laboratories, and waiting area on the floors of the Building with no tenants other than Tenant, and (iii) make all necessary repairs to the lavatories on the floors in the Building demised to Tenant and to the interior of elevators dedicated for the use of Tenant and its invitees; provided, however, at Tenant’s option, upon reasonable prior notice to Landlord, Landlord shall perform the same for Tenant and bill Tenant for the actual cost thereof as supported by appropriate documentation. Landlord shall reimburse Tenant, as Additional Rent, for such costs within thirty (30) days of receiving Landlord’s written bill and supporting documentation. The foregoing notwithstanding, if Tenant fails after fifteen (15) days’ notice (or such shorter period as may be required due to an emergency) to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by Landlord and Landlord may bill Tenant for the cost thereof in accordance with the preceding sentence. All costs required to be reimbursed to Landlord by Tenant may, in the discretion of the Comptroller of the City of New York, be post- audited by the Comptroller.

 

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Section 13.02 (a)     In the event Landlord fails to fulfill its obligations under this Article 13, Tenant may, in addition to its other remedies, give written notice to Landlord specifying the repairs required by Tenant and, subject to Force Majeure, Landlord shall commence performance of such repairs within three (3) business days after the receipt of such notice and diligently proceed to complete said repairs. In the event Landlord fails to commence or diligently prosecute to completion said repair within such three (3) business day period (subject to Force Majeure) Tenant, in addition to any other remedy it may have may: (i) perform the same and deduct the actual and reasonable cost thereof from any rent due or that may become due and payable under this Lease; provided that such repair shall not affect any Building System and shall be of a non- structural nature; or (ii) may withhold a portion of the rent due and owing to Landlord in an amount equal to one and one- half (1 1/2) times the reasonably estimated cost of curing such default until such time as Landlord shall have cured such default, at which time Tenant shall promptly pay to Landlord all such withheld rent.

 

(b)          Anything to the contrary notwithstanding, in the event the repairs to be performed by the Landlord are required to correct a hazardous condition or to end an emergency which renders the Demised Premises or any portion thereof unsuitable for the use set forth herein, Tenant shall give Landlord, its agent, superintendent or the person designated to receive such notice, immediate notice in writing, personally or by certified mail, and Landlord, within twenty-four (24) hours of giving said notice, shall commence the repairs and diligently proceed with continuity to complete said work. In the event Landlord fails to commence and complete said work after said notice (subject to Force Majeure), Tenant may: (i) perform same and deduct the actual and reasonable cost thereof from any rent due or that may become due and payable under this Lease or (ii) withhold all rent due and owing with respect to the affected portion of the Demised Premises, until Landlord substantially completes such repairs, at which point Tenant shall pay all withheld rent.

 

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(c)          Notwithstanding anything in this Article to the contrary, in the event Tenant is unable to use any part or all of the Demised Premises in substantially the same manner as prior to such failure and ceases to use such part (of all) of the Demised Premises for not less than seven (7) consecutive business days due to Landlord’s failure to perform the repairs as set forth in the two preceding paragraphs hereof (other than by reason of Force Majeure), the rent shall be reduced, on a per diem basis in the proportion in which the area of the portion of the Demised Premises which is so unusable and not used bears to the total area of the Demised Premises for each such day subsequent to the aforesaid seven (7) business days that such portion of the Demised Premises remain so unusable and not used,

 

(d)           Tenant may make, at its sole cost and expense, such ordinary and nonstructural interior repairs as it deems necessary for its occupancy, subject to the provisions of this Lease.

 

ARTICLE 14

 

CONDEMNATION

 

Section 14.01           If the whole of the Demised Premises shall be taken in condemnation, this Lease shall terminate upon the vesting of title in the condemnor and all rent and other charges paid or payable by Tenant shall be apportioned as of the date of vesting of title in such condemnation proceeding.

 

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Section 14.02           If more than thirty five percent (35%) of the Demised Premises, or fifty percent (50%) of the Demised Premises if the condemnation is by the City of New York or any other government entity at the City’s request, as the case may be, shall be so taken in condemnation, then Tenant may either terminate this Lease as to the remainder of the Demised Premises on thirty (30) days’ written notice to Landlord or remain in possession of the remaining portion of the Demised Premises under all of the terms, conditions and covenants of this Lease, except that the rent thereafter shall be apportioned and reduced from the date of each such partial taking to the amount equal to the product of the dollar amount of rent payable on such date and the number of square feet in the part remaining. The portion of the proceeds of any award for partial taking allocable to the Demised Premises shall be applied by Landlord to the repair, restoration or replacement of the remaining Demised Premises, and if there be any surplus, it shall belong to the Landlord. Said repairs, restoration or replacement of the remaining Demised Premises shall be completed within nine (9) months of the aforesaid taking in condemnation (subject to Force Majeure and Tenant Delay), pursuant to plans and specifications approved by the occupying agency and D&PM., which approval shall not be withheld if the plans and specifications, in D&PM’s and the occupying agency’s reasonable opinion, specify restoration of the Demised Premises to the substantially similar condition (including any Landlord’s Work and Tenant’s Work that were already completed in accordance with the terms of this Lease) as prior to the taking. In the event said repairs, restoration or replacement are not completed within said nine (9) months period, Tenant, in addition to any other remedy it may have, may either (i) terminate this Lease on thirty (30) days written notice, or (ii) perform said repairs, restoration and replacement and deduct the actual and reasonable cost thereof from any rent which may be due and payable under this Lease.

 

Section 14.03           Tenant shall be entitled to an award for the value of the improvements and fixtures made or paid for by Tenant upon that part of the Demised Premises taken in condemnation, provided it does not reduce Landlord’s award. Tenant shall also be entitled to an award for the unexpired term of this Lease for the Demised Premises taken, unless the condemnation is by the City of New York or by any other governmental entity at the City’s request.

 

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ARTICLE 15

 

DESTRUCTION BY FIRE OR OTHER CASUALTY

 

Section 15.01 (a)     If the whole of the Demised Premises or a portion thereof is totally destroyed or damaged by fire or other casualty, or destroyed or damaged to such an extent that they are unsuitable or untenantable for use for the purpose for which they are leased, then from the date of such damage or destruction the rent shall be reduced in the proportion which the area of the part of the Demised Premises which is not usable by Tenant for the purposes permitted herein bears to the total area of the Demised Premises immediately prior to such damage until such time as Landlord repairs and restores the same to substantially suitable and tenantable condition as certified by the occupying agencies and D&PM, acting reasonably, which approval shall not be unreasonably withheld if the plans and specifications, in D&PM’s and the occupying agency’s reasonable opinion, specify restoration of the Demised Premises to the substantially similar condition (including Landlord’s Work and Tenant Work that were already complete in accordance with the terms of this Lease prior to the casualty) as prior to the casualty. Tenant shall have forty- five (45) days (during the first thirty (30) days of which period no rent shall be due to Landlord unless Tenant actually moves into the Demised Premises) to move into the Demised Premises after having been notified that the repairs have been completed by Landlord. At least seven (7) business days prior to said completion, Landlord shall notify Tenant of same. In the event that D&PM and the occupying agency do not agree with Landlord that the repairs are complete, the parties shall submit their dispute to expedited arbitration in accordance with the procedures set forth in Subsection 6A.13 (b) hereof within such seven (7) business day period.

 

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(b)           If the Building shall be so damaged by fire or other casualty that, in Landlord’s opinion, substantial alteration, demolition or reconstruction of the Building shall be required, then Landlord, at Landlord’s option, may terminate this Lease by notice to Tenant within ninety (90) days from the date of such fire or other casualty. If Landlord elects to terminate this Lease, the Term shall expire upon a date set by Landlord and Tenant shall vacate and surrender the same in accordance with the provisions of Article 12 hereof. If no such notice is given, Landlord shall, within forty- five (45) days after receipt of insurance proceeds (which period shall in no event exceed one hundred and twenty (120) days from the fire or casualty), commence and diligently proceed with continuity to complete the repairs and restoration of the Building and Demised Premises to the substantially similar condition prior to said fire or casualty (including Landlord’s Work and Tenant Work that was already completed in accordance with the terms of this Lease). If Landlord fails to commence said repairs and restoration as above provided, Tenant may terminate this Lease on thirty (30) days’ written notice to Landlord. If Tenant makes such election, the Term shall expire upon the thirtieth (30 th ) day after notice of such election is given by Tenant, and Tenant shall vacate the Demised Premises and surrender the same to Landlord in accordance with the provisions of Article 12 hereof.

 

Section 15.02      (a) (i) Within forty- five (45) days after notice to Landlord of any damage described herein, Landlord shall deliver to Tenant a statement prepared by a licensed, independent architect setting forth such architect’s estimate (the “Estimate” ), reasonably determined, as to the time required to repair such damage (including Landlord Work and Tenant Work that was already completed), exclusive of time required to repair any Tenant’s Alterations. If the estimated time period exceeds three hundred and sixty (360) days from the date of the Estimate, Tenant may elect to terminate this Lease by notice to Landlord not later than thirty (30) days following receipt of the Estimate. If Tenant makes such election, the Term shall expire upon the thirtieth (30 th ) day after notice of such election is given by Tenant, and Tenant shall vacate the Demised Premises and surrender the same to Landlord in accordance with the provisions of Article 12 hereof. If Tenant shall not have elected to terminate this Lease pursuant to this Article 15 (or is not entitled to terminate this Lease pursuant to this Article 15), of if Landlord has not terminated this Lease pursuant to Section 15.01 (b) hereof, the same shall be diligently repaired by and at the sole cost and expense of Landlord as set forth in this Article.

 

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(ii)         Notwithstanding anything to the contrary contained herein, if Landlord shall have failed to complete the repairs on or prior to the date which is four hundred fifty (450) days from the date of the Estimate or such longer period as may be estimated in the Estimate for completion of such repair work, then Tenant may elect to terminate this Lease by notice given to Landlord within thirty (30) days after the expiration of such period, TIME BEING OF THE ESSENCE with respect to Tenant’s giving of such notice. If Tenant make such election, the Term shall expire upon the thirtieth (30 th ) day after notice of such election is given by Tenant, and Tenant shall vacate the Demised Premises and surrender the same to Landlord in accordance with the provisions of Article 12 hereof.

 

(b)          Notwithstanding the forgoing, if the Demised Premises shall be substantially damaged during the last twenty- four (24) months of the Term (as the same may be renewed), then either Landlord or Tenant may serve notice on the other party of its intention to terminate this Lease, and this Lease shall terminate on the date which is thirty (30) days after the date of such notice as if such termination date were the Expiration Date. Any prepaid portion of the Base Rent and Additional Rent shall be abated as of such date of damage or destruction and shall be refunded by Landlord to Tenant and Tenant shall vacate the Demised Premises and surrender the same to Landlord in accordance with the provisions of Article 12 hereof.

 

Section 15.03      Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage by fire or other casualty or the repair thereof. Landlord will not carry insurance of any kind on Tenant’s Property or Tenant’s Alterations nor shall it be required to repair any of Tenant’s Alterations. It is expressly understood that if Landlord shall be delayed from completing the repairs due to any acts of Tenant, its agents, servants, employees or contractors, then such repairs shall be deemed complete on the date when the repairs would have been complete but for such delay and the expiration of the abatement of Tenant’s obligations hereunder shall not be postponed by reason of such delay. Any additional costs to Landlord to complete any repairs occasioned by such delay shall be paid by Tenant to Landlord within thirty (30) days after demand, as Additional Rent

 

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Section 15.04          Landlord and Tenant agree that they shall cooperate with the other in providing information to an insurance company with respect to any loss or damage occurring in the Demised Premises and shall not interfere with the other’s collection of insurance proceeds.

 

Section 15.05           Nothing herein contained shall relieve either party from any liability to the other caused by such party’s negligence, willful misconduct or criminally liable acts in connection with any damage to the Demised Premises or the Building by fire of other casualty.

 

Section 15.06           This Lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and any law providing for such contingency in the absence of such express agreement, now or hereafter enacted, shall have no application in such case.

 

ARTICLE 16

 

NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE

 

Section 16.01           Landlord warrants and represents that no officer, agent, employee or representative of The City of New York has received any payment or other consideration from Landlord for the making of this Lease and that no officer, agent, employee or representative of The City of New York has any interest, directly or indirectly, in this Lease or the proceeds thereof.

 

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ARTICLE 17

 

QUIET ENJOYMENT

 

Section 17.01          Subject to the terms, conditions and provisions of this Lease, Landlord covenants that Tenant, upon paying the rent reserved herein, and performing all of the other terms, covenants and conditions on its part to be performed, shall and may peaceably and quietly have, hold and enjoy the Demised Premises for the uses and purposes stated in this Lease in Article 1.

 

ARTICLE 18

 

INTENTIONALLY DELETED

 

ARTICLE 19

 

SUBORDINATION AND NON-DISTURBANCE

 

Section 19.01           (a) This Lease shall be subject and subordinate to all existing mortgages of record or future mortgages from a reputable lender or lending institution which may affect the Land and the Building (“Superior Mortgages ”), and to all existing or future ground or underlying leases which affect the Land and/or the Building (“Superior Leases”) provided, and as a condition precedent to the subordination of this Lease to any said Superior Mortgages and Superior Leases, the mortgagee of any Superior Mortgage and the lessor under a Superior Lease, as the case may be, shall execute and deliver to Tenant an agreement (a Nondisturbance Agreement ”) in recordable form and in the form reasonably acceptable to Tenant (or substantially in the form attached hereto as Exhibit E). The Nondisturbance Agreement shall provide, inter alia , that should it become necessary to foreclose such Superior Mortgage or terminate such Superior Lease, as the case may be, or should said mortgagee or lessor otherwise come into possession of the Demised Premises, such mortgagee or lessor will not join Tenant under this Lease in foreclosure or summary proceedings and will not disturb the use and occupancy of Tenant under this Lease so long as Tenant is not in default under any of the terms, covenants and conditions of this Lease.

 

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(b)          Notwithstanding anything to the contrary in the foregoing subparagraph (a), Landlord agrees, at its sole cost and expense, to deliver to Tenant, simultaneously with Landlord’s execution of this Lease, a fully negotiated and executed Nondisturbance Agreement (substantially in the form attached hereto as Exhibit E or in the form used by the mortgagee that is reasonably acceptable to Tenant) signed by Landlord and Landlord’s current mortgagee, ground lessor and/or over landlord(s), as the case may be, if any Superior Mortgage, Superior Lease or sublease exists at the time of Landlords’ execution of this Lease. Delivery of such Nondisturbance Agreement by Landlord to Tenant shall be a precondition to Tenant’s execution and delivery of this Lease.

 

ARTICLE 20

 

HOLDOVER TENANT

 

Section 20.01          Should Tenant continue to occupy the Demised Premises or any portion thereof after the expiration of the Term or renewal term, if any, including, without limitation, a termination by Tenant pursuant to Article 3) such tenancy shall be from month- to-month, terminable by either party of thirty (30) days’ notice to the other, and such month - to-month tenancy shall be under the same terms, covenants and conditions of this Lease at the same Base Rent and Additional Rent due for the last month of the term. Notwithstanding anything to the contrary contained herein, Landlord reserved its rights to pursue all of its remedies against Tenant in law and in equity.

 

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ARTICLE 21

 

NOTICE

 

Section 21.01 (a)    Any notice required to be given shall be in writing and shall be sent by overnight delivery (with evidence of receipt) or delivered personally to Landlord (with receipt of by hand delivery), and addressed to Landlord at the address hereinbefore set forth to the attention of Mr. David Bistricer, with a copy sent simultaneously in like manner to : Jacob J. Schwimmer, Security Equity LLC, 4611 12th Avenue, Brooklyn, New York 11219 or to Tenant addressed to:

 

ASSISTANT COMMISSIONER

REAL ESTATE TRANSACTIONS/ ASSET MANAGEMENT

Department of Citywide Administrative Services

1 Centre Street, 20th Floor North

New York, N.Y. 10007

 

and, in addition, to:

OFFICE OF COURT ADMINISTRATION

25 Beaver Street

New York, New York 10004

 

Attention: Mr. Thomas Lotito, Coordinator of Facilities Management Either party may change its address as set forth herein by notice to the other in the manner provided for herein, provided that no notice of change of address shall be effective until the first day of the month following the month in which notice is given. Notice shall be deemed given as of the third (3rd) day of mailing.

 

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Section 21.02 (a)     Special Notices: In addition to any other notices expressly required under this Lease to be given by Landlord to Tenant, Landlord shall immediately give written notice to Tenant of (i) the giving of any notice or the taking of any action by the holder of any Superior Mortgage, the result of which may be the foreclosure of, or the sale or taking of possession of, all or any part of the Demised Premises, (ii) the commencement of a case in bankruptcy or under the laws of any state naming Landlord as the debtor, which remains undismissed for a period of one hundred twenty (120) days, or (iii) the making by Landlord of an assignment or any other arrangement for the benefit of creditors under any state statute, which remains undismissed for a period of one hundred twenty (120) days.

 

(b)          Notwithstanding the foregoing, service of process to commence a summary proceeding pursuant to Article 7 of the Real Property Actions and Proceeding Law (RPAPL) relating to an occupancy by the City of New York or its agencies or officers of the Demised Premises which at its commencement was authorized under this Lease shall be served in the manner required by CPLR Section 311.

 

ARTICLE 22

 

FORCE MAJEURE

 

Section 22.01           Landlord, Tenant or any leasehold mortgagee or any mortgagee under a Superior Mortgage shall not be deemed in default under this Lease if it is delayed in the performance of any act, matter or thing which it is obligated to perform hereunder due to “Force Majeure” (other than either party’s obligation to make any payment due hereunder). For purposed of this Lease, the term “Force Majeure” shall mean (i) strikes, lockouts, or labor disputes; or (ii) acts of God, governmental restrictions, regulations or controls, unreasonable delay by governmental agencies, enemy or hostile governmental actions, civil commotion, insurrection, revolution, sabotage, fire, other casualty or other conditions similar to those enumerated in this Article. In the event of any delay due to Force Majeure, all dates for performance shall automatically be extended by a period equal to the aggregate period of all such delays.

 

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ARTICLE 23

 

SAVE HARMLESS

 

Section 23.01          Except as expressly provided in this Lease, Landlord and Tenant shall each indemnify, defend and hold harmless the other party from and against any and all liability, fines, suits, claims, demands, expenses and actions of any kind or nature arising (i) by reason of injury to person or property occurring on or about the Demised Premises, the Building, or the Land of which they form a part, to the extent such accident, injury or damage results or is claimed to have resulted from any act, omission or negligence of the other party or its agents, employees, contractors, licensees, or servants; (ii) by reason of either party’s breach, violation or non- performance of any covenant or condition in this Lease on the part of such party to be fulfilled, kept, and observed and performed; and (iii) from any act, omission or negligence of either party, its contractors, licensees, agents, servant or employees. Tenant shall not do or permit any act or thing to be done upon the Demised Premises which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of any Requirements, and shall exercise such control over the Demised Premises as to fully protect Landlord against any such liability. Neither Landlord nor Tenant shall have any liability for consequential damages suffered by the other party.

 

ARTICLE 24

 

INVESTIGATIONS

 

1.1          The parties to this agreement agree to cooperate fully and faithfully with any investigation, audit or inquiry conducted by a State of New York (State) or City of New York (City) governmental agency or authority that is empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath, or conducted by the Inspector General of a governmental agency that is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license that is the subject of the investigation, audit or inquiry.

 

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1.2(a)      If any person who has been advised that his or her statement, and any information from such statement, will not be used against him or her in any subsequent criminal proceeding refuses to testify before a grand jury or other governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath concerning the award of or performance under any transaction, agreement, lease, permit, contract, or license entered into with the City, the State, or any political subdivision or public authority thereof, or the Port Authority of New York and New Jersey, or any local development corporation within the City, or any public benefit corporation organized under the laws of the State of New York, or;

 

1.2(b)      If any person refuses to testify for a reason other than the assertion of his or her privilege against self-incrimination in an investigation, audit or inquiry conducted by a City or State governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to take testimony under oath, or by the Inspector General of the governmental agency that is a party in interest in, and is seeking testimony concerning the award of, or performance under, any transaction, agreement, lease, permit contract, or license entered into with the City, the State, or any political subdivision thereof or any local development corporation within the City, then;

 

1.3(a)      The commissioner or agency head whose agency is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license shall convene a hearing, upon not less than five (5) days written notice to the parties involved to determine if any penalties should attach for the failure of a person to testify.

 

1.3(b)     If any non-governmental party to the hearing requests an adjournment, the commissioner or agency head who convened may, upon granting the adjournment, suspend any contract, lease, permit, or license pending the final determination pursuant to paragraph 1.5 below without the City incurring any penalty or damages for delay or otherwise.

 

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1.4          The penalties which may attach after a final determination by the commissioner or agency head may include but shall not exceed:

 

a) The disqualification for a period not to exceed five (5) years from the date of an adverse determination for any person, or any entity of which such person was a member at the time the testimony was sought, from submitting bids for, or transacting business with, or entering into or obtaining any contract, lease, permit or license with or from the City; and/or

 

(b) The cancellation or termination of any and all such existing City contracts, leases, permits or licenses that the refusal to testify concerns and that have not been assigned as permitted under this agreement, nor the proceeds of which pledged, to an unaffiliated and unrelated institutional lender for fair value prior to the issuance of the notice scheduling the hearing, without the City incurring any penalty or damages on account of such cancellation or termination; monies lawfully due for goods delivered, work done, rentals, or fees accrued prior to the cancellation or termination shall be paid by the City.

 

1.5          The commissioner or agency head shall consider and address in reaching his or her determination and in assessing an appropriate penalty the factors in paragraphs (a) and (b) below. He or she may also consider, if relevant and appropriate, the criteria established in paragraphs (c) and (d) below in addition to any other information which may be relevant and appropriate:

 

(a) The party’s good faith endeavors or lack thereof to cooperate fully and faithfully with any governmental investigation or audit, including but not limited to the discipline, discharge, or disassociation of any person failing to testify, the production of accurate and complete books and records, and the forthcoming testimony of all other members, agents, assignees or fiduciaries whose testimony is sought.

 

(b) The relationship of the person who refused to testify to any entity that is a party to the hearing, including, but not limited to, whether the person whose testimony is sought has an ownership interest in the entity and/or the degree of authority and responsibility the person has within the entity.

 

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(c) The nexus of the testimony sought to the subject entity and its contracts, leases, permits or licenses with the City.

 

(d) The effect a penalty may have on an unaffiliated and unrelated party or entity that has a significant interest in an entity subject to penalties under 1.4 above, provided that the party or entity has given actual notice to the commissioner or agency head upon the acquisition of the interest, or at the hearing called for in 1.3(a) above gives notice and proves that such interest was previously acquired. Under either circumstance the party or entity must present evidence at the hearing demonstrating the potential adverse impact a penalty will have on such person or entity.

 

1.6(a)     The term “license” or “permit” as used herein shall be defined as a license, permit, franchise or concession not granted as a matter of right.

 

1.6(b)     The term “person” as used herein shall be defined as any natural person doing business alone or associated with another person or entity as a partner, director, officer, principal or employee.

 

1.6(c)     The term “entity” as used herein shall be defined as any firm, partnership, corporation, association, or person that receives monies, benefits, licenses, leases, or permits from or through the City or otherwise transacts business with the City.

 

1.6(d)     The term “member” as used herein shall be defined as any person associated with another person or entity as a partner, director, officer, principal or employee.

 

1.7           In addition to and notwithstanding any other provision of this Agreement, the Commissioner or agency head may in his or her sole discretion terminate this Agreement upon not less than three (3) days written notice in the event contractor fails to promptly report in writing to the Commissioner of Investigation of the City of New York any solicitation of money, goods, requests for future employment of other benefit or thing of value, by or on behalf of any employee of the City or other person, firm, corporation or entity for any purpose which may be related to the procurement or obtaining of this Lease by the Landlord, or affecting the performance of this Lease.

 

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ARTICLE 25

 

SIGNIFICANT RELATED PARTY TRANSACTIONS

 

Section 25.01          Landlord shall be required to disclose and notify Tenant of any transactions with Affiliates (hereinafter defined) of Landlord, the costs of which are charged to Tenant as rent, including, but not limited to, Base Year Operating Expenses, overtime HVAC and other services, tenant repairs, common area electricity, cleaning and painting. Landlord shall provide Tenant with written notice of such transactions upon submission of invoices for rent or at the end of the calendar year in which the transactions to be billed as rent were performed by any Affiliates. When such transactions occur, prices of same must be in line with normal industry practice in New York City. Landlord’s failure to notify Tenant of such Affiliate transactions shall result in a disallowance of such costs that would otherwise be billed as rent. If such Affiliate transactions occurred and were disclosed, but it is found by Tenant, in its reasonable judgment, that the costs thereof exceed normal industry costs in an arm’s length third party transaction in New York City, then such excessive charges shall be disallowed. For the purposes of this Lease, the term “Affiliates” shall mean a person or entity which shall (a) Control, (b) be under the Control of, or (c) be under common Control with Landlord. The term “Control” shall mean ownership of more than fifty percent (50%) of the outstanding voting stock of a corporation or other majority equity and control interest if not a corporation and the possession of power to direct or cause the direction of the management and policy of such corporation or other entity, whether through the ownership of voting securities, by statute or according to the provisions of a contract.

 

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ARTICLE 26

 

ASBESTOS

 

Section 26.01       Landlord and Tenant agree that during the Term, if required by applicable Requirements, Landlord or, to the extent required in this Article, Tenant shall abate (i.e. remove, enclose, encapsulate and/or replace) and/or monitor and manage any asbestos containing materials (including, but not limited to, any such materials on boilers, pipes, ducts, breechings, plenum, tanks, spray on or other insulation, and any affected floor tiles, plaster, and ceiling tiles, collectively “ ACM ”) in the Demised Premises and portions of the Building through which Tenant has access to the Demised Premises, upon and subject to the following terms and conditions set forth in this Article. Except as may otherwise be provided herein, the decision whether the appropriate course of action is abatement or monitoring and management shall be made by Landlord is its sole discretion.

 

Section 26.02 (a)    Unless already provided to Tenant by Landlord pursuant to Article 24 of the License Agreement, within ten (10) business days following the execution and delivery of this Lease by Tenant, Landlord shall, at its sole cost and expense, retain an independent third party consultant (which consultant must be approved in advance by the Department of Citywide Administrative Services (“ DCAS ”), which approval shall not be unreasonably withheld or delayed), which consultant shall conduct and prepare a survey of the Demised Premises and portions of the Building through which Tenant has access for the presence of ACM (the “ Survey ”) which Survey shall be done in accordance with requirements and standards set forth in the Federal Asbestos Hazard Emergency Response Act of 1987 (“AHERA”) and regulations promulgated thereunder (see 40 CFR 763). The Survey shall set forth findings, as well as recommendations, with respect to the ACM. The first part of the Survey (“ Phase I ”) shall be completed within ten (10) business days following Landlord’s retention of the consultant and shall specifically identify ACM which is deteriorated and the locations of those areas in which it is deteriorated and shall recommend whether the deteriorated ACM so discovered should be removed, enclosed, repaired and/or encapsulated. A copy of Phase I of the Survey shall be forwarded to Tenant by Landlord within five (5) business days of Landlord’s receipt of the same, and copies shall be filed by Landlord with all governmental authorities or agencies whose regulations so require.

 

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(b)          The balance of the Survey (“ Phase II ”), which shall cover ACM other than deteriorated ACM set forth in Phase I, shall be completed no later than sixty (60) days from the date of the Phase I survey. A copy of Phase I and Phase II of the Survey (the “ Total Survey ”) shall be provided by Landlord to Tenant within five (5) business days of Landlord’s receipt of Phase II of the Survey and copies of the Total Survey shall be filed by Landlord with all governmental authorities or agencies where regulations so require.

 

(c)          No later than thirty (30) days after completion of Phase I of the Survey, Landlord shall, at its own cost and expense, commence or cause an abatement of any deteriorated ACM in the manner the Survey may specify or recommend, subject to concurrence by DCAS, and perform any work incidental thereto (the “ACM Work” ). Landlord shall, within a time frame to be mutually agreed to between Landlord and Tenant, diligently and in good faith complete the ACM Work. Landlord’s contractor performing the ACM Work must be approved by DCAS; DCAS approval shall not be unreasonably withheld or delayed. Landlord shall give Tenant at least ten (10) days advance written notice of commencement and phasing of any ACM Work. Performance of the ACM Work shall be in accordance with and shall comply with all applicable Federal, State, County and Municipal laws, rules, standards, regulations, requirements and ordinances, as well as policy statements specifically directed by the City of New York (collectively “Laws and Procedures”) governing ACM Work. The contractor performing the ACM Work shall file (and pay all fees associated with) all notices or documents, certifications or other communications required by the City, State and Federal governments as signed by the Landlord as the “Owner”. The contractor shall simultaneously forward to Tenant/DCAS copies of all notices, certifications or other communications given to Landlord or filed with the proper agencies or authorities relating to ACM. In addition. Landlord shall contract for on-site air testing which, in accordance with the rules and regulations of the New York City Asbestos Control Program, must be conducted by a party prescribed by applicable law. The party performing the on-site air testing is subject to prior written approval by DCAS, which approval shall not be unreasonably withheld or delayed.

 

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(d)           As set forth above, Landlord shall be required to give Tenant not less than ten (10) days advance written notice of the scheduling of each phase of the ACM Work so that Tenant may relocate its operations and personnel, if necessary, prior to the commencement thereof. Landlord shall consider Tenant’s use and occupancy of the Demised Premises so as to minimize the negative impact of the ACM Work on Tenant’s operations in and use of the Building and the Demised Premises. In the event Tenant must vacate the Demised Premises or any portion thereof because the ACM Work, in the sole determination of Tenant, renders the Demised Premises unusable by Tenant, annual rent shall abate in the proportion that the portion of the Demised Premises which is vacated and/or rendered unusable bears to the entire Demised Premises for the period of time involved, provided it exceeds one full business day. Such abatement of rent shall continue until the Demised Premises or any portion thereof may be used for the purposes set forth in this Lease, as determined solely by Tenant, and Tenant certifies same in writing.

 

(e)          If Landlord fails to comply with the requirements of subparagraphs (a) through (d) above, Tenant shall, in addition to any other remedy it may have, have the option to effect the ACM Work on its own, as agent for Landlord by hiring any consultants, contractors or experts Tenant deems necessary to plan, effect and supervise the ACM Work and Tenant shall be entitled to offset all costs and expenses associated with the ACM Work against any amounts otherwise due or becoming due to Landlord as rent and additional rent under the terms of this Lease, which offset shall be in addition to any applicable abatement or reduction in rent under subparagraph (d) above. Tenant shall not proceed with the ACM Work unless: (a) written notice shall first be given to Landlord specifying the manner in which Tenant claims such ACM Work has not been properly completed; and (b) Landlord shall have had thirty (30) days following receipt of such notice within which to complete said work.

 

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(f)           Following performance and completion of the ACM Work, Landlord shall, at its sole cost and expense, restore the Demised Premises to the condition that, in Tenant’s sole opinion, permits Tenant to use the Demised Premises for the purposes set forth in this Lease. Landlord shall be solely responsible for all repairs arising out of the performance of the ACM work. Landlord hereby agrees to save, hold harmless and indemnify Tenant, its employees, guests and invitees against any and all claims for bodily injury or property damage in connection with the ACM Work and work incidental thereto.

 

(g)          During the Term, Landlord shall, at its sole cost and expense, have the ACM monitored in the Demised Premises and the portions of the Building through which Tenant has access to the Demised Premises or which affect the Demised Premises pursuant to a plan approved by Tenant (the “Monitor Survey”) by a New York City Department of Environmental Protection certified asbestos investigator at least once every one hundred eighty (180) days from the Inspection, and Landlord shall immediately provide Tenant with a copy of the results of each such Monitor Survey. The Monitor Survey shall be in accordance with the principles set forth in the EPA Document “Managing Asbestos In Place” (the “Green Book”), as it may be subsequently revised or replaced by a similar text. If any such Monitor Survey should reveal that ACM has deteriorated, Landlord shall so notify Tenant in writing within five (5) days of the completion of such survey which notice shall be accompanied by a copy of such survey. Landlord shall within five (5) days from the completion of such Monitor Survey commence and diligently proceed to comply with continuity with the provisions of this Article with respect to abatement of any deteriorated ACM described in any such Monitor Survey.

 

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(h)          The ACM Work must be performed by Landlord in accordance with Laws and Procedures and shall be done to the full satisfaction of Tenant. Upon completion of the ACM Work, Landlord shall provide Tenant with a certification of completion of same prepared by a New York City Department of Environmental Protection certified asbestos investigator. At such time, Tenant may re-inspect the premises to verify the accuracy of Landlord’s certification and advise Landlord if any further work needs to be done.

 

(i)          Notwithstanding anything to the contrary set forth in this Lease or this Article, Landlord shall be required at all times during the term of this Lease to comply with Laws and Procedures governing ACM and the ACM Work in the Demised Premises and/or Building.

 

ARTICLE 27

 

LANDLORD’S REPRESENTATIONS

 

Section 27.01      Landlord hereby warrants that, having made reasonable efforts to discover same, to the best of its knowledge, it is not in default beyond any applicable grace or notice period of any obligation to the City of New York, nor is Landlord, its officers, principals or stockholders a defendant in any action instituted by the City.

 

Section 27.02      The manager and members of Landlord are as set forth in the Landlord disclosure form dated September 19, 2014. Any misrepresentation by Landlord with regard to the warranties set forth in this Article shall constitute a basis for rescission of this Lease.

 

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ARTICLE 28

 

EXCULPATORY CLAUSE

 

Section 28.01      Tenant shall look solely to the estate and interest of Landlord in the Building and the Land for the satisfaction of Tenant’s remedies for the collection of a judgment(or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other property or assets of Landlord or of any partner, member, stockholder, officer or director (direct or indirect) thereof shall be subject to levy, execution, attachment or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to this Lease, the relationship of Landlord or Tenant hereunder, or Tenant’s use or occupancy of the Demised Premises, or any other liability of Landlord to Tenant. The obligations of Landlord under the Lease shall not be binding upon Landlord named herein after sale, conveyance, assignment or transfer by such Landlord, except with respect to matters or liability accruing prior to the effective date of such sale conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale conveyance, assignment or transfer by such subsequent landlord, except with respect to matters or liability accruing prior to the effective date of such sale conveyance, assignment or transfer by such landlord) of its interest in the Building or the Land, as the case may be, and in the event of any such sale conveyance, assignment or transfer, which Landlord shall have the right to as in in its sole discretion, Landlord shall thereafter be and hereby is entirely freed of all covenants and obligations of Landlord under the Lease, except with respect to matters or liability accruing prior to the effective date of such sale conveyance, assignment or transfer by Landlord.

 

ARTICLE 29

 

NO WAIVER

 

Section 29.01         The failure by either party to insist, in one or more instances upon the full performance of any of the covenants, conditions or obligations of the other party hereunder shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent or approval by one party to or of any act by the other party requiring the first party’s consent or approval shall not be construed to waive or render unnecessary the first party’s consent or approval to or of any subsequent similar act by the other party. No provision of this Lease shall be deemed to have been waived by a party unless such waiver be in writing signed by the party against whom such waiver is claimed.

 

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ARTICLE 30

 

BROKERAGE

 

Section 30.01      Landlord and Tenant represent to the other that neither has dealt with any broker in connection with this Lease. Tenant and Landlord hereby indemnify and hold each other harmless against all loss, damage liability, cost and expense of any nature (including reasonable attorney’s fees and disbursements) based on any claim by any party whom such indemnifying party has dealt for a commission or other compensation in connection with this Lease which is based on the actions of the indemnifying party or its agents or representatives. The indemnified party shall cooperate with the indemnifying party in any defense; the indemnified party shall not settle a claim, liability or action for which the indemnifying party has the obligation to defend or indemnify without the indemnifying party’s consent. The foregoing indemnifications shall survive any expiration or termination of this Lease.

 

ARTICLE 31

 

TENANT’S DEFAULT

 

Section 31.01      This Lease and the Term and estate hereby granted are subject to the further limitations that:

 

(a)          If Tenant shall default in the payment of any Base Rent or Additional Rent or other charges under this Lease and such default shall continue for twenty (20) business days in the case of Base Rent or thirty (30) business days in the case of Additional Rent after Landlord shall have given Tenant notice specifying such failure; or

 

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(b)          If Tenant shall, whether by action or inaction, be in default of any of its obligations under this Lease (other than a default in the payment of Base Rent, Additional Rent or other charge under this Lease) and such default shall continue and not be remedied within thirty (30) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to any risk of forfeiture, penalties, or criminal liability or of default under any superior lease or superior mortgage (or permit the lender not to fund the same), if Tenant shall not (i) within said thirty (30) day period acknowledge the existence of such default and advise Landlord of Tenant’s intention to take all steps necessary to remedy such default, (ii) duly commence within said thirty (30) day period, and thereafter continuously and diligently prosecute to completion all steps necessary to remedy such default and (iii) complete such remedy within a reasonable time after the date of said notice to Tenant; or

 

(c)          If Tenant shall assign this Lease or sublease all of any portion of the Demised Premises in violation of Article 34 hereof; then in any of said cases, Landlord may give to Tenant a notice of intention of end the Term of this Lease at the expiration of twenty (20) business days from the date of the service of such notice of intention, and upon the expiration of said twenty (20) business days this Lease and the Term and estate hereby granted shall terminate with the same effect as if that day was the day herein definitely fixed for the expiration of this Lease. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damage to which Landlord may be lawfully entitled by reason of Tenant’s default hereunder. Suites or suits for the recovery of such damages, or any installment thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term of this Lease would have expired if it had not been so terminated under the provisions of this Article 31.

 

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Section 31.02      Without limiting any other rights or remedies of Landlord under this Lease, if Tenant shall fail to pay any installment of Base Rent, Additional Rent or any other item of rent within twenty (20) business days after any of the same shall be due in the case of Base Rent or thirty (30) business days after the same shall be due in the case of Additional Rent, with an additional grace period of up to thirty (30) days each for delays in payment due to the annual re- registration of this Lease by the Comptroller, Tenant shall pay to Landlord, as the case may be, as a late charge and as Additional Rent, a sum equal to interest at the Default Rate on the amount unpaid, computed from the date such payment was due to and including the date of payment. For purposes of this Lease, the term “Default Rate” shall mean the greater of (a) the statutory rate for judgments and (b) the annual interest rate publicly announced by Citibank, N.A. (or any successor thereto) at its principal place of business in New York City as its locally applicable so- called ‘base rent” (the “Prime Rate”).

 

ARTICLE 32

 

ESTOPPEL CERTIFICATE

 

Section 32.01         Tenant, at any time, and from time to time, but not more than every six (6) months upon at least thirty (30) days’ prior notice by Landlord, shall execute, acknowledge and delivery to Landlord, and/or to any other person, firm or corporation specified by Landlord (“Recipient”), a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same in in full force and effect as modified and stating the modifications), stating the then amount of the Base Rent and the dates to which the Base Rent and Additional Rent have been paid, stating whether or not there exist any default by Landlord under this Lease known to Tenant, and if, if so, specifying each such default, and identifying the Demised Premises of which Tenant has taken possession.

 

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ARTICLE 33

 

WAIVER OF TRIAL BY JURY AND COUNTERCLAIMS

 

Section 33.01          It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use and occupancy of the Demised Premises, and any emergency statutory or other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding for non- payment of rent, Tenant will not interpose and does hereby waive the right to interpose any counterclaim of whatever nature or description in any such proceeding other than compulsory counterclaims, or counterclaims that might be otherwise lost if not asserted in said proceeding.

 

ARTICLE 34

 

ASSIGNMENT, SUBLETTING OR MORTGAGING

 

Section 34.01         Tenant, for itself, its legal representative, successor or assigns, expressly covenants that it shall not mortgage this Lease without the prior written consent of Landlord. Except as expressly permitted by Section 1.01 above, Tenant shall not assign this Lease or sublet all or any portion of the Demised Premises without the prior written consent of Landlord, which may be granted or denied in Landlord’s sole discretion. No assignment, mortgage, sublease or occupancy shall be deemed a release of Tenant from the further performance by Tenant of the covenants or agreements on the part of Tenant to be performed and Tenant shall remain fully liable under this Lease for the payment of all sums and the performance of all of Tenant’s obligations hereunder. No consent by Landlord to an assignment or subletting shall be construed to relieve Tenant from obtaining the prior consent in writing of Landlord to any further assignment or subletting. In no way shall the forgoing limit the purposes for which the Commissioner of DCAS may determine to use the Demised Premises in his or her sole discretion as set forth in the Section 1.01 of this Lease, which determination shall not require Landlord’s written consent.

 

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ARTICLE 35

 

LEASE ENTIRE AGREEMENT

 

Section 35.01          This Lease sets forth the entire Agreement between the parties, superseding all prior agreements and understandings, written or oral, and may not be altered or modified except by a writing signed by both parties. This Lease shall be binding upon the parties hereto, their successors, legal representatives and assigns.

 

ARTICLE 36

 

APPICABLE LAW

 

Section 36.01         This Lease shall be governed by and construed in accordance with the internal laws of the State of New York.

 

ARTICLE 37

 

NUISANCE: HAZARDOUS MATERIALS

 

Section 37.01      Tenant covenant and agrees that throughout the Term, it shall not suffer, allow or permit any offensive or obnoxious vibration, noises, fumes, smoke, odor or other undesirable effect to emanate from the Demised Premises, or any machine or other installation herein, or otherwise suffer, allow or permit any such obnoxious vibration, noise, fumes, smoke, odor or other undesirable effect to constitute a nuisance or otherwise interfere with the safety, comfort or convenience of Landlord, other tenants of the Building or other customers, agents, or invitees or any others lawfully in or upon said Demised Premises or the Building. The provisions of this Article are in addition to the provisions made in Article 7 hereof and are not to be construed as a limitation of anything or matter contained in said Article 7.

 

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Section 37.02      Tenant shall not cause or permit any “Hazardous Materials” (as defined below) to be used, transported, stored, released, handled, produced or installed in, or, or from the Demised Premises or the Building, except for such Hazardous Materials (such as cleaning and photocopying fluid) that are customarily used in the operation of offices, provided that such Hazardous Materials are used in compliance with all laws and/or requirement of public authorities. The term “Hazardous Materials” shall mean any flammable, explosive, or radioactive materials, or hazardous wastes, hazardous and toxic substances, or related material, asbestos or any material containing asbestos, or any other such substance or material, as defined by any federal, state or local environmental law, ordinance, rule, regulation or common law including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant to each of the foregoing. In the event of a breach by Tenant of the provisions of this Article, Landlord shall, in addition to all of it rights and remedies under this Lease and pursuant to law, require Tenant to remove any such Hazardous Materials from the Demised Premises or the Building in the manner prescribed for such removal by all requirements of law. The provisions of this Article shall survive the expiration or sooner termination of this Lease.

 

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ARTICLE 38

 

VAULTS

 

Section 38.01      No vaults, vault space or area, whether or not enclosed or covered, not within the property line of the Building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this Lease to the contrary notwithstanding. Landlord makes no representation as to the location of the property line of the Building. All vaults and vault space and all such areas not within the property line of the Building, which Tenant may be permitted to use and/ or occupy, are to be used and /or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction.

 

ARTICLE 39

 

ACCESS TO PREMISES

 

Section 39.01      Landlord and Landlord’s agents shall have the right (but shall not be obligation) to enter the Demised Premises in an emergency at any time, and, at other reasonable times upon reasonable forty - eight (48) hour advance notice, if possible to examine same and to make such repairs, replacements and improvements as Landlord may deem necessary and reasonably desirable to the Demised Premises (however, in no event may Landlord be permitted to perform any work to the exterior face and perimeter windows of the Building or perform any work which shall disrupt Tenant’s operation of the Demised Premises) or to any other portion of the Building. Tenant shall permit Landlord to erect, use and maintain and replace pipes and conduits in and through the Demised Premises and to erect new pipes and conduits therein, provided they are installed adjacent to or concealed behind the walls, floor or ceiling. Landlord may, during the progress of any work in the Demised Premises, take all necessary materials and equipment into said Demised Premises without the same constituting an eviction, except as otherwise set forth in Section 13.02 and Section 9.02 thereof, Tenant shall not be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the Term, Landlord shall have the right to enter the Demised Premises at reasonable hours, upon reasonable notice, for the purpose of showing the same to prospective purchasers or mortgagees of the Building, and during the last twelve months of the Term for the purpose of showing the same to prospective tenants.

 

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Section 39.02       Landlord shall use its reasonable efforts to minimize interference with Tenant’s use and occupancy of the Demised Premises in making any repairs, alterations, additions or improvements; provided, however, that Landlord shall no have no obligation to employ contractors or labor at so- called overtime or other premium pay rates or to incur any other overtime costs or expense whatsoever.

 

ARTICLE 40

 

ATTORNEYS’ FEES

 

Section 40.01      Each party agrees to pay to the other upon demand, as additional rent in the case of Tenant, a sum equal to all reasonable out- of pocket costs and expenses (including attorney’s fees, costs of investigation and disbursements) incurred by the other party, if the other party prevails in enforcing any or all of its rights hereunder, specifically including the cost of collecting sums due, whether or not an action or proceeding is commenced, or levying and collecting on any judgment or arbitration award in the other party’s favor. To the extent either party uses its own employees as attorney, such party shall be entitled to collect, if entitled to attorney fees pursuant to the preceding sentence, such reasonable fees as a private -sector outside attorney performing the same services would be entitled to.

 

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ARTICLE 41

 

EXCAVATION AND SHORING;

 

BRIDGE OR SCAFFOLDING

 

Section 41.01           If an excavation shall be made upon land adjacent to the Demised Premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which Demised Premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement of rent. If such excavation is being performed by Landlord, Landlord shall (a) provide Tenant with such advance notice as is reasonable under the circumstances, (b) use commercially reasonable efforts to minimize interference with the operation of Tenant’s business in the Demised Premises, (c) indemnify Tenant (in its capacity as tenant hereunder) from and against any claim arising from such exaction and (d) abate Tenant’s rent to the extent such work renders the Demised Premises unusable and Tenant in fact does not use the Demised Premises.

 

Section 41.02      In the event Landlord must, in order to comply with applicable law, modify portions of the Building or alter or renovate the same, or clean, repair or waterproof the Building’s facade, Landlord may erect scaffolding “Bridges” and other temporary structures to accomplish the same, notwithstanding that such structure may obscure signs or windows forming a part of the Demised Premises, and notwithstanding that access to portions of the Demised Premises may be diverted or partially obstructed; provided, however, Landlord agrees to use reasonable efforts to minimize impairment of access to the Demised Premises and agrees to endeavor to accomplish the purposes intended and remove the structure in an expeditious manner. Landlord shall not be liable to Tenant or any party claiming through Tenant for loss of business of other consequential damages arising out of any change in the Building resulting from such alteration, renovation, repair, cleaning, out of the foregoing structures, or out of any noise, dust or debris from the performance of work in connection therewith, nor out of the disruption of Tenant’s business or access to the Demised Premises necessary to perform sidewalk repairs, nor shall any matter arising out of the foregoing be deemed an actual or constructive eviction, in whole or partial, of Tenant from the Demised Premises or a beach of Landlord’s covenant of quiet enjoyment or entitle Tenant to any abatement of rent whatsoever.

 

ARTICLE 42

 

RULES AND REGULATIONS

 

Section 42.01          Tenant shall comply with all current rules and regulation for the Building, a copy of which is attached hereto as Exhibit F , including any reasonable modification thereof and additions thereto as Landlord may make and hereafter communicate to Tenant, from time to time (the “Rules and Regulations”), which, in Landlord’s reasonable judgment, shall be necessary for the reputation, safely, care and appearance of the Building, or the operation or maintenance of the Building and which do not materially or unreasonably affect the conduct of Tenant’s business in the Demised Premises; provide, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations, the provisions of this Lease shall control.

 

{SIGNATURE PAGE FOLLOWS}

 

  86  

 

 

IN WITNESS WHEREOF , the said parties have caused this Lease to be executed the day and year first above written.

 

  BERKSHIRE EQUITY LLC
   
  Landlord
     
  By: /s/ David Bistricer
    Name:
    Title:
     
  THE CITY OF NEW YORK, acting
  through the Department of Citywide
  Administrative Services
     
  Tenant
     
  By: /s/ Ricardo E. Morales
    Ricardo E. Morales
    Deputy Commissioner
    Asset Management
    Department of Citywide
    Administrative Services

 

Approved as to Form:  
   
/s/ [ILLEGIBLE]  
Acting Corporation Counsel  
JDC OCT 17 2014  

 

  87  

 

 

UNIFORM FORM OF ACKNOWLEDGMENT

 

STATE OF NEW YORK )
  ) ss.:
COUNTY OF NEW YORK )

 

On the 24 day of September, in the year 2014, before me, the undersigned, personally appeared David Bistricer, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that she executed the same in her capacity, and that by her signature on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

 

  /s/ Chaya Sara Beer
  (Notary Public) ”Strike-out (Commissioner of Deeds)
   
   

 

STATE OF NEW YORK )
  ) ss.:
COUNTY OF )

 

On the 17th day of December, in the year 2015, before me, the undersigned, personally appeared Ricardo E. Morales, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(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 capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

 

  /s/ Susan R. Gabriel
  (Notary Public) “Strike-out (Commissioner of Deeds)
   
   

  

  88  

 

 

Exhibit 10.39

 

LEASE NO. X7433

 

LEASE BETWEEN

 

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, NEW YORK 10007

 

&

 

NPMM REALTY INC.

 

C/O BANK OF TOKYO-MITSUBISHI TRUST COMPANY

100 BROADWAY, 15TH FLOOR

NEW YORK, NEW YORK 10005

 

 

 

Premises: 240-250 Livingston Street (Block 165, Lot 22),

Borough of Brooklyn

Approximately 79,424 square feet of space

to be used by the

Human Resources Administration

 

 

 ****

 

 

 

FINAL

FEBRUARY 28, 1997

240 LIVINGSTON STREET

 

 

 

 

INDEX

 

ARTICLE 1 TERM PAGE 3
     
ARTICLE 2 RENT PAGE 4
     
ARTICLE 3 OPTION TO RENEW PAGE 5
     
ARTICLE 4 OPTION TO TERMINATE PAGE 5
     
ARTICLE 5 TAX AND OPERATING EXPENSE ESCALATIONS PAGE 6
     
ARTICLE 6 LANDLORD’S INTEREST IN PREMISES PAGE 15
     
ARTICLE 7 ALTERATIONS AND IMPROVEMENTS PAGE 16
     
ARTICLE 8 CERTIFICATE OF OCCUPANCY: COMPLIANCE WITH LAWS PAGE 23
     
ARTICLE 9 REAL ESTATE TAXES, ASSESSMENTS, WATER RATES, SEWER RENTS, ARREARS PAGE 25
     
ARTICLE 10 LANDLORD’S SERVICES PAGE 26
     
ARTICLE 11 TENANT’S SERVICES PAGE 29
     
ARTICLE 12 ALTERATIONS BY TENANT PAGE 29
     
ARTICLE 13 END OF TERM PAGE 30
     
ARTICLE 14 REPAIRS PAGE 30
     
ARTICLE 15 CONDEMNATION PAGE 33
     
ARTICLE 16 DESTRUCTION BY FIRE OR OTHER CASUALTY PAGE 34
     
ARTICLE 17 NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE PAGE 35
     
ARTICLE 18 QUIET ENJOYMENT PAGE 36
     
ARTICLE 19 ACCESS BY DISABLED PERSONS PAGE 36
     
ARTICLE 20 SUBORDINATION AND NON-DISTURBANCE PAGE 36
     
ARTICLE 21 TENANT NOT A HOLDOVER TENANT PAGE 37

 

( i

 

 

INDEX CONTINUED

 

ARTICLE 22 NOTICES PAGE 37
     
ARTICLE 23 FORCE MAJEURE PAGE 39
     
ARTICLE 24 SAVE HARMLESS PAGE 40
     
ARTICLE 25 INVESTIGATIONS PAGE 40
     
ARTICLE 26 ASBESTOS ABATEMENT PAGE 44
     
ARTICLE 27 LANDLORD’S REPRESENTATIONS PAGE 48
     
ARTICLE 28 SIGNIFICANT RELATED PARTY TRANSACTIONS PAGE 49
     
ARTICLE 29 MISCELLANEOUS PAGE 49
     
ARTICLE 30 WAIVER PAGE 52
     
ARTICLE 31 BROKERAGE PAGE 52
     
ARTICLE 32 APPLICABLE LAW PAGE 53
     
ARTICLE 33 LEASE ENTIRE AGREEMENT PAGE 53

 

EXHIBITS

 

EXHIBIT “A” FLOOR PLANS
SCHEDULE 1 ARREARS
EXHIBIT “B” BASE YEAR OPERATING EXPENSE SCHEDULE
EXHIBIT “C” CPI INDEX CALCULATION
EXHIBIT “D” SCOPE OF WORK
EXHIBIT “E” PREVENTIVE MAINTENANCE MEASURES
EXHIBIT “F” RULES AND REGULATIONS

 

( ii

 

 

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

DIVISION OF REAL ESTATE SERVICES

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, N.Y. 10007

 

AGREEMENT OF LEASE made as of this first (1st) day of January, 1997 between NPMM REALTY INC., whose address is c/o Bank of Tokyo-Mitsubishi Trust Company, 100 Broadway, 15th Floor, New York, New York 10005, hereinafter designated as Landlord, and THE CITY OF NEW YORK, a municipal corporation, acting through the Department of Citywide Administrative Services, successor-in-interest to the Department of General Services with an address at 1 Centre Street, 20th Floor North, New York, New York 10007, hereinafter designated as Tenant.

 

WITNESSETH :

 

WHEREAS , the parties hereto desire to enter into a lease of approximately 79,424 square feet of office space on the terms and conditions set forth herein; and

 

WHEREAS , Tenant reregistered the lease agreement dated September 18, 1980 between 240 Livingston Co., Landlord’s predecessor-in-interest, and Tenant for the period from June 1, 1994 through December 31, 1996; and

 

WHEREAS , this lease is subject to public hearing and Mayoral approval pursuant to §1602 (3)(a) of the New York City Charter, said hearing to be scheduled subsequent to the execution by the Landlord of this Lease; and

 

WHEREAS , this lease may be executed by the Deputy Commissioner of the Department of Citywide Administrative Services after public hearing and Mayoral approval pursuant to §1602 (3)(a) of the New York City Charter and subject to approval as to form by the Corporation Counsel of the City of New York; and

 

 

 

 

WHEREAS , the Board of Directors of Landlord by resolution adopted on 10/16/96, authorized the execution of this Lease by one of its officers; and

 

Tenant hereby represents and warrants to Landlord that:

 

1.          Tenant is a municipal corporation, duly organized, validly existing and in good standing under the laws of the State of New York.

 

2.          Tenant has the full right and authority to enter into this Lease; and

 

3.          The execution and delivery and performance of this Lease by Tenant (a) has been duly authorized, (b) does not require any approvals other than those hereinabove set forth, (c) does not conflict with the provisions of any instrument to which Tenant is a party or by which Tenant is bound, and (d) constitutes a valid, legal and binding obligation of Tenant.

 

NOW, THEREFORE , Landlord hereby leases to Tenant and Tenant hereby leases from Landlord subject to public hearing and mayoral approval and subject to approval as to form by Corporation Counsel, the following described premises (hereinafter referred to as the “Demised Premises”): approximately 79,424 rentable square feet of office space on part of the 1st, 2nd and 3rd floors of the building (hereinafter referred to as the “Building”) located at 240-250 Livingston Street (Block 165, Lot 22) in the Borough of Brooklyn. The Demised Premises shall be used for the type of office operation presently conducted by the Human Resources Administration or for such other similar purposes as the Commissioner of Citywide Administrative Services may determine, upon the terms and conditions hereinafter set forth, provided that such office purposes shall not impair or diminish the quality or character of the building and shall not increase the traffic in the Building. The floor plans of the leased area shall be made a part of the lease as Exhibit “A” and the square footage of same has been verified by the Bureau of Design of the Division of Real Estate Services of the Department of Citywide Administrative Services (hereinafter referred to as “DRES”).

 

2

 

 

Notwithstanding the foregoing, except for the particular functions performed by the agencies and offices hereinabove set forth as of the Commencement Date of the Lease, the Demised Premises shall not be used or occupied (i) to conduct a school, employment office or employment training facility, (ii) drug, alcohol or other type of substance abuse clinic or counseling service, (iii) as a child-care facility, (iv) for the preparation or service of food or beverages, (v) as a center for employment, training, rehabilitation, counseling or payments by mail, or (vi) for any other purposes not consistent with the first class character of the Building or which will substantially increase the traffic flow in the Building.

 

ARTICLE 1

 

TERM

 

The term of this Lease is fifteen (15) years, commencing on January 1, 1997 (the “Commencement Date”) and expiring at midnight of the day (“Expiration Date”) before the fifteenth (15th) anniversary of such Commencement Date, or on December 31, 2011.

 

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ARTICLE 2

 

RENT

 

The “Base Rent” shall commence on the Commencement Date and shall be at the annual rate of One Million Thirty-Two Thousand Five Hundred Twelve Dollars ($1,032,512.00) per annum from January 1, 1997 through December 31, 1999; One Million Seventy-Six Thousand Nine Hundred Eighty-Nine Dollars and Forty-Four Cents ($1,076,989.44) per annum from January 1, 2000 through December 31, 2002; One Million Two Hundred Sixteen Thousand Seven Hundred Seventy-Five Dollars and Sixty-Eight Cents ($1,216,775.68) per annum from January 1, 2003 through December 31, 2005; and One Million Three Hundred Seventy-Three Thousand Two Hundred Forty Dollars and Ninety-Six Cents ($1,373,240.96) per annum from January 1, 2006, through December 31, 2008; and One Million Five Hundred Forty-Eight Thousand Seven Hundred Sixty-Eight Dollars ($1,548,768.00) from January 1, 2009 through the Expiration Date; all other payments due to Landlord from Tenant under this lease shall be considered “Additional Rent.” Base Rent and Additional Rent shall be referred sometimes as “rent” in this Lease. All rent shall be payable in equal monthly installments at the end of each calendar month, provided that for the months in which the Commencement Date and the date of expiration of the term of this Lease occur, Tenant shall pay only a pro rata share of the monthly installment for the period of its occupancy. Pending any audit by Tenant or the Comptroller of the arrears due and owing from August 1, 1995 through December 31, 1996 under the prior lease agreement, as reregistered, for the Demised Premises (the “Arrears”), which Arrears are described on the attached Schedule 1, Tenant shall pay Landlord the amount of the Arrears. Upon completion of such audit, Tenant shall be allowed to deduct immediately the amount of the overcharges detected by the audit from the next installment of rent hereunder. All rent (Base Rent and Additional Rent) shall be payable at Landlord’s address hereinbefore set forth or at such other address as may be designated by Landlord from time to time, by notice in the manner provided in Article 22 hereof.

 

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All bills sent by Landlord to Tenant shall have clearly reflected thereon the property, address, and block and lot for which the bill is being sent. All bills must be legible and must contain the address to which the payment should be sent. The name, address, and telephone number of the Landlord’s contact person for billing inquiries is as follows: Reza Khan, Williams Real Estate Co., Inc., 530 Fifth Avenue, New York, New York 10036 (212) 704-3811. Any change in the Landlord’s contact person must be provided to Tenant in the manner designated in Article 22 hereof.

 

ARTICLE 3

 

OPTION TO RENEW

 

The Tenant shall have the right to renew the Lease for a period of five (5) years from January 1, 2012 through December 31, 2016 (“Renewal Period”), upon the same terms and conditions as this Lease (including those pertaining to Additional Rent), except that the Base Rent for the Renewal Period shall be One Million Seven Hundred Seven Thousand Six Hundred Sixteen Dollars ($1,707,616.00) per annum. The Tenant shall exercise the option by written notification to the Landlord no later than twelve (12) months prior to the expiration of the Lease, or by December 31, 2010. The Landlord shall be required to notify Tenant in writing not earlier than one (1) year nor later than six (6) months in advance of the date by which the option must be exercised.

 

ARTICLE 4

 

OPTION TO TERMINATE

 

The Tenant shall have the right to terminate this Lease without any penalty or liability to Tenant, in whole only, effective as of the second (2nd) anniversary of the Commencement Date or at any time thereafter, upon One Hundred Twenty (120) days prior written notice to the Landlord.

 

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ARTICLE 5

 

TAX AND OPERATING EXPENSE ESCALATIONS

 

The Landlord and the Tenant agree that in addition to the annual Base Rent provided for in the preceding paragraphs of this Lease, Additional Rent shall be payable, consisting of Real Estate Tax escalations and Operating Expense escalations as those terms are hereinafter defined. Tenant shall pay its pro rata share, which is thirty-two percent (32%) of any increase in direct Operating Expenses or Real Estate Taxes.

 

A. 1. BASE YEAR OPERATING EXPENSES

 

“Base Year Operating Expenses” shall be defined as all reasonable costs and expenses, without duplication, paid or incurred by Landlord in Calendar Year 1995, i.e. the Operating Expense Base Year, in the reasonable exercise of Landlord’s business judgment with respect to the following:

 

I. Items included in Operating Expenses

 

(1) Labor costs [including salaries, wages, medical, surgical and general welfare benefits (including group life and medical insurance) and pension payments, payroll taxes, Workmen’s Compensation, Union Benefits paid by employer, unemployment insurance, social security and other similar taxes] for the services of the following classes of employees performing services required in connection with the operation, repair and maintenance of the Building:

 

(i) the Building manager who works full or part time (if part time the allocable labor costs to the Building) on the Building.

 

(ii) engineers, mechanics, electricians, plumbers, porters, janitors and other employees engaged on a full or part-time basis in the actual operation, repair and maintenance of any part of the Building, including cleaning, and the heating, air conditioning, ventilating, plumbing, electrical and elevator systems of the Building; provided that in the case of such part-time employees only the costs attributable to the Building shall be included.

 

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  (2) (i) The competitive cost of materials and supplies used in the operation, repair and maintenance of the Building including painting of the Demised Premises and removal of graffiti, and including cleaning, and the real property on which it is located.

 

(ii) The competitive cost of independent contractors performing services required for the repair, operation and maintenance of the Building including extermination services once each month, including cleaning.

 

(iii) The costs of electricity and all other utilities for the common areas of the Building.

 

(3) The cost of casualty (war-risks if obtainable), workers compensation and property damage insurance;

 

(4) Management fees, provided that said management fee shall be no higher than that which is ordinary and customary in the real estate management industry in New York City.

 

(5) Repairs or replacements made to the Building and the Demised Premises by Landlord, at its expense, subject to those items contained in exclusions #2,9,10,12,13,14, and 17 of Article 5(A. 1.)(II); and

 

(6) Straight line depreciation or amortization over a ten (10) year period (including interest at the rate of two percent (2%) in excess of the “prime rate” or “base rate” of Citibank, N.A. at the time such expenditure is made) for any expenditure for capital improvement during the Operating Expense Base Year only, which results in a reduction of Operating Expenses (limited, however, to the annual amount that such Operating Expense(s) is reduced for the applicable year).

 

(7) Accountants’ fees for services rendered in connection with the preparation of the Base Year Operating Expense report.

 

II. Items Excluded from Operating Expenses

 

(1) The cost of correcting defects in the construction of the Building or in the Building equipment, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear shall not be deemed defects for the purpose of this category;

 

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(2) Cost of any repair made by Landlord to remedy damage caused by or resulting from the negligence of Landlord, its agents, servants or employees;

 

(3) Labor costs in respect to executives of Landlord not assigned to the Building as part of the normal Building operation staff;

 

(4) Taxes and Real Estate Taxes as defined below;

 

(5) Legal, accounting or other professional fees (including without limitation, brokerage, and finder’s and advertising fees) incurred to attract, lease to, or procure new tenants;

 

(6) Any insurance premium, except as provided in I. above;

 

(7) Interest for late payments of water and sewer rents;

 

(8) The cost of any items to the extent Landlord is reimbursed by insurance or which are reimbursable by insurance;

 

(9) The cost of extraordinary services provided for other tenants within the premises respectively demised to such tenants;

 

(10) The costs attributable to the correction or remedying of any act or omission of any tenant in the Building where such tenant is liable for the correction or remedying of any such act or omission under its lease with Landlord;

 

(11) Any cost (of electricity or any other item) for which Landlord is reimbursed by any tenant of the Building;

 

(12) The cost of repair or rebuilding caused by fire or other casualty or condemnation;

 

(13) The cost of any alterations, additions, changes, replacements and other items which under generally accepted accounting principles consistently applied are properly classified as capital expenditures, excepting only such capital expenditures which shall be made for replacements of Building equipment and property during the Operating Expense Base Year, the repair cost of which would exceed fifty percent (50%) of the cost of replacement and accordingly, the Landlord reasonably determined the cost of repair warrants replacement thereof in lieu of repair, and such allowable expenditures shall be included on a straight line basis, as are set forth in subsection A.1.(I)(6) above. Landlord shall furnish Tenant with reasonable evidence confirming both the repairs and the replacement cost referred to herein;

 

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(14) The cost of any alterations to prepare space for occupancy of any tenant in the Building;

 

(15) Expenses resulting from any violations by Landlord of the terms of this Lease or any other lease in the Building;

 

(16) Refinancing costs and mortgage interest and amortization payments;

 

(17) Any item otherwise indicated in this Lease to be performed at Landlord’s sole cost and expense; and

 

(18) Any item otherwise indicated in this Lease to be performed by Landlord but paid for by Tenant as additional rent or otherwise, other than as part of Operating Expenses.

 

Subject to Tenant’s right of audit hereinafter set forth, the parties agree that the Base Year Operating Expenses constitute the amount of $792,684,00. For purposes of such audit, the intent of the parties is that Tenant shall pay its proportionate share of increases in Base Year Operating Expenses (i.e. Operating Expense Escalations) based on the Building being fully occupied. Accordingly, in determining the amount of Base Year Operating Expenses, if less than one hundred percent (100%) of the Building rentable area was occupied by tenant(s) at any time during any such Operating Expense Base Year, Base Year Operating Expenses shall be an amount equal to expenses which would have been incurred in the Building under an operating clause such as this one had such occupancy been one hundred percent (100%) throughout such Operating Expense Base Year. The above amount includes such an adjustment.

 

Landlord has furnished to Tenant a schedule of Operating Expenses for said Operating Expense Base Year, which has been adjusted for 100% occupancy of the Building and is annexed hereto as Exhibit “B”.

 

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Such schedule of Base Year Operating Expenses includes a statement signed by Landlord’s CPA. To the best of Landlord’s knowledge, there is complete and accurate documentation in Landlord’s managing agent’s files to support each and every charge included in Base Year Operating Expenses.

 

Landlord must have supporting documents for each and every Base Year Operating Expense or it will be disallowed.

 

Such schedule of Base Year Operating Expenses has been accompanied by a report of Landlord’s Certified Public Accountant, which report must be based upon an audit conducted in accordance with generally accepted auditing standards and state whether the schedules of Base Year Operating Expenses present fairly the Base Year Operating Expenses of Landlord, as defined in the Lease.

 

If Landlord fails to furnish any Statements under this Article relating to Operating Expense Escalations under A.2. below, Tenant may, upon thirty (30) days’ written notice and Landlord’s failure to furnish such statement within such thirty (30) day period, withhold all Additional Rent due and owing to Landlord, including but not limited to Real Estate Tax Escalations and Operating Expense Escalations under A.2. below, until Landlord furnishes the foregoing statements. Tenant’s liability for Operating Expense Escalations due pursuant to this Article and/or Landlord’s liability for refunding any overpayment shall survive the expiration of the term hereof.

 

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Pending any audit by the Tenant or Comptroller of Base Year Operating Expenses for the Operating Expense Base Year, Tenant shall pay Operating Expense Escalations pursuant to the foregoing provisions hereof for any Lease Year, defined below, as billed by Landlord, provided, however, that Tenant shall have the right to withhold a reasonably disputed amount on account of Operating Expense Escalations until the dispute in question is resolved; and upon completion of such audit Tenant shall be allowed to deduct immediately overcharges detected upon audit from any installment of rent then becoming due, or if at the end of the Lease term Tenant shall be entitled to a payment from Landlord for such amounts within seven (7) days of Lease termination or expiration.

 

Tenant shall have the right to copy, examine and audit Landlord’s Base Year Operating Statement.

 

-A.2. Landlord’s Statement of Operating Expense Escalations--

 

Consumer Price Index Adjustments

 

1. Definitions

 

1.1           “Price Index” shall mean “The Consumer Price Index for U.S. City Average-All Urban Consumers (1982-84 equals 100), issued by the Bureau of Labor Statistics of the United States Department of Labor.

 

1.2           “Base Price Index” shall mean the Price Index for the month of October, 1995.

 

1.3           “Lease Year” shall mean each period of twelve (12) consecutive months, beginning on the first day of January, 1997, during the term of this Lease .

 

1.4           “Base Year Operating Expenses” shall mean the Operating Expenses for the Operating Expense Base Year, as defined in Section A.1 above.

 

2.          “Operating Expense Escalation” shall mean a sum payable by Tenant to Landlord each Lease Year computed by multiplying the sum representing the Base Year Operating Expenses as defined under Subsection A.1 of this Article 4 by the percentage, if any, by which the Price Index, as published for the month of October immediately preceding the first day of the Lease Year in question, shall exceed the Base Price Index. Such sum shall be multiplied by Thirty-Two percent (32%), which represents Tenant pro rata share of Operating Expenses for the Building. An example for calculating CPI Index changes is annexed hereto as Exhibit “C” (The “CPI Index Calculation”).

 

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3.           Such Operating Expense Escalation for every Lease Year which follows the Operating Expense Base Year shall be billed and paid as follows:

 

(a)          At any time after January 1st of each Lease Year, Landlord shall deliver to Tenant a statement (hereinafter the “Statement”) showing the amount of such Operating Expense Escalation payable for the then current Lease Year, which amount shall be calculated by using the CPI for the immediately preceding October factor according to paragraph 2. above. Tenant shall pay Landlord the same sum, in equal monthly installments (such monthly installment hereinafter referred to as the “Amount”) on the last day of each and every month during such Lease Year. Notwithstanding anything to the contrary, actual payment of any Operating Expense Escalation shall not start until January 1, 1997.

 

4.          Landlord shall not be obliged to make any adjustments or recomputations, retroactive or otherwise, by reason of any revision which may later be made in the figure of the Price Index first published for any month. The Price Index published for any Lease Year shall, for the purpose of this Subsection A.2., be deemed no lower than the Base Price Index.

 

5.          If the Price Index ceases to use the 1982-84 average equaling 100 as the basis of calculation, then the Price Index shall be appropriately adjusted to reflect the change in the Price Index from that in effect at the date of this Lease. If such Price Index shall no longer be published by said Bureau, then any substitute or successor index published by said Bureau or other governmental agency of the United States, and similarly adjusted as aforesaid, shall be used. If such Price Index (or a successor or substitute index similarly adjusted) is not available, a reliable governmental or other reputable publication reasonably selected by Landlord and Tenant jointly and evaluating the information theretofore used in determining the Price Index shall be used.

 

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6.          If any part of a year of the term of this Lease shall include any part of a Lease Year, Tenant’s liability under this Subsection A.2. shall be apportioned so that Tenant shall pay only such part of the sums required to be paid under this Subsection A.2. that shall be included in the term of this Lease.

 

B.   REAL ESTATE TAX ESCALATIONS

 

The term “Taxes” and “Real Estate Taxes” as used herein, shall mean the real estate taxes and assessments (excluding special assessments) on or with respect to the Building and the land upon which it is located, assessed, levied, or imposed by any governmental authority having jurisdiction. Excluded from the foregoing enumerations of Taxes and Real Estate Taxes will be (i) any income, franchise, inheritance, capital stock, excise, excess profits, occupancy or rent, gift, estate, payroll or stamp taxes or foreign ownership or control taxes or any so-called “Gains Tax” imposed pursuant to Article 31-B of the New York State Tax Law (the “Gains Tax”) and deed tax or transfer tax imposed by Article 29 of the New York State Tax Law, and any mortgage recording tax imposed by Article 11 of the New York State Tax Law, (ii) any expenses incurred by Landlord, or Landlord’s estate, including payments to attorneys and appraisers, in contesting the Taxes and Real Estate Taxes by tax certiorari proceedings and such expenses and payments shall be the obligation of Landlord, and (iii) any Taxes resulting from an increase of the assessed value of the Building attributable to an increase in the rentable area of the Building. As of the date hereof, to the best of Landlord’s knowledge, the only Taxes affecting the Building and/or the Land are the real estate taxes payable to the City of New York.

 

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Tenant covenants and agrees that for each tax fiscal year of the initial lease term commencing with the partial tax fiscal year which begins on January 1, 1997, where the total annual Real Estate Taxes imposed or assessed upon the land and Building for such lease year exceed the Real Estate Tax base for the New York City tax fiscal year 1995/96 (hereinafter referred to as the “Real Estate Real Estate Tax Base Year”), Tenant shall pay to Landlord as additional rent, a sum equal to thirty-two percent (32%) of such excess, which represents Tenant’s proportionate share of such excess. The amount of such Additional Rent payable for any tax fiscal year having a duration of less than twelve (12) months shall be prorated and may be billed . and shall be paid retroactively. Tenant shall pay such share of such excess within forty-five (45) days after Landlord provides Tenant with reasonably satisfactory documented proof that it has paid such tax liability for each semi-annual period (a copy of either Landlord’s cancelled check in payment of such Taxes or an official receipt of the taxing authority shall be deemed sufficient proof for such purpose).

 

The Tax base for the Real Estate Tax Base Year shall be the annual Real Estate Taxes finally imposed or assessed on the land and Building for the Real Estate Tax Base Year.

 

Appropriate credit shall be given for any refund obtained by reason of a reduction in the assessed valuation made by the assessors or the courts at any time during this Lease or at any time thereafter relating to a tax fiscal year for which Tenant provides a payment hereunder. The original computations, as well as payments of additional rent, if any, under the provisions of this Article, shall be based on the original assessed valuation with adjustments to be made if and when the Tax refund, if any, has been paid to Landlord.

 

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If the assessment of the land and Building shall be reduced for the Real Estate Tax Base Year as a result of protests of proceedings filed therefor, then the Tax base shall be amended to the amount actually collectible by the City of New York for the base fiscal tax year on the corrected assessment. Landlord shall have an obligation to immediately notify Tenant in writing each time a tax assessment is challenged.

 

C.    RIGHT TO AUDIT

 

Tenant and its authorized representative shall have the right to examine, copy and audit any and all books and records of Landlord, including but not limited to original invoices, originals of executed contracts, original cancelled checks, general ledgers and books of original entry, for the purpose of verifying the accuracy of any statement, including the statement of Arrears, furnished by Landlord to Tenant. All statements are subject to audit by the occupying agency or its representative and post-audit by the Office of the Comptroller. Landlord shall be required to retain the books and records required herein for six (6) years after the Period to which they relate.

 

Landlord shall have an affirmative obligation to notify Tenant of (i) any protest filed by any other tenant regarding any amounts billed pursuant to this Article; and (ii) any audits, resolution of audits, claims for refund of overpayments, settlements of overpayments, refunds of overpayments, and litigation and arbitration proceedings for recovery of overpayments, where such audits and other actions result in a determination that overcharges have occurred for litigation and arbitration proceedings for recovery of overpayments, “determination shall mean the trial-lower court or arbitrators determination, respectively, prior to any appeals.

 

ARTICLE 6

 

LANDLORD’S INTEREST IN PREMISES

 

Landlord warrants and represents that it is the owner in fee of the Building, the Demised Premises, and the real property on which they are located and is empowered and authorized to lease said premises as provided herein.

 

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ARTICLE 7

 

ALTERATIONS AND IMPROVEMENTS

  

(A)         Landlord agrees, prior to the Substantial Completion Date, (as defined below), to make alterations and improvements (the “Work”) based on preliminary plans and a scope of work (the “Scope of Work”) prepared by HRA and approved by DRES and attached hereto as Exhibit “D” and made a part hereof. The Work consists of (i) alterations and improvements that Landlord shall perform at its own cost and expense, described in the Landlord’s Base Building Scope of Work (the “Landlord’s Base Building Work”), and (ii) alterations and improvements that Landlord shall perform at its own cost and expense, described in the Tenant’s Scope of Work (the “Tenant Work”). Landlord’s Base Building Work and the Tenant Work are both fully described in Exhibit “D”.

 

Landlord shall cause its selected architect (the “Architect”) to prepare and deliver to HRA architectural and engineering plans and specifications, as required by the Buildings Department (the “Final Plans”). The Final Plans must (i) be engineering and architecturally complete; (ii) be coordinated with existing building conditions and facilities; (iii) conform to all NYC codes and all other applicable requirements (including but not limited to terms and conditions in the professional services requirement document prepared by DRES, i.e. “Guide for Design Consultant”, but only with respect to work to be performed in the specific areas of the Demised Premises which require submission of Final Plans to the Buildings Department); (iv) clearly distinguish Landlord’s Base Building Work from Tenant’s Work; (v) be coordinated and based on the Preliminary Plans; and (vi) incorporate and elaborate on the Phasing Plan, in order to create a complete set of construction documents. Landlord or Landlord’s Architect shall prepare the Phasing Plan, which shall describe the sequence of the Work to be performed, as approved by HRA, which approval shall not be unreasonably withheld or delayed. The Final Plans must be filed by Landlord with the Building and Fire Departments and all other governmental authorities having jurisdiction.

 

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Within thirty five (35) business days from the execution and delivery of this Lease, Landlord shall cause said Architect to arrange for preparation of initial Final Plans and delivery of same to the Director of Facilities at HRA and the Buildings, Fire Department and other regulatory agencies which require said submission. HRA will review and either approve or disapprove the Final Plans, such approval not to be unreasonably withheld or delayed. In the event HRA shall not approve such Final Plans it shall indicate in writing the corrections reasonably required before such approval can be furnished. Thereafter, Landlord shall resubmit revised Final Plans within ten (10) business days and HRA shall approve or disapprove such revised drawings (which approval shall not be unreasonably withheld or delayed) and indicate whatever corrections it reasonably requires within ten (10) business days after its receipt thereof; following which Landlord shall within five (5) business days of his receipt of corrections required by HRA fully complete the revision of the Final Plans based on the requested corrections and furnish HRA with a complete set thereof for its approval which shall not be unreasonably withheld or delayed.

 

Within fifteen (15) days after HRA’s approval of the Final Plans, and prior to the commencement of the Work, Landlord shall submit to HRA Building Department administrative approvals with respect to Final Plans. In the event that Landlord has not received the Buildings Department administrative approvals by the time HRA approves the Final Plans, then Landlord shall provide HRA with (a) reasonable written verification that it has not received the administrative approvals, and (b) a list of the most recent objections by the Buildings Department and Landlord’s reply, and (c) written evidence that Landlord is diligently proceeding to obtain the Buildings Department approvals.

 

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Within ten (10) business days from approval of the Final Plans by the Buildings Department and prior to commencing construction, Landlord will submit a copy of the Building Permit to HRA. In the event Landlord has not received the Building Permit within ten (10) business days from said Final Plans approval, then Landlord shall (a) provide HRA with written verification that it has not received the Building Permit and (b) demonstrate to HRA that it has (i) diligently pursued and continues to diligently pursue obtaining said Building Permit, and (ii) responded in a timely manner to objections raised by the Buildings Department.

 

By virtue of the fact that Landlord is a wholly owned subsidiary of the Bank of Tokyo- Mitsubishi Trust Co., Landlord hereby warrants and represents that it has the financial capability and/or adequate financing to complete the Work in the time frames set forth herein. Landlord’s misrepresentation with regard to its ability to provide adequate financing shall constitute a basis for rescission of this Lease.

 

Landlord shall have a continuing obligation to make regular periodic payments to its contractors at approximately thirty (30) day intervals in amounts reasonably commensurate with the amount of progress towards Substantial Completion from the start of work up to the date of Substantial Completion, to ensure diligent and timely completion of the Work.

 

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The Demised Premises shall be deemed “Substantially Complete” and “Substantial Completion” shall be deemed to have occurred (the “Substantial Completion Date”) upon (1) certification by HRA of Landlord’s completion of the Work excepting minor details of construction or decoration which do not adversely affect Tenant’s use of the Demised Premises; and (2) receipt by Landlord and delivery to HRA of (i) all applicable Building Department and Fire Department inspection sign-offs (including but not limited to Building Department Post Permit TR-1, Equipment Use Permits, a new Certificate of Occupancy, electrical and plumbing sign-offs, Fire Department and elevator inspections and sign-offs and compliance with the terms and provisions of Article 26 of the Lease) (Asbestos) and (ii) certified air balancing report approved by Landlord’s engineer as being in conformance with the Final Plans. HRA shall use reasonable efforts to certify or deny certification of Substantial Completion pursuant to (1) above within seven (7) business days after HRA receives written notice from Landlord of Landlord’s determination that the Work is Substantially Complete; such notice from Landlord must include all items under (2)(i) and (ii) above. In the event the Certificate of Occupancy and/or sign-offs are temporary, Landlord will keep them all in full force and effect and will be solely liable for all costs in connection therewith. Landlord, prior to the Substantial Completion Date, shall remove all violations, including but not limited to Building Code and Fire Code violations, now pending or which may be placed against the Demised Premises, except those violations caused by Tenant’s breach of the terms of this Lease or caused by other tenants in the Building, which violations Landlord shall diligently proceed to advise such tenant to remove.

 

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(B) In the event Landlord (i) fails to commence construction of the Work within ten (10) business days after its receipt of Tenant’s approval of the Final Plans and all necessary governmental permits and approvals and/or pursue completion of same diligently and in continuous manner, and/or (ii) fails to meet any applicable time frames under Subsection (A) above, subject, however, to force majeure and Tenant’s delay in providing Landlord access to the phased area after notice, then Tenant shall give Landlord written notice (hereinafter referred to as “Delay Notice”) advising Landlord of its failure to so commence and/or perform. If Landlord fails to commence the Work or perform its obligations under Subsection (A) above within ten (10) business days from the date of said Delay Notice, Tenant, in addition to any other remedy it may have, at it’s option may: (i) as agent of the Landlord commence performance of the work and deduct the cost thereof from the rent to become due and payable pursuant to Article 2 hereof; or (ii) after sending a Second Delay Notice to Landlord and Landlord’s failing to proceed diligently within five (5) business days, terminate this Lease on ten (10) days written notice to Landlord. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant provides a written Delay Notice to Landlord or elects to perform the work as Landlord’s agent, it shall receive a rent credit subsequent to the target date for Substantial Completion equivalent to (i) one day of free rent if Landlord’s delay adversely affects Tenant’s occupancy of the Demised Premises and Tenant vacates the Demised Premises, or (ii) $870.40 per day, if Tenant remains in occupancy of the Demised Premises, for each day the commencement of the Work was delayed or time frames were not met, further resulting in Landlord’s delay in achieving Substantial Completion of the Work. The foregoing remedies will not be exercised by Tenant if Landlord (i) has timely filed all appropriate paperwork, but has not received the necessary governmental sign offs within the time frames described at the beginning of this paragraph for Landlord to commence the Work, and (ii) has demonstrated to HRA in writing that it is diligently pursuing receipt of said necessary sign offs.

 

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(C ) Notwithstanding anything to the contrary herein, in the event Landlord, after commencing the Work, fails to complete said alterations and improvements, after commencement of same, within six (6) months from Final Plans approval and receipt of the Building Permit, subject, however, to force majeure and Tenant’s delay in providing Landlord access to the phased area after notice, Tenant shall give Landlord written notice (hereinafter referred to as the “Completion Delay Notice”) advising the Landlord of its failure to achieve timely Substantial Completion. If Landlord fails to achieve Substantial Completion within one (1) month from the date that Landlord receives such Completion Delay Notice, or if such work cannot be completed within said one (1) month and Landlord fails to act diligently, and continuously without interruption to Substantially Complete said work within a reasonable time, Tenant, in addition to any other remedy it may have, may: (i) as agent of Landlord, perform said work and deduct the cost thereof and/or from the rent to become due and payable pursuant to Article 2 hereof; or (ii) after sending a second Completion Delay Notice to Landlord and Landlord’s failing to achieve Substantial Completion one (1) month thereafter, terminate this Lease on ten (10) days written notice to Landlord. Tenant, however, shall not be required to exercise either of the foregoing rights. If Tenant elects not to terminate the Lease, and regardless of whether or not Tenant provides written Completion Delay Notice or elects to perform the work as Landlord’s agent, it shall receive a rent credit subsequent to Substantial Completion equivalent to (i) one (1) day of free rent if Landlord’s delay adversely affects Tenant’s occupancy of the Demised Premises and Tenant vacates the Demised Premises, or (ii) $870.40 per day, if Tenant remains in occupancy of the Demised Premises, for each day Landlord has delayed Substantial Completion of the Work. The foregoing remedies will not be exercised by Tenant if Landlord (i) has substantially completed the Work, (ii) has timely filed all appropriate paperwork, but has not received the necessary governmental sign offs within the time frames described at the beginning of this paragraph for Landlord to Substantially Complete the Work, and (iii) has demonstrated to HRA in writing that it is diligently pursuing receipt of said necessary sign offs.

 

In the event Substantial Completion has occurred, then with respect to as built drawings and minor details of construction or decoration which do not adversely affect Tenant’s use of the Demised Premises, Tenant shall submit to Landlord a written list of such minor details including the as built drawings which it deems to be incomplete (hereinafter the “Punch List”).

 

Landlord shall within thirty (30) days of receipt of the Punch List, commence performance and diligently proceed in a continuous manner to complete said work. In the event Landlord fails to commence the Punch List within thirty (30) days of receipt of the Punch List and thereafter diligently proceed to complete the same, Tenant, in addition to any other remedy it may have, may (i) as agent for the Landlord, perforin said work and deduct the cost thereof from the rent due or that may become due and owing under this Lease or (ii) withhold rent due and owing to Landlord in the amount of $870.40 per day, until Landlord performs such work to the satisfaction of Tenant.

 

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With respect to Tenant’s repair obligations, upon completion of the work, Landlord shall assign to Tenant the beneficial interest in all warranties and guarantees received by Landlord from contractors and materialmen engaged in the performance of the work, as well as the right to enforce any contracts made with such contractors and materialmen. Landlord hereby appoints Tenant as its attorney-in-fact to institute suit in Landlord’s name and for Tenant’s benefit and agrees to cooperate fully with Tenant in the event that Tenant seeks to enforce its rights with respect to the warranties and guarantees.

 

Notwithstanding anything to the contrary in Article 13 hereof, Landlord shall be solely responsible for the performance and cost of all repairs resulting from defects of materials and workmanship in construction and/or alterations and improvements of the Demised Premises or of the Building. Furthermore, and notwithstanding anything to the contrary contained in Article 13 hereof, if Landlord uses existing ductwork or ventilation equipment, it shall remain solely responsible for the performance and cost of repair or replacement of same during the entire term hereof.

 

Landlord acknowledges that the Demised Premises may be occupied and used by Tenant, its employees and invitees during the performance of the Work. Accordingly, Landlord shall, and shall cause it contractors, to use best efforts to minimize noise, dust and other conditions which may adversely affect Tenant, its invitees, children, employees, and workers, to take every reasonable precaution against injuries to persons or damage to property, and to provide for the safety of persons at the Demised Premises. Landlord shall be responsible for the initiation, maintenance and supervision of reasonable safety precautions and programs in connection with the performance of the Work. Prior to the commencement of the Work Landlord shall designate a qualified person to carry out such programs and notify Tenant of the person so designated.

 

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In accordance with the approved Phasing Plan, the occupying agency shall, upon ten (10) days prior notice from Landlord temporarily move its equipment and property, as necessary, in the affected area in order for Landlord to perform the Phase of the Work. Tenant shall allow Landlord access to the Demised Premises for the purpose of performing the Work, pursuant to the Phasing Plan, which approval shall not be unreasonably withheld or delayed. The unisex bathrooms to be installed by the Landlord shall be located within the Demised Premises at a location mutually satisfactory to Landlord and Tenant. If Tenant fails to provide Landlord access to the affected phased area of the Demised Premises to perform an item of work within ten (10) days after a second notice, Landlord shall not be required to perform said item of work for Substantial Completion and Landlord’s time frame to Substantially Complete the Work shall be extended by such delay.

 

Landlord agrees to name, or cause its contractors to name, the City of New York, as an additional named insured on their respective policies of public liability insurance, and furnish the Tenant with certificates of insurance to that effect, provided there is no additional charge therefor, or if Tenant agrees to pay said additional charge.

 

ARTICLE 8

 

CERTIFICATE OF OCCUPANCY; COMPLIANCE WITH LAWS

 

Landlord agrees to deliver to the Department of Citywide Administrative Services a Certificate of Occupancy or other sufficient indicia of legality for use of the premises for office purposes, and same shall be a prerequisite to the official assumption of occupancy by Tenant.

 

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At its own expense, Landlord agrees to obtain all permits necessary to legalize the Demised Premises, the alterations and improvements specified herein and to comply with all requirements, rules, laws, regulations and orders of Federal, State and local authorities and of any board of fire underwriters having jurisdiction over the Demised Premises or the real property of which they form a part, including, without limitation, the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq. (“ADA”) during the term hereof or renewal term, if any. With respect to the ADA and regulations promulgated pursuant thereto, Landlord shall comply with and perform the Landlord’s obligations, if any, as a public accommodation pursuant to Title III of the ADA. Landlord shall remove all violations which may be placed against the Demised Premises, including but not limited to Building Code and Fire Code violations, except those violations caused by Tenant’s breach of the terms of this Lease.

 

In the event Landlord fails to comply with any of the provisions of this Article, Tenant, in addition to any other remedy it may have, after notice to Landlord and Landlord’s failure thereafter to diligently proceed to comply, (i) may, as agent of Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease or, (ii) may withhold an amount of rent equal to 133% of the reasonable cost of performing same as reasonably determined by Tenant until Landlord shall have performed same to Tenant’s reasonable satisfaction, at which time any amounts so withheld shall be promptly paid to Landlord.

 

Furthermore, in the event Tenant provides a second notice to Landlord of Landlord’s default under this Article and Landlord thereafter fails to commence compliance and thereafter diligently continue compliance with any of the provisions of this Article within fifteen (15) days following receipt of the second notice, and as a result of Landlord’s failure, (a) one third (1/3) of the Demised Premises is rendered unusable for business purposes and (b) Tenant vacates said portion of the Demised Premises, then Tenant may terminate this Lease on twenty (20) days written notice to Landlord.

 

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ARTICLE 9

 

REAL ESTATE TAXES, ASSESSMENTS, WATER RATES,

 

SEWER RENTS, ARREARS

 

(A)         Landlord shall pay all real estate taxes, assessments, water rates and sewer rents levied against said Building and Land for the tax lot where the Demised Premises are located or that may be liens thereon. Landlord shall provide Tenant with receipted bills, payment receipts or other back-up information satisfactory to Tenant evidencing Landlord’s payment thereof within five (5) business days after Tenant shall give notice to Landlord requesting such evidence of payment. Should Landlord fail to pay said taxes, assessments, water rates and sewer rents, then Tenant, in addition to any and all other remedies it may have, may apply any rent due or that may become due and payable under this Lease to the payment of said taxes, assessments, water rates and sewer rents and so long as any of such items are unpaid, no action or proceeding may be maintained by Landlord against Tenant for nonpayment of the rent so applied.

 

(B)         Additionally, if Landlord is in any other arrears on the Property, Building and/or Demised Premises payable to the City of New York, including but not limited to taxes, water and sewer charges, rents, mortgage payments, if any and any other payments or obligations payable to the City of New York, after 30 days notice from Tenant to Landlord and Landlord’s failure to make such payment within said 30 day period, then Tenant may apply any rent due or that may become due and payable under this Lease to the payment of such arrears and as long as such arrears are unpaid, no action or proceeding may be maintained by Landlord against Tenant for nonpayment of the rent so applied.

 

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ARTICLE 10

 

LANDLORD’S SERVICES

 

Landlord shall provide heat, hot and cold water, adequate elevator service, maintain the public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets (including supply and cleaning thereof) or other public parts of the building (collectively “common areas”), perform regular monthly extermination services to the Demised Premises and the common areas, and maintain the heating, ventilation and air conditioning equipment in good working order so as: (i) to provide air conditioning during the summer months at an average inside design temperature of seventy-five (75) degrees Fahrenheit dry bulb and a room relative humidity of fifty percent (50%) when the outside temperature is ninety-five (95) degrees Fahrenheit dry bulb coincident with a wet bulb temperature of seventy-five (75) degrees Fahrenheit, provided that, with respect to air conditioning, Tenant keeps the blinds closed in all windows exposed to direct sunlight and maintains a lighting and equipment load of not more than 4 1/2 watts per rentable square feet and a people load of not more than one person per 100 square feet; and (ii) to provide heating during the winter months at an average inside design temperature of seventy-two (72) degrees Fahrenheit dry bulb when the outside temperature is zero (0) degrees Fahrenheit dry bulb with a wind velocity of fifteen (15) miles per hour.

 

The foregoing Landlord’s services shall be provided during the hours of 8:00 a.m. to 6:00 p.m. Monday through Friday inclusive, New York City holidays excluded, (“Business Hours”) except that elevator service and access to the Demised Premises shall be provided twenty-four (24) hours per day, seven (7) days per week, subject to Landlord’s reasonable rules and regulations.

 

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Within sixty (60) days after the execution of the Lease by Tenant, Landlord, at its sole cost and expense, shall perform all of the preventive maintenance measures set forth in Exhibit “E”, attached hereto and made a part hereof. Landlord, at its sole cost and expense, may, at its option, enter into a separate agreement for the maintenance of the roof and each of the building systems of the Demised Premises. Any such agreement may remain in effect during the term of the Lease and shall provide that the contractor perform all of the preventive maintenance measures set forth in Exhibit “E”. The contractor shall adhere to industry wide standards in performing its obligations under the maintenance agreement. Any such maintenance agreement shall further provide that within ten (10) business days after inspecting the roof or building systems the contractor shall prepare a written report. Such report shall (a) summarize contractor’s, or Landlord’s, findings and recommendations for maintenance service and (b) state whether maintenance service has been rendered. Contractor or Landlord shall submit a copy of the report to Tenant within fifteen (15) days after it is completed.

 

Landlord shall paint the Demised Premises completely within sixty (60) days of the execution of this Lease by Tenant, and again when requested by Tenant after the fifth (5th) and tenth (10th) anniversaries of the Lease Term in accordance with Building Standard specifications and colors selected by Tenant from the Building Standard color chart; Furthermore, in the event Tenant exercises its option to renew the Lease, Landlord shall paint the Demised Premises completely in the sixteenth (16th) year of the Lease, as renewed.

 

27

 

 

In the event Landlord fails to comply with any of the provisions of this Article within five (5) business days after written notice by Tenant, Tenant, in addition to any other remedy it may have, may (i) as agent of Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (ii) withhold an amount of rent equal to 133% of the reasonable cost of such repairs as reasonably determined by Tenant until Landlord performs such repairs to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly repaid to Landlord.

 

Anything to the contrary notwithstanding, in the event the repairs to be performed by the Landlord are required to correct a hazardous condition or to end an emergency which renders the premises unsuitable for the use set forth herein, Tenant shall give Landlord, its agent, superintendent or the person designated to receive such notice, immediate notice in writing, personally or by certified mail, and Landlord, shall commence the repairs by the next business day after receipt of such notice (the making of necessary telephone calls being deemed commencement) and diligently proceed in a continuous manner to complete said work. In the event Landlord fails to commence and complete said work after said notice, as aforesaid, Tenant, (i) as agent for the Landlord, may perform same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease or (ii) may withhold an amount of rent equal to 133% of the reasonable cost of such repairs as reasonably determined by Tenant until Landlord performs such repairs to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord.

 

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Furthermore, in the event Tenant provides a second notice (the “Second Notice”) to Landlord of Landlord’s default under this Article and Landlord thereafter fails to commence to cure and diligently proceed in a continuous manner to cure said default within fifteen (15) days following receipt of the Second Notice, and as a result of Landlord’s failure, (a) one third (1/3) of the Demised Premises is rendered unusable for business purposes and (b) Tenant vacates said portion of the Demised Premises, then Tenant may terminate this Lease on Twenty (20) days written notice to Landlord.

 

ARTICLE 11

 

TENANT’S SERVICES

 

Tenant shall pay for its electricity directly to the public utility company. Landlord shall, at its sole cost and expense, provide the meter and any necessary wiring. Tenant shall provide its own cleaning and rubbish removal services. Tenant shall close the blinds and windows in the Demised Premises at end of each business day.

 

ARTICLE 12

 

ALTERATIONS BY TENANT

 

Tenant may make alterations, decorations, installations, additions and improvements in and to the Demised Premises and may erect signs therein or thereon. Tenant may make alterations, installations, additions and improvements in excess of Ten Thousand Dollars ($10,000.00) upon prior written consent of Landlord, which consent shall not be unreasonably delayed or withheld. All such work performed by Tenant shall be in compliance with all applicable laws and the Building Rules and Regulations, which Rules and Regulations are annexed hereto and made a part hereof as Exhibit “F”. All property of whatever kind or nature in or on the Demised Premises owned, installed or paid for by Tenant shall be and remain the property of Tenant and upon the termination of this Lease, renewal, extension or holdover period, Tenant shall remove such property. Tenant shall repair any damage to the Demised Premises caused by Tenant’s removal of its property upon the expiration or earlier termination of this Lease. If Tenant shall fail to remove such property upon termination of this Lease, renewal, extension or holdover period, the property shall be deemed to be surrendered, and may be removed by Landlord. Tenant shall reimburse Landlord for the reasonable actual cost of removing Tenant’s property within forty-five (45) days of receipt of Landlord’s reasonable back-up documentation.

 

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ARTICLE 13

 

END OF TERM

 

Upon the expiration or other termination of the term of this Lease, Tenant shall quit and surrender the Demised Premises in good order and condition with ordinary wear and tear, and damage by the elements, including fire or other casualty, excepted, and in compliance with the provisions of Article 12.

 

ARTICLE 14

 

REPAIRS

 

Landlord shall make all interior, exterior and structural repairs, excluding such repairs necessitated by the negligence or improper conduct of Tenant or its invitees, but including maintenance, repair or replacement of the roof, windows and window glass, replacement of light bulbs and fluorescent lamps, elevators, plumbing, and electrical, heating and air conditioning systems, common areas, removal of graffiti from the exterior and interior of the Building and/or the Demised Premises, and all repairs needed because of Landlord’s negligence or because of defective materials or workmanship in the construction and/or improvement of the Demised Premises or of the Building of which they are a part. Landlord shall repair and maintain any sidewalks, curbs and passageways adjoining and/or appurtenant to the Demised Premises in good, clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstruction.

 

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In the event Landlord fails to fulfill its obligations, Tenant may, in addition to its other remedies, give written notice to Landlord specifying the repairs required by Tenant and Landlord shall commence performance of such work within five (5) business days after the giving of such notice and diligently proceed to complete said work. In the event Landlord fails to so commence or diligently proceed in a continuous manner to complete said work after said written notice, Tenant, in addition to any other remedy it may have, (i) may, as agent of Landlord, perform the same and deduct the cost thereof from any rent due or that may become due and payable under this Lease, or (ii) withhold an amount of rent equal to 133% of the reasonable cost of such repairs as reasonably determined by Tenant until Landlord performs such repairs to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord.

 

Anything to the contrary notwithstanding, in the event the repairs to be performed by the Landlord are required to correct a hazardous condition or to end an emergency which renders the premises unsuitable for the use set forth herein, Tenant shall give Landlord, its agent, superintendent or the person designated to receive such notice, immediate notice in writing, personally or by certified mail, and Landlord, shall commence the repairs by the next business day after receipt of such notice (the making of necessary telephone calls being deemed commencement) and diligently proceed in a continuous manner to complete said work. In the event Landlord fails to commence and complete said work after said notice, as aforesaid, Tenant (i) may, as agent for the Landlord, perform same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, (ii) may withhold an amount of rent equal to 133% of the reasonable cost of such repairs as reasonably determined by Tenant until Landlord performs such repairs to the reasonable satisfaction of Tenant at which time any amounts so withheld shall be promptly paid to Landlord, or (iii) may give Landlord a second notice (the “Second Notice”) of said default to Landlord.

 

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Furthermore, in the event Tenant provides a Second Notice to Landlord of Landlord’s default under this Article and Landlord thereafter fails to commence to cure and diligently proceed with continuity to cure said default within fifteen (15) days following receipt of the Second Notice, and as a result of Landlord’s failure, (a) one third (1/3) of the Demised Premises is rendered unusable for business purposes and (b) Tenant vacates said portion of the Demised Premises, then Tenant may terminate this Lease on twenty (20) days written notice to Landlord.

 

In the event Tenant is unable to use any part or all of the Demised Premises because of Landlord’s failure to timely perform such work as set forth in the two preceding paragraphs hereof, the rent shall be reduced, during such period, proportionately to the diminution in space resulting from such failure.

 

In the event Tenant may still be able to use the Demised Premises for the purposes set forth in the Lease but Landlord’s failure to timely make repairs or provide services adversely affects Tenant’s operations within the Demised Premises in a material manner, Tenant shall be entitled, during such period, to a bona fide equitable reduction in rent.

 

Tenant may make such ordinary and nonstructural interior repairs as it deems necessary for its occupancy.

 

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ARTICLE 15

 

CONDEMNATION

 

If the whole of the Demised Premises shall be taken in condemnation, this Lease shall terminate upon the vesting of title in the condemnor and all rent and other charges paid or payable by Tenant shall be apportioned as of the date of vesting of title in such condemnation proceeding.

 

If only part of the Demised Premises shall be so taken in condemnation so that the remainder cannot be used for the intended purpose, then Tenant may either terminate this Lease as to the remainder of the premises on ten (10) days written notice to Landlord or remain in possession of the remaining portion of the premises under all of the terms, conditions and covenants of this Lease, except that the rent thereafter shall be apportioned and reduced from the date of each such partial taking to the amount equal to the product of the dollar amount of rent payable on such date and the number of square feet in the part remaining. If this Lease is not so terminated, the proceeds of any award for partial taking shall be applied by Landlord to the repair, restoration or replacement of the remaining premises, to their condition immediately prior to the condemnation (“Restoration”) and if there be any deficiency, it shall be made up by Landlord, but if there be any surplus, it shall belong to the Landlord. Said Restoration of the remaining premises shall be performed pursuant to plans and specifications reasonably approved by the Human Resources Administration and completed within six (6) months after such approval. In the event said Restoration is not completed within said six (6) months period, Tenant, in addition to any other remedy it may have, may terminate this Lease on ninety (90) days written notice or perform said Restoration and deduct the reasonable cost thereof from any rent which may be due and payable under this Lease.

 

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Tenant shall be entitled to apply for a separate award for the value of the improvements and fixtures made or paid for by Tenant upon that part of the premises taken in condemnation and hereby waives any claim for the value of its leasehold position.

 

ARTICLE 16

 

DESTRUCTION BY FIRE OR OTHER CASUALTY

 

If the whole of the Demised Premises is totally destroyed or damaged by fire or other casualty (“Casualty”), or destroyed or damaged by Casualty to such an extent that they are wholly or substantially unsuitable or untenantable for use for the purpose for which they are leased (“Total Casualty”), then from the date of such damage or destruction the rent shall abate fully until such time as Landlord fully repairs and restores the Demised Premises to its layout and condition immediately prior to the Casualty as reasonably certified by the Human Resources Administration.

 

Either party may terminate this Lease by notice to the other within thirty (30) days from the date of the Total Casualty. If no such notice is given, Landlord shall, within ninety (90) days after receipt of insurance proceeds, commence and diligently proceed with continuity to complete the repairs and restoration of the Demised Premises to their layout and condition prior to said Total Casualty. If Landlord fails to commence said repairs and restoration as above provided, or complete the same within one hundred and eighty (180) days after such commencement, Tenant may terminate this Lease on forty-five (45) days written notice or, in addition to any other remedy it may have, may perform such repairs and restoration and reimburse itself for the reasonable cost thereof from any rent due or that may become due and payable under this Lease.

 

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If the Demised Premises are partially damaged by Casualty, to the extent of less than a Total Casualty (“Partial Casualty”), Landlord shall, within ninety (90) days after receipt of applicable insurance proceeds, commence and diligently proceed to complete the repairs and restoration of the Demised Premises to their layout and condition prior to said Partial Casualty. If Landlord fails to commence as aforesaid or to complete the same within one hundred and twenty (120) days after such commencement, Tenant, in addition to any other remedy it may have, may terminate this Lease by giving Landlord forty-five (45) days written notice or may perform such repairs and restoration and reimburse itself for the reasonable cost thereof from any rent due or which may become due under this Lease.

 

From the date of such damage to the date of substantial completion of such repairs and restoration of the Partial Casualty as reasonably certified by the Human Resources Administration in writing, Tenant shall pay rent for that part of the premises it is using during the alterations and repairs on a square foot basis in an amount equal to the product of the dollar amount of rent per square foot payable on such date and the number of square feet being occupied by Tenant.

 

ARTICLE 17

 

NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE

 

Landlord warrants and represents that no officer, agent, employee or representative of The City of New York has received any payment or other consideration for the making of this Lease and that no officer, agent, employee or representative of The City of New York has any interest, directly or indirectly, in this Lease or the proceeds thereof.

 

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ARTICLE 18

 

QUIET ENJOYMENT

 

Landlord covenants that Tenant, paying the rent reserved herein, and performing all of the other terms, covenants and conditions on its part to be performed, shall and may peaceably and quietly have, hold and enjoy the Demised Premises for the use and purpose stated in this Lease or for such other similar purposes as the Commissioner of Citywide Administrative Services may determine, subject to the terms of the introductory paragraph of this Lease preceding Article 1.

 

ARTICLE 19

 

ACCESS BY DISABLED PERSONS

 

Landlord represents that the premises demised herein are suitable for access by disabled persons.

 

ARTICLE 20

 

SUBORDINATION AND NON-DISTURBANCE

 

This Lease shall be subject and subordinate to all existing mortgages of record or future mortgages from a reputable lender or lending institution which may affect the real property of which the Demised Premises form a part, provided, and as a condition precedent to the subordination of this Lease to any of said future mortgages, the mortgagee shall execute and deliver to Tenant an agreement its then standard form and reasonably satisfactory to Tenant, whereby said mortgagee agrees that should it become necessary to foreclose such mortgage or should the mortgagee otherwise come into possession of the premises, such mortgagee will not join Tenant under this Lease in foreclosure or summary proceedings and will not disturb the use and occupancy of Tenant under this Lease so long as Tenant is not in default under any of the terms, covenants and conditions of this Lease.

 

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ARTICLE 21

 

TENANT NOT A HOLDOVER TENANT

 

Landlord agrees not to hold Tenant liable as holdover tenant should it continue to occupy the Demised Premises or any portion thereof after the expiration of the term of this Lease or renewal term, if any, but, in any such event, Tenant shall be deemed to be a tenant from month to month at a rental not less than the same rental as that of the last month of the demised term and the liability of Tenant shall in no event be greater than that of a Tenant from month to month, any law to the contrary notwithstanding.

 

ARTICLE 22

 

NOTICES

 

A.           Any notice required to be given shall be in writing and shall be sent by certified mail and addressed to Landlord at NPMM REALTY, INC., c/o Bank of Tokyo-Mitsubishi Trust Company, 100 Broadway, 15th Floor, New York, New York 10005 (Attention: Mr. Richard Ference) or to Tenant addressed to:

 

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ASSISTANT COMMISSIONER FOR

LEASING AND DESIGN

Department of Citywide Administrative Services

Division of Real Estate Services

1 Centre Street, 20th Floor North, Room 2000

New York, N.Y. 10007

 

and

 

DIRECTOR

Human Resources Administration

Office of Food Stamps

240-250 Livingston Street

Brooklyn, New York 11201

 

and

 

ASSISTANT DEPUTY ADMINISTRATOR

Human Resources Administration

Office of Facilities Operations

260 11th Avenue, 6th Floor

New York, New York 10001

 

Either party may change its address as set forth herein by notice to the other in the manner provided for herein, provided that no notice of change of address shall be effective until the month following the month in which notice is given. Notice shall be deemed given as of the day of mailing.

 

B.            Special Notices: In addition to any other notices expressly required under this Lease to be given by Landlord to Tenant, Landlord shall immediately give written notice to Tenant of (i) the giving of any notice or the taking of any action by the holder of any mortgage of the Premises, the result of which may be the foreclosure of, or the sale or taking of possession of, all or any part of the Premises, (ii) the commencement of a case in bankruptcy or under the laws of any state naming Landlord as the debtor, or (iii) the making by Landlord of an assignment or any other arrangement for the benefit of creditors under any state statute.

 

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Notwithstanding the foregoing, service of process to commence a summary proceeding pursuant to Article 7 of the Real Property Actions and Proceeding Law (“RPAPL”) relating to an occupancy by the City of New York or its agencies or officers of the Demised Premises which at its commencement was authorized under this Lease shall be served in manner required by CPLR Section 311.

 

ARTICLE 23

 

FORCE MAJEURE

 

Landlord, Tenant or any Mortgagee shall not be deemed in default if it is delayed in the performance of any act, matter or thing which it is obligated to perform hereunder, if such delay is an “unavoidable delay”. An “unavoidable delay” shall mean (i) strikes, lockouts, or labor disputes; (ii) shortages of labor or materials; (iii) acts of God, governmental restrictions, regulations or controls, enemy or hostile governmental actions, civil commotion, insurrection, revolution, sabotage, fire, other casualty or other conditions similar to those enumerated in this Article; or (iv) any other circumstances beyond either party’s reasonable control. In the event of any unavoidable delay, all dates for performance shall automatically be extended by a period equal to the aggregate period of all such delays. In no event shall Tenant’s obligation to pay rent or additional rent as and when same becomes due be excused due to an unavoidable delay.

 

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ARTICLE 24

 

SAVE HARMLESS

 

Landlord and Tenant shall each indemnify and hold harmless the other party from and against any and all liability, fines, suits, claims, demands, expenses and actions of any kind or nature arising by reason of injury to person or property occurring on or about the Demised Premises, the Building, or the real property of which they form a part, occasioned in whole or in part by its acts or omissions or the acts or omissions of any person present by its license and/or permission, express or implied, or by reason of Landlord performing preventive maintenance pursuant to a maintenance contract, or by reason of Landlord’s failure to comply with obligations arising under the ADA as set forth in Article 8 of this Lease.

 

ARTICLE 25

 

INVESTIGATIONS

 

1.1           The parties to this agreement agree to cooperate fully and faithfully with any investigation, audit or inquiry conducted by a State of New York (State) or City of New York (City) governmental agency or authority that is empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath, or conducted by the Inspector General of a governmental agency that is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license that is the subject of the investigation, audit or inquiry.

 

40

 

 

1.2(a) If any person who has been advised that his or her statement, and any information from such statement, will not be used against him or her in any subsequent criminal proceeding refuses to testify before a grand jury or other governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath concerning the award of or performance under any transaction, agreement, lease, permit, contract, or license entered into with the City, the State, or any political subdivision or public authority thereof, or the Port Authority of New York and New Jersey, or any local development corporation within the City, or any public benefit corporation organized under the laws of the State of New York, or;

 

1.2(b) If any person refuses to testify for a reason other than the assertion of his or her privilege against self-incrimination in an investigation, audit or inquiry conducted by a City or State governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to take testimony under oath, or by the Inspector General of the governmental agency that is a party in interest in, and is seeking testimony concerning the award of, or performance under, any transaction, agreement, lease, permit contract, or license entered into with the City, the State, or any political subdivision thereof or any local development corporation within the City, then;

 

1.3(a) The commissioner or agency head whose agency is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license shall convene a hearing, upon not less than five (5) days written notice to the parties involved to determine if any penalties should attach for the failure of a person to testify.

 

1.3(b) If any non-governmental party to the hearing requests an adjournment, the commissioner or agency head who convened may, upon granting the adjournment, suspend any contract, lease, permit, or license pending the final determination pursuant to paragraph 1.5 below without the City incurring any penalty or damages for delay or otherwise.

 

41

 

 

1.4           The penalties which may attach after a final determination by the commissioner or agency head may include but shall not exceed:

 

(a) The disqualification for a Period not to exceed five (5) years from the date of an adverse determination for any person, or any entity of which such person was a member at the time the testimony was sought, from submitting bids for, or transacting business with, or entering into or obtaining any contract, lease, permit or license with or from the City; and/or

 

(b) The cancellation or termination of any and all such existing City contracts, leases, permits or licenses that the refusal to testify concerns and that have not been assigned as permitted under this agreement, nor the proceeds of which pledged, to an unaffiliated and unrelated institutional lender for fair value prior to the issuance of the notice scheduling the hearing, without the City incurring any penalty or damages on account of such cancellation or termination; monies lawfully due for goods delivered, work done, rentals, or fees accrued prior to the cancellation or termination shall be paid by the City.

 

1.5         The commissioner or agency head shall consider and address in reaching his or her determination and in assessing an appropriate penalty the factors in paragraphs (a) and (b) below. He or she may also consider, if relevant and appropriate, the criteria established in paragraphs (c) and (d) below in addition to any other information which may be relevant and appropriate:

 

(a) The party’s good faith endeavors or lack thereof to cooperate fully and faithfully with any governmental investigation or audit, including but not limited to the discipline, discharge, or disassociation of any person failing to testify, the production of accurate and complete books and records, and the forthcoming testimony of all other members, agents, assignees or fiduciaries whose testimony is sought.

 

42

 

 

(b) The relationship of the person who refused to testify to any entity that is a party to the hearing, including, but not limited to, whether the person whose testimony is sought has an ownership interest in the entity and/or the degree of authority and responsibility the person has within the entity.

 

(c) The nexus of the testimony sought to the subject entity and its contracts, leases, permits or licenses with the City.

 

(d) The effect a penalty may have on an unaffiliated and unrelated party or entity that has a significant interest in an entity subject to penalties under 1.4 above, provided that the party or entity has given actual notice to the commissioner or agency head upon the acquisition of the interest, or at the hearing called for in 1.3(a) above gives notice and proves that such interest was previously acquired. Under either circumstance the party or entity must present evidence at the hearing demonstrating the potential adverse impact a penalty will have on such person or entity.

 

1.6(a) The term “license” or “permit” as used herein shall be defined as a license, permit, franchise or concession not granted as a matter of right.

 

1.6(b) The term “person” as used herein shall be defined as any natural person doing business alone or associated with another person or entity as a partner, director, officer, principal or employee.

 

1.6(c) The term “entity” as used herein shall be defined as any firm, partnership, corporation, association, or person that receives monies, benefits, licenses, leases, or permits from or through the City or otherwise transacts business with the City.

 

1.6(d) The term “member” as used herein shall be defined as any person associated with another person or entity as a partner, director, officer, principal or employee.

 

43

 

 

1.7 In addition to and notwithstanding any other provision of this Agreement, the Commissioner or agency head may in his or her sole discretion terminate this Agreement upon not less than three (3) days written notice in the event contractor fails to promptly report in writing to the Commissioner of Investigation of the City of New York any solicitation of money, goods, requests for future employment of other benefit or thing of value, by or on behalf of any employee of the City or other person, firm, corporation or entity for any purpose which may be related to the procurement or obtaining of this Lease by the Landlord, or affecting the performance of this Lease.

 

ARTICLE 26

 

ASBESTOS

 

Landlord and Tenant agree that during the term of this Lease (the “Lease Term”) Landlord shall abate (i.e. remove, enclose, encapsulate and/or replace) and/or monitor and manage any asbestos-containing materials (including, but not limited to, any such materials on boilers, pipes, ducts, breechings, plenum, tanks, spray on or other insulation, and any affected floor tiles, plaster, and ceiling tiles) (collectively “ACM”) in the Demised Premises and portions of the Building through which Tenant has access to the Demised Premises or which may affect the Demised Premises, upon and subject to the following terms and conditions:

 

(A)         Tenant has provided Landlord with a Report dated May 18, 1992 (the “Report”) of the Building and/or Demised Premises prepared by the Citywide Office of Safety and Health which Report states there was no ACM found in the Demised Premises. (However, Tenant makes no representation with respect to the accuracy or completeness of the Report. Landlord’s reliance on the Report and on its conclusions or recommendations shall impose no liability whatsoever on Tenant. Landlord shall make no claim against the City of New York based on its reliance on, compliance with, or use of the Report or related in any manner to ACM in the Demised Premises or Building, whether or not disclosed in the Report).

 

44

 

  

(B)         In the event that a subsequent inspection (“Inspection”) of the Demised Premises and portions of the Building through which Tenant has access to the Demised Premises or which may affect the Demised Premises, finds ACM, Landlord shall, at its sole cost and expense, promptly commence or cause an abatement of any deteriorated ACM, subject to reasonable concurrence by the Department of Citywide Administrative Services (“DCAS”) and perform any work incidental thereto (the “ACM Work”), by a contractor approved by DCAS, which approval shall not be unreasonably withheld or delayed. Landlord shall, within a time frame to be mutually agreed to between Landlord and Tenant, diligently and in good faith complete the ACM Work. Landlord shall give Tenant at least ten (10) days advance written notice of commencement and phasing of any ACM Work. Performance of the ACM Work shall be in accordance with and shall comply with all applicable Federal, State, County and Municipal laws, rules, standards, regulations, requirements and ordinances (collectively “Laws and Procedures”) governing ACM Work. The contractor performing the ACM Work shall file (and pay all fees associated with) all notices or documents, certifications or other communications required by the City, State and Federal governments as signed by the Landlord as the “Owner”. The contractor shall simultaneously forward to Tenant copies of all notices, certifications or other communications given to Landlord or filed with the proper agencies or authorities relating to ACM. In addition, Landlord shall contract for on-site air testing which, in accordance with the rules and regulations of the New York City Asbestos Control Program, must be conducted by a party prescribed by applicable law. The party performing the on-site air testing is subject to prior written approval by DCAS, which approval shall not be unreasonably withheld or delayed.

 

45

 

 

(C)         As set forth above, Landlord shall be required to give Tenant not less than ten (10) days advance, written notice of the scheduling of each phase of the ACM Work so that Tenant may relocate its operations and personnel, if necessary, prior to the commencement thereof. Landlord shall consider Tenant’s use and occupancy of the Demised Premises so as to minimize the negative impact of the ACM Work on Tenant’s operations in and use of the Building and the Demised Premises. In the event Tenant must vacate the Demised Premises or any portion thereof because the ACM Work, in the sole, but reasonable, determination of Tenant, renders the Demised Premises unusable by Tenant, annual rent shall abate in the proportion that the portion of the Demised Premises which is rendered unusable bears to the entire Demised Premises for the period of time involved, provided it exceeds one full business day. Such abatement of rent shall continue until the Demised Premises or any portion thereof may be used for the purposes set forth in the Lease, as determined solely, but reasonably, by Tenant, and Tenant certifies same in writing.

 

(D)         If Landlord fails to comply with the requirements of Subparagraph (B) and (C) above, Tenant shall, in addition to any other remedy it may have, have the option to effect the ACM Work on its own, as agent for Landlord by hiring any consultants, contractors or experts Tenant deems necessary to plan, effect and supervise the ACM Work and Tenant shall be entitled to offset all reasonable costs and expenses associated with the ACM Work against any amounts otherwise due or becoming due to Landlord as rent and additional rent under the terms of this Lease, which offset shall be in addition to any applicable abatement or reduction in rent under Subparagraph (C) above. Tenant shall not proceed with the ACM Work unless (a) written notice shall first be given to Landlord specifying the manner in which Tenant claims such ACM Work has not been properly completed and (b) Landlord shall have had thirty (30) days following receipt of such notice within which to commence and thereafter proceed diligently and continuously to complete said work. In the event Landlord fails to commence and thereafter proceed diligently and continuously to complete said work within said thirty (30) day period, Tenant may also, in addition to any other remedy it may have, terminate this Lease on not less than ten (10) days written notice to Landlord.

 

46

 

 

(E)         Following performance and completion of the ACM Work, Landlord shall, at its sole cost and expense, restore the Demised Premises to the condition that, in Tenant’s sole, but reasonable opinion, permits Tenant to use the Demised Premises for the purposes set forth in the Lease. Landlord shall be solely responsible for all repairs arising out of the performance of the ACM Work. Landlord hereby agrees to save, hold harmless and indemnify Tenant, its employees, guests and invitees against any and all claims for bodily injury or property damage in connection with the ACM Work and work incidental thereto.

 

(F)         During the Lease Term, Landlord shall, at its sole cost and expense, have any non-deteriorated ACM disclosed by an Inspection under Subparagraph (B) above of the Demised Premises and portions of the Building through which Tenant has access to the Demised Premises or which may affect the Demised Premises, monitored pursuant to a plan reasonably approved by Tenant (the “Monitor Survey”) by a New York City Department of Environmental Protection certified asbestos investigator at least once every one hundred eighty (180) days from the Inspection, and Landlord shall immediately provide Tenant with a copy of the results of each such Monitor Survey. The Monitor Survey shall be in accordance with the principles set forth in the EPA Document “Managing Asbestos In Place” (the “Green Book”), as it may be subsequently revised or replaced by a similar text. If any such Monitor Survey should reveal that ACM has deteriorated, Landlord shall so notify Tenant in writing within five (5) days of the completion of such survey which notice shall be accompanied by a copy of such survey. Landlord shall within five (5) days from the completion of such Monitor Survey commence and diligently proceed to comply with continuity with the provisions of this Article with respect to abatement of any deteriorated ACM described in any such Monitor Survey.

 

47

 

 

(G)         The ACM Work must be performed by Landlord in accordance with Laws and Procedures and shall be done to the full, but reasonable, satisfaction of Tenant. Upon completion of the ACM Work, Landlord shall provide Tenant with a certification of completion of same prepared by a New York City Department of Environmental Protection certified asbestos investigator. At such time, Tenant may reinspect the premises to verify the accuracy of Landlord’s certification and advise Landlord if any further work needs to be done.

 

(H)         Notwithstanding anything to the contrary set forth in this Lease or this Article, Landlord shall be required at all times during the term of this Lease to comply with Laws and Procedures governing ACM and the ACM Work in the Demised Premises and/or Building.

 

ARTICLE 27

 

LANDLORD’S REPRESENTATIONS

 

Landlord hereby warrants that, to the best of its knowledge, it is not in default of any obligation to the City of New York, nor is Landlord, its officers, principals or stockholders a defendant in any action instituted by the City.

 

The directors and officers of the corporation, which owns the Building currently are as follows: Directors: Takejiro Sueyoshi, Hidekazu Tamiya, and Robert E. Hand; Officers: Hidekazu Tamiya, President; Richard Ference, Vice President and Treasurer; Takeshi Sagawa, Vice President; James Duca, Vice President; and Robert E. Hand, Secretary.

 

Any misrepresentation by Landlord with regard to this warranty shall constitute a basis for rescission of this Lease.

 

48

 

 

ARTICLE 28

 

SIGNIFICANT RELATED PARTY TRANSACTIONS

 

Landlord shall be required to disclose and notify Tenant of any significant related party transactions the cost of which are included in the Base Year Operating Expenses. When such transactions occur prices of same must be in line with normal industry practice in New York City. Failure to notify Tenant of such related party transactions shall result in a disallowance of such costs that would otherwise be part of the Base Year Operating Expenses. If such related party transactions occurred and were disclosed but it is determined that the cost thereof was excessive, then such charges shall be disallowed to the extent they exceed normal industry prices in New York City.

 

ARTICLE 29

 

MISCELLANEOUS

 

A.           Landlord and its agents shall have the right, (but not the obligation) to enter upon the Demised Premises, in any emergency at any time and at other reasonable times upon reasonable prior notice to Tenant, to examine the same and to make such repairs, replacements and improvements as Landlord may deem necessary or desirable to the Demised Premises or any other portion of the Building. Tenant shall permit Landlord to use, maintain and replace the present pipes and conduits in and to the Demised Premises and to erect new pipes and conduits therein provided they are concealed within the walls, floors or ceilings. Landlord may, during the progress of any work in the Demised Premises, take all necessary materials and equipment into said premises without the same constituting an eviction or entitling Tenant to any damages or abatement of rent while such work is in progress, provided that any work done by Landlord is done in a manner not to cause material inconvenience to Tenant, nor to cause a significant interruption of Tenant’s operations.

 

49

 

 

B.           Throughout the term of this Lease, Landlord shall have the right to enter the Demised Premises during business hours upon reasonable prior notice to Tenant for the purpose of showing the same to prospective purchasers or mortgagees of the Building and, during the last twelve (12) months of the term of this Lease, for the purpose of showing the same to prospective tenants.

 

C.           Landlord shall have the right at any time upon two (2) weeks prior written notice to Tenant, without the same constituting an eviction and without incurring any liability to Tenant, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the Building and to change the name and/or address of the Building.

 

D.           In the event of any liability by Landlord, Tenant agrees to look solely to Landlord’s estate and interest in the Land and Building, or the Lease of the Building, or of the Land and Building, and the premises, for the satisfaction of any right or remedy of Tenant for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord, and no other property or assets of Landlord shall be subject to levy, execution, attachment, or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant’s use and occupancy of the Demised Premises or any other liability of Landlord to Tenant arising hereunder. In no event shall Tenant make any claim against or seek to impose any personal liability upon any party, individuals, general or limited partners or any partnership or any stockholder, director or principal of or partner in Landlord or any party that holds any interest in Landlord.

 

50

 

 

E.           Tenant at any time, and from time to time, but only in connection with a financing, a sale or leasing of the Building, upon at least forty-five (45) days’ prior notice by Landlord, shall execute, acknowledge and deliver to Landlord, and/or to any other person, firm or corporation specified by Landlord, a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the fixed rent and additional rent have been paid, and stating whether or not there exists any default by Landlord under this Lease, and, if so specifying each such default and such other reasonable information in connection with this Lease as shall be requested in said certificate.

 

F.           For the purposes of this Lease, the term “Landlord”, as used in this Lease, means only the owner, or the mortgagee in possession, from time to time of the Land and Building (or the owner of a lease of the Building or of the Land and Building) of which the Demised Premises form a part, so that in the event of any sale or sales of said Land and Building, or of said lease, or in the event of a lease of said Building, or of the Land and Building, the then Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord thereafter arising or accruing after the date of such sale, conveyance or transfer, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the sale lessee of the Building, or of the Land and Building, that the purchaser or the lessee of the Building has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder.

 

51

 

 

ARTICLE 30

 

NO WAIVER

 

The failure by Tenant to insist, in one or more instances upon the full performance of any of Landlord’s covenants, conditions or obligations hereunder shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent or approval by Tenant to or of any act by Landlord requiring Tenant’s consent or approval shall not be construed to waive or render unnecessary Tenant’s consent or approval to or of any subsequent similar act by Landlord. No provision of this lease shall be deemed to have been waived by Tenant unless such waiver be in writing signed by Tenant.

 

ARTICLE 31

 

BROKERAGE

 

Landlord and Tenant represent to the other that neither has dealt with any broker in connection with this Lease other than Williams Real Estate Co., Inc. (“Broker”). Landlord shall pay any commission owing to the Broker. Tenant and Landlord hereby indemnify and hold each other harmless against all loss, damage liability, cost and expense of any nature (including reasonable attorney’s fees and disbursements) based on any claim by any party other than the Broker with whom such indemnifying party has dealt for a commission or other than compensation in connection with this Lease which is based on the actions of such party or its agents or representatives. The indemnified party shall cooperate with the indemnifying party in any defense; the indemnified party shall not settle a claim, liability or action for which the indemnifying party has the obligation to defend or indemnify without the indemnify without the indemnifying party’s consent. The foregoing indemnifications shall survive any expiration or termination of this Lease.

 

52

 

 

ARTICLE 32

 

APPLICABLE LAW

 

This Lease shall be governed by and construed in accordance with the internal laws of the State of New York.

 

ARTICLE 33

 

LEASE ENTIRE AGREEMENT

 

This Lease sets forth the entire Agreement between the parties, superseding all prior agreements and understandings, written or oral, and may not be altered or modified except by a writing signed by both parties. This Lease shall be binding upon the parties hereto, their successors, legal representatives and assigns.

 

53

 

 

IN WITNESS WHEREOF , the said parties have caused this Lease to be executed the day and year first above written.

 

  NPMM REALTY, INC.,
  Landlord
   
  By /s/ [ILLEGIBLE]
   
  THE CITY OF NEW YORK,
  Tenant
   
  By /s/ Lori Fierstein
  Lori Fierstein
  Deputy Commissioner
  Department of Citywide
  Administrative Services

 

Approved as to Form:  
   
/s/ [ILLEGIBLE]  
Acting Corporation Counsel  

 

54

 

Exhibit 10.40

 

 

Edna Wells Handy December 28, 2010
Commissioner  

 

Real Estate Services By Certified Mail
Return Receipt Requested
   
1 Centre Street Berkshire Equity LLC
20 th Floor 4611 12 th Avenue - Suite 1L
New York, NY 10007 Brooklyn, New York 11219
  Attn: David Bistricer

 

(212) 669 3645 tel    
(212) 669 2666 fax Re: Option to Renew Lease
    Lease made the 1st day of January, 1997
    240-250 Livingston Street (the "Lease")
    Block 165, Lot 22, Brooklyn
    Human Resources Administration

 

  Dear Mr. Bistricer:
   
  Pursuant to Article 3 of the Lease, Tenant does hereby exercise its option to renew the Lease, for a period of five (5) years, commencing January 1, 2012 and expiring December 31, 2016, at an annual rent of One Million Seven Hundred Seven Thousand Six Hundred Sixteen Dollars ($1,707,616.00) for the entire renewal term.
   
  In accordance with Article 22 (Notices) of the Lease, please be advised that notices to Tenant shall be addressed as follows:
   
  Assistant Commissioner of Acquisitions and Construction Services
  Department of Citywide Administrative Services
  Division of Real Estate Services
  1 Centre Street, 20 th Floor North
  New York, New York 10007
   
  and
   
  Director, Lease Management
  General Support Services
  Human Resources Administration
  250 Church Street, 14 th Floor
  New York, New York 10013

 

 

 

 

David Bistricer

December 28, 2010

Page 2

 

Thank you for your attention to this matter.

 

  Sincerely,
   
  /s/ Jeffrey Kondrat
  Jeffrey Kondrat
  Assistant Commissioner
  (212) 669-2620

 

c: James Lawler, HRA
  Maureen Mullaney, HRA
  Jacob Schwimmer
  Spiro Antypas, OMB
  Chris Fleming
  Mark Steiner
  Central File- HRA-3/165/22/1381

 

 

 

Exhibit 10.41

 

LEASE NO. X7550

 

LEASE BETWEEN

 

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, NEW YORK 10007

 

&

 

LIVINGSTON ACQUISITION, LLC

450 PARK AVENUE, 28TH FLOOR

NEW YORK, NEW YORK 10022

 

Premises: 240-250 Livingston Street (Block 165, Lot 22)

Borough of Brooklyn

Floors 4, 5, 6, 7 and 8 and portions of basement and sub-basement

 

and

 

230-234 Livingston Street (Block 165, Lots 17, 18, 19 and 58)

Borough of Brooklyn

parking lot

 

Approximately 187,145 rentable square feet of internal space and

18,500 square feet of parking lot space

to be used by the

Human Resources Administration and the Department of Environmental Protection

 

FINAL

July 1, 1999

 

 

 

 

 

 

TABLE OF CONTENTS

 

ARTICLE 1 TERM 5
     
ARTICLE 2 RENT 6
     
ARTICLE 3 TENANT’S RIGHT TO TERMINATE 12
     
ARTICLE 4 TAX AND OPERATING EXPENSE ESCALATIONS 14
     
ARTICLE 5 LANDLORD’S INTEREST IN PREMISES 26
     
ARTICLE 5A TENANT’S OPTION W/RESPECT TO ORIGINAL STORAGE SPACE 27
     
ARTICLE 6 WORK; SUBSTANTIAL COMPLETION 27
     
ARTICLE 7 CERTIFICATE OF OCCUPANCY; COMPLIANCE WITH LAWS 46
     
ARTICLE 8 REAL ESTATE TAXES, ASSESSMENTS, WATER RATES, SEWER RENTS, ARREARS 50
     
ARTICLE 9 LANDLORD’S SERVICES 51
     
ARTICLE 10 TENANT’S SERVICES 55
     
ARTICLE 11 ALTERATIONS BY TENANT 56
     
ARTICLE 12 END OF TERM 56
     
ARTICLE 13 REPAIRS 57
     
ARTICLE 14 CONDEMNATION 59
     
ARTICLE 15 DESTRUCTION BY FIRE OR OTHER CASUALTY 61
     
ARTICLE 16 NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE 63
     
ARTICLE 17 QUIET ENJOYMENT 63
     
ARTICLE 18 ACCESS BY DISABLED PERSONS 63
     
ARTICLE 19 SUBORDINATION AND NON-DISTURBANCE 64
     
ARTICLE 20 TENANT NOT A HOLDOVER TENANT 65

   

 

 

  

ARTICLE 21 NOTICES 65
     
ARTICLE 22 FORCE MAJEURE 67
     
ARTICLE 23 SAVE HARMLESS 68
     
ARTICLE 24 INVESTIGATIONS 68
     
ARTICLE 25 SIGNIFICANT RELATED PARTY TRANSACTIONS 72
     
ARTICLE 26 ASBESTOS 73
     
ARTICLE 27 LANDLORD’S REPRESENTATIONS 73
     
ARTICLE 28 NO WAIVER 74
     
ARTICLE 29 EXCULPATORY CLAUSE 74
     
ARTICLE 30 LEASE ENTIRE AGREEMENT 75
     
ARTICLE 31 APPLICABLE LAW 75
     
ARTICLE 32 ESTOPPEL CERTIFICATE 75
     
ARTICLE 33 MISCELLANEOUS 76

 

- ii

 

  

EXH I BITS AND S CHEDULES

 

Exhibit A New Storage Space
   
Exhibit A-1 Original Storage Space
   
Exhibit B Certified Public Accountant’s Report (Expense Schedule)
   
Exhibit C Preliminary Plans
   
Exhibit D Guide for Design Consultant
   
Exhibit E Intentionally Omitted
   
Exhibit F Certificates of Occupancy
   
Exhibit G Preventive Maintenance Measures
   
Exhibit H Subordination, Nondisturbance and Attornment Agreement
   
Exhibit I COSH ACM Report
   
Schedule 1 Amortization of brokerage commission—Termination Payment under Article 3

 

- iii

 

  

THE CITY OF NEW YORK

DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES

DIVISION OF REAL ESTATE SERVICES

1 CENTRE STREET, 20TH FLOOR NORTH

NEW YORK, NEW YORK 10007

 

AGREEMENT OF LEASE made as of the ____ day of ________, 1999, between LIVINGSTON ACQUISITION, LLC , a Delaware limited liability company, whose address is c/o Blackacre Capital Management, LLC, 450 Park Avenue, 28th floor, New York, New York 10022, hereinafter designated as Landlord, and THE CITY OF NEW YORK , a municipal corporation, acting through the Department of Citywide Administrative Services, with an address at 1 Centre Street, 20th Floor North, New York, New York 10007, hereinafter designated as Tenant.

 

WITNESETH :

 

WHEREAS , the parties hereto desire to enter into a lease of approximately 143,771 rentable square feet of office space together with 1,905 rentable square feet of ancillary lobby space, approximately 19,340 rentable square feet of sub-basement space and 22,129 rentable square feet of basement space, and approximately 18,500 square feet of parking lot space, on the terms and conditions contained herein (the “Lease”); and

 

WHEREAS , this Lease is subject to public hearing and Mayoral approval pursuant to §824 of the New York City Charter, said hearing to be scheduled subsequent to the execution by Landlord of this Lease (the “Mayoral Approval”); and

 

 

 

 

WHEREAS , this Lease may be executed by the Deputy Commissioner of the Department of City wide Administrative Services after issuance of the Mayoral Approval and subject to approval as to form (the “Form Approval”) by the Corporation Counsel of the City of New York (the Mayoral Approval and the Form Approval being collectively referred to as the ‘‘Approvals”); and

 

WHEREAS , Blackacre Capital Group, L.P. (Blackacre Capital”), the sole member of Landlord, by consent dated as of June 30, 1999 authorized the execution of this Lease by Howard M. Glatzer, as Vice President of Blackacre Capital Management Corp., the General Partner of Blackacre Capital; and

 

WHEREAS , Tenant hereby represents and warrants to Landlord that:

 

1. Tenant is a municipal corporation, duly organized, validly existing and in good standing under the laws of the State of New York.

 

2. Tenant has the full right and authority to enter into this Lease; and

 

3. The execution and delivery and performance of this Lease by Tenant (a) has been duly authorized, (b) does not require any approvals other than those hereinabove set forth, (c) does not conflict with the provisions of any instrument to which Tenant is a party or by which Tenant is bound, and (d) constitutes a valid, legal and binding obligation of Tenant.

 

  - 2 -  

 

  

NOW, THEREFORE , subject to the issuance of the Approvals, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the following described premises (collectively, the “Demised Premises”): (i) an agreed 143,771 rentable square feet of office space (the “Office Space”), consisting of the entire rentable area of the fourth, fifth, sixth, seventh and eighth floors (respectively, “Floor 4,” “Floor 5,” “Floor 6,” “Floor 7 and “Floor 8”, each such floor being referred to as a “Floor”) together with an agreed 1,905 rentable square feet of ancillary lobby space (the “Lobby Space”), of the building (the “Building”) located at 240/250 Livingston Street (Block 165, Lot 22) in the borough of Brooklyn (each Floor containing an agreed 28,754.2 rentable square feet), (ii) an agreed 19,340 rentable square feet of sub-basement space (the “ New Storage Space”) in the Building as shown hatched on Exhibit A annexed hereto, (iii) an agreed 22,129 rentable square feet of existing basement storage space at the Building (the “Original Storage Space”)as shown hatched on Exhibit A-1 annexed hereto, and (iv) an agreed 18,500 square feet of parking lot space, constituting the entire parking lot located at 230-234 Livingston Street (Block 165, Lots 17, 18,19 and 58) and adjacent to the Building (the “Parking Lot”) or substitute parking lot space (the “Substitute Parking Space”) as further described and provided for in Section (P) of Article 6 below.

 

The Office Space shall be used by the Human Resources Administration (“HRA”), Division of Income Support/Eligibility Verification Review and the Department of Environmental Protection (“DEP”), Bureau of Water Supply only for general and administrative offices and ancillary storage space, or for such other similar general office or administrative office use as the Commissioner of Citywide Administrative Services may determine, and for no other purpose. The Lobby Space shall be used, in conjunction with Landlord and other tenants of the Building, for access to the Office Space, and for no other purpose. The Original Storage Space and the New Storage Space shall be used only for storage purposes incidental to the use and occupancy of the Office Space, and for no other purpose. The Parking Lot shall be used only for the parking of vehicles incidental to the use and occupancy of the Office Space, and for no other purpose.

 

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Anything herein to the contrary notwithstanding, the Demised Premises shall not be used or occupied (i) to conduct a school, employment office or employment training facility, except in connection with HRA’s and/or DEP’s programs in the Demised Premises (ii) as a drug, alcohol or other type of substance abuse clinic or counseling service, (iii) as a probation office, (iv) by, or as a facility servicing, the criminal justice system, (v) in connection with providing or administering health care services, (vi) as a child-care facility other than an incidental use and service for clients visiting the respective offices of HRA and DEP in the Demised Premises, (vii) for the preparation or service of food or beverages, (viii) for the holding of public hearings, (ix) for the distribution of public benefits (including, without limitation, welfare benefits), except in connection with the HRA and DEP programs in the Demised Premises referred to above, (x) for the storage for purpose of sale of any alcoholic beverage in the Demised Premises; (xi) for the storage for retail sale of any product or material in the Demised Premises; (xii) for the conduct of a manufacturing, printing or electronic data processing business, except that Tenant may operate business office reproducing equipment, electronic data processing equipment and other business machines for Tenant’s own requirements; (xiii) for the rendition of any health or related services, conduct of a school or conduct of any business which results in the presence of the general public in the Demised Premises ( except in connection with the intended business and use by HRA and DEP of the Demised Premises referred to above); (xiv) for an employment agency or executive search firm; (xv) to conduct any public auction, gathering, meeting or exhibition; (xvi) for the occupancy of a foreign governmental or quasi-governmental body, agency or department or any authority or other entity which is affiliated therewith or controlled thereby; or (xvii) for any other purpose not reasonably consistent with the character of the Building.

 

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The agreed rentable square footage of the Demised Premises, Tenant’s Proportionate Share of Taxes and Tenant’s Proportionate Share of Operating Expenses (as such terms are hereinafter defined), with respect to the entire Demised Premises and as allocable to the total Office Space and Lobby Space, the New Storage Space and the Original Storage Space, the Parking Lot and each Floor, have been verified by the Bureau of Space Design of the Division of Real Estate Services (“DRES”) of the Department of City wide Administrative Services (“DCAS”), and are mutually agreed to by the parties (as set forth herein).

 

ARTICLE 1

 

TERM

 

(A)         The term of this Lease for the Original Storage Space (“OSS Term”) is twenty-one (21) years, from January 1, 1998 ( OSS Commencement Date”) through December 31, 2018, unless the OSS Term shall be extended or sooner end pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law.

 

(B)         The term of this Lease for the Office Space, Lobby Space, New Storage Space and Parking Lot (the “ Term”) is twenty (20) years, more or less, commencing on the Commencement Date (as defined in Section (C) hereinbelow) and expiring at midnight on the twentieth (20th) anniversary of the Last Portion Commencement Date (as defined in Section (C) hereinbelow) (the “Expiration Date”), unless the Term shall sooner end pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law.

 

(C)         The commencement date of this Lease (the “Commencement Date”) shall be the Portion Commencement Date (as hereinafter defined in Section 6(0) hereinbelow) for Portion 1. The Portion Commencement Dale for each subsequent Portion shall be as provided in Section 6 (O) hereinbelow. The “Last Portion Commencement Date” shall be the latest to occur of the several Portion Commencement Dates.

 

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(D)         Within ten (10) business days after request of either party at any time subsequent to the Last Portion Commencement Date, Landlord and Tenant shall execute, acknowledge and deliver to each other an agreement setting forth the Commencement Date, each Portion Commencement Date, the annual periods which constitute the First Lease Year and each subsequent Lease Year and the Expiration Date, but the failure to execute such an agreement shall not affect any of such dates and/or periods.

 

ARTICLE 2

 

RENT

 

(A)         The “Base Rent” for each portion of the Demised Premises (“Portion”) shall commence on the Portion Commencement Date therefor, except for the Original Storage Space for which Base Rent shall commence retroactively to the OSS Commencement Date and with respect to which past due amounts shall be paid within sixty (60) days of the date this Lease is executed by Tenant (the “Lease Execution Date”). Amounts due under this Article after the Lease Execution Date with respect to the Original Storage Space shall be paid on a regular monthly basis as herein provided.

 

Portion I consists of Floor 8, the Parking Lot and an undivided 1/5 of the Lobby Space. Portion 2 consists of any two (2) of the remaining Floors of Office Space, an undivided 2/5 of the Lobby Space and the New Storage Space. Portion 3 consists of the remaining two (2) Floors of Office Space and the remaining undivided 2/5 of the Lobby Space. Portion 4 is the Original Storage Space. The term “Lease Year” means (i) the portion of a year commencing on the Commencement Date and ending on the day preceding the Last Portion Commencement Date (“Partial Lease Year”), (ii) the twelve (12) month period beginning on the day following the end of the Partial Lease Year (“First Lease Year”), and (iii) each subsequent twelve-month period during the Term successively following the end of the First Lease Year.

 

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(B)         Base Rent for each Floor (which shall include Base Rent allocable to 1/5 of the Lobby Space) is as follows:

 

(1)         For the period beginning on the Portion Commencement Date of the Portion of which the Floor is a part and ending on the last day of the third (3rd) Lease Year (“First Office Rent Period”) - $407,892.80 per annum ($2,039,464.00 per annum for the entire Office Space and Lobby Space);

 

(2)         for the period beginning on the day following the end of the First Office Rent Period and ending on the last day of the sixth (6th) Lease Year (“Second Office Rent Period”) - $456,839.92 per annum ($2,284,199.60 per annum for the entire Office Space and Lobby Space):

 

(3)         for the period beginning on the day following the end of the Second Office Rent Period and ending on the last day of the ninth (9th) Lease Year (“Third Office Rent Period”) - $511,660.70 per annum ($2,558,303.50 per annum for the entire Office Space and Lobby Space):

 

(4)         for the period beginning on the day following the end of the Third Office Rent Period and ending on the last day of the twelfth (12th) Lease Year (“Fourth Office Rent Period”) - $573,059.98 per annum ($2,865,299.90 per annum for the entire Office Space and Lobby Space):

 

(5)         for the period beginning on the day following the end of the Fourth Office Rent Period and ending on the last day of the fifteenth (15th) Lease Year (“Fifth Office Rent Period”) - $641,827.16 per annum ($3,209,135.80 per annum for the entire Office Space and Lobby Space): and

 

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(6)         for the period beginning on the day following the end of the Fifth Office Rent Period and ending on the Expiration Date - $718,846.40 per annum ($3,594,232.00 per annum for the entire Office Space and Lobby Space).

 

(C)         Base Rent for the New Storage Space is as follows:

 

(1)         For the period beginning on the Portion Commencement Date of Portion 2 and ending on the last day of the fifth (5th) Lease Year (“First New Storage Rent Period”) - $96,700.00 per annum;

 

(2)         for the period beginning on the day following the end of the First New Storage Rent Period and ending on the last day of the tenth (10th) Lease Year (“Second New Storage Rent Period”) - $106,370.00 per annum;

 

(3)         for the period beginning on the day following the end of the Second New Storage Rent Period and ending on the last day of the fifteenth (15th) Lease Year (“Third New Storage Rent Period”) - $117,007.00 per annum; and

 

(4)         for the period beginning on the day following the end of the Third New Storage Rent Period and ending on the Expiration Date - $128,707.70 per annum.

 

(D)         Base Rent for the Original Storage Space is as follows:

 

(1)         For the period beginning on the OSS Commencement Date (viz. January 1, 1998) and ending on the last day of the fifth (5 th ) Lease Year (“First Original Storage Rent Period”)-$110,645.00 per annum;

 

(2)         for the period beginning on the day following the end of the First Original Storage Rent Period and ending on the last day of the tenth (10 th ) Lease Year (“Second Original Storage Rent Period”)-$121,709.50 per annum;

 

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(3)         for the period beginning on the day following the end of the Second Original Storage Rent Period and ending on the last day of the fifteenth (15 th ) Lease Year (“Third Original Storage Rent Period”)-$133,880.45 per annum; and

 

(4)         for the period beginning on the day following the end of the Third Original Storage Rent Period and ending on the Expiration Date-$147,157.85 per annum.

 

(E)         Base Rent for the Parking Lot is as follows:

 

(1)         For the period beginning on the Portion Commencement Date of Portion 1 and ending on the last day of the fourth (4th) Lease Year (“First Parking Rent Period”) - $125,000.00 per annum;

 

(2)         for the period beginning on the day following the end of the First Parking Rent Period and ending on the last day of the eighth (8th) Lease Year (“Second Parking Rent Period”) - $150,000.00 per annum;

 

(3)         for the period beginning on the day following the end of the Second Parking Rent Period and ending on the last day of the twelfth (12th) Lease Year (“Third Parking Rent Period”) - $175,000.00 per annum;

 

(4)         for the period beginning on the day following the end of the Third Parking Rent Period and ending on the last day of the sixteenth (16th) Lease Year (“Fourth Parking Rent Period”) - $200,000.00 per annum; and

 

(5)         for the period beginning on the day following the end of the Fourth Parking Rent Period and ending on the Expiration Date - $225,000.00 per annum.

 

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(F)          (1)         Accordingly, during the portion of the Term commencing with the First Lease Year and ending on the Expiration Date (the last day of the 20 th Lease Year), the Base Rent payable by Tenant to Landlord is as follows:

 

Lease Year   Base Rent (per annum)  
1   $ 2,371,809.00  
2   $ 2,371,809.00  
3   $ 2,371,809.00  
4   $ 2,616,544.60  
5   $ 2,641,544.60  
6   $ 2,662,279.10  
7   $ 2,936,383.00  
8   $ 2,936,383.00  
9   $ 2,961,383.00  
10   $ 3,268,379.40  
11   $ 3,291,187.35  
12   $ 3,291,187.35  
13   $ 3,660,023.25  
14   $ 3,660,023.25  
15   $ 3,660,023.25  
16   $ 4,070,097.55  
17   $ 4,095,097.55  
18   $ 4,095,097.55  
19   $ 4,095,097.55  
20   $ 4,095,097.55  

 

(2)         During the Partial Lease Year, the components of the Base Rent, as and when applicable, are as follows:

 

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Portion 1 $532,892.80 per annum
  ($44,407.73 per month)
   
Portion 2 $912,486.40 per annum
  ($76,040.53 per month)
   
Portion 3 $815,785.60 per annum
  ($67,982.13 per month)
   
Portion 4 $110,645.00 per annum
  ($9,220.42) per month

 

(D)         All other payments due to Landlord from Tenant under this Lease shall be considered “Additional Rent.” Base Rent and Additional Rent shall be referred to sometimes as “rent” in this Lease. Base Rent shall be payable in equal monthly installments at the end of each calendar month, provided that for the months in which each Portion Commencement Date and the Expiration Date occur, Tenant shall pay only a pro rata share of the applicable monthly installment. All rent (Base Rent and Additional Rent) shall be payable to Landlord’s managing agent (presently as set forth in the last sentence of this Section (F)) or to any party or to any other address as may be designated by Landlord from time to time, by notice in the manner provided in Article 21 hereof.

 

All bills sent by Landlord to Tenant shall have clearly reflected thereon the property, address, and block and lot for which the bill is being sent. All bills must be legible and must contain the address to which the payment should be sent. The name, address, and telephone number of the Landlord’s contact person for billing inquiries must be provided to Tenant in the manner designated in Article 21 hereof. The initial such person is Cassius Earnest, c/o Williams Real Estate Co. Inc., 380 Madison Avenue, New York, New York 10017 (telephone number 716-3651).

 

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ARTICLE 3

 

TENANT’S RIGHT TO TERMINATE

 

(A)         Tenant may by at least one (1) year’s prior written notice (“Termination Notice”) sent to Landlord, at any time on or after the seventh (7th) anniversary of the Last Portion Commencement Date, time being of the essence, elect to terminate this Lease as to a Termination Space (as hereinafter defined), effective on the date (“Early Termination Date”) specified in the Termination Notice, which Early Termination Date may be no earlier than one (1) year after the date on which the Termination Notice is received by Landlord. The Termination Notice must also specify the Termination Space to which the Termination Notice is applicable. If Tenant properly exercises such right of termination, this Lease shall terminate with respect to the Termination Space specified in the Termination Notice on the Early Termination Date, but such termination shall, at Landlord’s option, be effective only if (1) on or before the Early Termination Date. Tenant vacates and delivers possession of the Termination Space in the condition required by this Lease: (2) Tenant is not in material default of a monetary obligation under this Lease after written notice to Tenant from Landlord pursuant to Article 33 (F) below and expiration of any applicable grace period at the time Tenant sends the Termination Notice and on the Early Termination Date; and (3) Tenant pays the Termination Payment (as hereinafter defined) no later than thirty (30) days following the Early Termination Date, provided Landlord has provided Tenant with an invoice therefor in a timely manner and reflecting the appropriate amount of the Termination Payment in accordance with the schedule referred to in Section (E) of this Article 3.

 

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(B)         A “Termination Space” is one of the following only:

 

(1)         The entire Demised Premises, as then constituted; or

 

(2)         Floor 8 and an unsubdivided 1/5 of the Lobby Space; or

 

(3)         Floors 4, 5, 6 and 7, the unsubdivided balance of the Lobby Space, the New Storage Space and the Parking Lot, together; or

 

(4)         the Original Storage Space.

 

(C)         If this Lease is effectively terminated in part pursuant to Section (A) hereof ( i.e. , if the Termination Space as to which this Lease had been terminated had not been the entire Demised Premises), then Tenant shall have the right to send a second Termination Notice, on all of the terms and conditions set forth in Section (A) (including the time periods, Termination Payment, and conditions to the effectiveness thereof), except that (1) the termination date (“Final Termination Date”) specified in such second Termination Notice shall be no earlier than two (2) years after the Early Termination Date under the first Termination Notice; and (2) the Termination Space under the second Termination Notice shall be the entire remaining Demised Premises.

 

(D)         Anything herein to the contrary notwithstanding, and without affecting Tenant’s right to send a second Termination Notice under Section (C) of this Article 3, Tenant may terminate this Lease solely with respect to the Original Storage Space by a Termination Notice effective at any time on or after the eighth (8 th ) anniversary of the Last Portion Commencement Date. In the event of such a termination, there shall be no Termination Payment.

 

(E)         The “Termination Payment” is the unamortized amount, as of the applicable Termination Date, of that portion of the brokerage commission payable only to C&W by Landlord under Article 33 Subsection (E) below with respect to this Lease and allocable, on a pro rata basis based on Base Rent (as set forth in Article 2), to the applicable Termination Space, pursuant to the brokerage commission agreement provided to Tenant under Article 33 (E) hereinbelow, all as set forth in Schedule 1 annexed hereto and made a part hereof.

 

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(F)         If Tenant effectively exercises its right to terminate this Lease as to a Termination Space as set forth in this Article, then, effective as of the applicable Termination Date, this Lease shall terminate as to the applicable Termination Space as if such Termination Date were the Expiration Date therefor. If the Termination Space is not the entire Demised Premises, then, as of the Early Termination Date, the Base Rent otherwise payable under this Lease shall be reduced by the Base Rent allocable to the Termination Space (calculated on a per rentable square foot basis with respect to Office Space) and Tenant’s Proportionate Share ( as further defined in Article 4 below) shall be reduced by subtracting therefrom 9.92% if the Termination Space includes Floor 8 and an undivided 1/5 of the Lobby Space, 46.28% if the Termination Space includes Floors 4. 5. 6 and 7 and the unsubdivided balance of the Lobby Space, the New Storage Space and the Parking Lot and 7.2% if the Termination Space is or includes the Original Storage Space.

 

ARTICLE 4

 

TAX AND OPERATING EXPENSE ESCALATIONS

 

Landlord and Tenant agree that in addition to the Base Rent provided for in the preceding Articles of this Lease, Tenant shall pay, as Additional Rent, Tenant’s Proportionate Share of Tax Payments and Operating Expense Escalation, as those terms are hereinafter defined. Paragraph I and II do not apply to the Parking Lot, which is dealt with in Paragraph IV.

 

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I. (A)        BASE YEAR OPERATING EXPENSES: CONSUMER PRICE INDEX ADJUSTMENTS

 

(1)    “ Base Year Operating Expenses” shall mean the costs and expenses, i.e., ‘‘Operating Expenses,” reasonably incurred or borne by Landlord with respect to the operation and maintenance of the Building, including, without limitation, but without duplication and consistent with industry practice in similar buildings in Brooklyn, in the calendar year 2000 ( i.e., the” Base Year”), in providing services to tenants and costs and expenses with respect to (a) salaries, wages, medical, surgical and general welfare benefits (including, without limitation, group life insurance, hospitalization and disability benefits), pension payments, all other fringe benefits of employees of Landlord engaged in the operation and maintenance of the Building of not higher than the grade of Building manager (or Building superintendent) and below (collectively, “Building Employees”) and all other payments made on behalf of or for the account of such employees; (b) payroll taxes and worker’s compensation insurance for Building Employees; (c) uniforms and cleaning of uniforms for Building Employees; (d) steam and/or any other fuel; (e) the cost of all heat, ventilation and air-conditioning furnished to the Building and all water (including related sewer charges) used in the Building unless and to the extent separately paid for by Tenant or other tenants or occupants of the Building, and the cost of all charges (including fuel adjustment factor, surcharges, and meter reading charges) for electricity furnished to the public, common and service areas of the Building and/or used in the operation of all of the base building systems and service facilities of the Building unless and to the extent separately paid for by Tenant or other tenants or occupants of the Building, including any taxes on such utilities; (f) the cost of all charges for casualty and risk insurance, extended coverage; (g) the cost of all building and cleaning supplies (for common areas for the Building and the charges for a telephone for the Building; (h) the cost of all charges for window cleaning, cleaning (other than the interior of the Office Space which Tenant shall provide at its sole cost and expense), exterminating, rubbish removal, security, alarm and all other service or maintenance contracts, unless and to the extent separately paid for, or provided for, by Tenant or other tenants or occupants of the Building; (i) the cost of rentals of capital equipment designed to result in savings or reductions in Base Year Operating Expenses; (j) all costs of lobby decorations and interior and exterior landscape and plant care and maintenance; (k) all costs of painting and decorating the public, common and service areas of the Building; (I) professional and consulting fees (including, without limitation, accounting fees but not legal and attorneys’ fees) directly related to the maintenance and operation of the Building (including, without limitation, preparation of statements and bills for escalations, and disputes with tenants that benefit other Building tenants and where Landlord is successful), which are “out-of-pocket” expenses actually incurred by Landlord and which shall not be in excess of fees for such items incurred by landlords of comparable office buildings in Brooklyn; (m) capital equipment, improvements or replacements to the extent that the same (i) are expenses or regarded as deferred expenses under generally accepted accounting principles, or (ii) are required by law, or (iii) actually result in a saving of Base Year Operating Expenses (in any of such cases, the cost of the capital improvements shall be included in only to the extent of one tenth of their value (assuming an amortization period of ten years) with an interest factor equal to two percent (2%) percent over the so-called “prime” or “base” rate of Citibank, N.A. from time to time in effect) if they are incurred during the Base Year, provided, however that Base Building Work and Tenant Work under Article 6 hereof shall not qualify in any respect for this item (m); (n) only to the extent of one tenth of their value (assuming an amortization period of ten years) with an interest factor equal to two percent (2%) percent over the so-called “prime” or “base” rate of Citibank, N.A. from time to time in effect, if they are incurred during the Base Year, all expenses incurred by Landlord in connection with compliance with any law, rule, order, ordinance, regulation or requirement of any governmental authority having or asserting jurisdiction or any order, rule, requirement or regulation of any utility company, insurer of Landlord or the Board of Fire Underwriters (or successor organization), but excluding any such costs incurred in complying with laws, rules, requirements, ordinances or regulations that (i)exist on the Lease Execution Date, or (ii) are part of the Work under Article 6 below, or (iii) are Landlord’s responsibility under Article 7 below (ADA); (o) the cost of all exterior window replacements and repair; (p) management fees; and (q) any and all other expenses reasonably incurred by Landlord for operation and maintenance of the Land and Building which are customary for similar buildings in New York City.

 

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(2)         Notwithstanding anything in this Lease to the contrary, the following items shall be excluded from Base Year Operating Expenses: (a) the costs of repairs or other work occasioned by fire, windstorm or other insured loss (and, if Landlord has failed to maintain such insurance coverage as would be maintained by a reasonably prudent owner of similar property, then the costs of repairs or other work occasioned by uninsured losses which would have been covered by such insurance), or by the exercise of eminent domain, or the cost of repairs for which Tenant has reimbursed Landlord under any provision of this Lease, or which are to be performed at Landlord’s sole cost and expense as expressly set forth in this Lease; (b) leasing commissions, rental concessions and lease buy-outs; (c) the costs of renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants of the Building; (d) Landlord’s cost of electricity and other services and goods that are sold to tenants and for which Landlord is entitled to be reimbursed by tenants as an additional charge or rental over and above the basic rent payable under the lease with such tenant (or if provided on a so-called “rent inclusion” basis); (e) depreciation; (f) overhead and profit increment paid to subsidiaries or affiliates of Landlord for services on or to the Building and amounts paid for services that are not rendered pursuant to an arms length contract, to the extent only that the costs of such services exceed competitive costs of such services; (g) interest on debt or amortization payments on any mortgage or mortgages, and rental under any ground or underlying lease or leases; (h) Landlord’s general overhead and any other expense not related to the Building; (i) any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord; (j) all items and services and goods for which Tenant or any other person reimburses Landlord or pays third persons (other than pursuant to operating expense, porter’s wage formula or like provisions); (k) wages, salaries and other compensation paid to employees of the Building above the grade of Building manager (or Building superintendent); (1) professional fees allocable to preparation of leases and related instruments (including, without limitation, guarantees, surrender agreements, lease amendments and consents to assignment or subletting) for other tenants (or prospective tenants) and the enforcement of any such instrument (except as otherwise provided in subdivision (l) (i) hereinabove); (m) advertising and promotional expenses with respect to leasing space in the Building; (n) Taxes and/or Real Estate Taxes; (o) estate, inheritance, gift, franchise and income taxes not included in Taxes and/or Real Estate Taxes; (p) all items that would be capitalized under generally accepted accounting principles except if expressly provided for in subdivision (A)(l)(m) hereinabove; (q) all other items for which any tenant compensates Landlord hereunder so that no duplication of payments shall occur, and (r)all other expenses which are to be borne by Landlord at its sole cost and expense under any applicable provision of this Lease.

 

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(3)         “Base Year Operating Expenses” shall mean the Operating Expenses for the calendar year 2000 (the “Base Year”).

 

(4)         The intent of the parties is that Tenant shall pay its proportionate share of increases in Base Year Operating Expenses (i.e., Operating Expense Escalations) based on the Building being fully occupied. Accordingly, in determining the amount of Base Year Operating Expenses, if less than one hundred percent (100%) of the Building rentable area shall have been occupied by tenant(s) at any time during the Base Year, Base Year Operating Expenses shall be an amount equal to those Operating Expenses that would have been incurred in the Building under the definition of Operating Expenses above set forth had such occupancy been one hundred percent (100%) throughout the Base Year.

 

(5)         Landlord shall be required to notify Tenant of any significant related party transactions the cost of which are included in the Base Year Operating Expenses. When such transactions occur, the prices of the same must be in line with normal industry practice in Brooklyn for similar types of buildings. Failure to notify Tenant of such related party transactions shall result in a disallowance of any costs thereof that would otherwise be part of the Base Year Operating Expenses. If such related party transactions occurred and were disclosed but it is established that the cost thereof was excessive, then such charges shall be disallowed to the extent they exceed normal industry prices in Brooklyn for similar types of buildings.

 

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(6)         No later than July 1,2001, Landlord shall furnish to Tenant a schedule of Base Year Operating Expenses. Such schedule of Base Year Operating Expenses must be prepared in a format no less detailed than the corresponding schedule which constitutes an exhibit to the lease between Landlord and Tenant, dated as of January 1,1997, for space at 240- 250 Livingston Street, Brooklyn, New York and which is annexed hereto as Exhibit B and made a part hereof. Such schedule of Base Year Operating Expenses must include a statement signed by an executive of Landlord that avers that there is complete and accurate documentation in Landlord’s or Landlord’s managing agent’s files to support each and every charge included in Base Year Operating Expenses. Landlord must have supporting documents for each component of Base Year Operating Expense or any such component for which such documentation is not furnished will be disallowed. Such schedule of Base Year Operating Expenses (“Expense Schedule”) shall be accompanied by a report of Landlord’s Certified Public Accountant in the form attached hereto as part of Exhibit B.

 

(B) (1) (a)       “Price Index” shall mean The Consumer Price Index for U.S. City Average - All Urban Consumers (1982-84 equals 100), issued by the Bureau of Labor Statistics of the United States Department of Labor.

 

(b)     “Base Price Index” shall mean the Price Index for December, 1999.

 

(c)     “Operating Year” shall mean each twelve (12) month period consecutively following the calendar year 2000, all or any part of which falls within the Term.

 

(d)     “Index Month” shall mean December, 2000 and the month of December in each successive Operating Year (so that the Index Month for Operating Year 2001 shall be December. 2000, the Index Month for Operating Year 2002 shall be December, 2001, etc.).

 

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(2)         “Operating Expense Escalation” shall mean a sum which Tenant covenants and agrees to Landlord for each Operating Year commencing with calendar year 2001, computed by multiplying (x) the sum representing the Base Year Operating Expenses by (y) the percentage, if any, by which the Price Index, as published for the Index Month of the Operating Year in question exceeds the Base Price Index, multiplied by (z) 63.4%,, which represents Tenant’s Proportionate Share of Operating Expenses under this Lease, assuming Substantial Completion and/or delivery and/or occupancy by Tenant for the conduct of its business, of the entire Demised Premises as provided hereinbelow in Article 6, but otherwise pro rata based on the percentages set forth in Section (F) of Article 3 herein. (See example below for calculating the Price Index change for a sample Operating Ye ar.)

 

(3)         Such Operating Expense Escalation for every Operating Year shall be billed and paid as follows: Within two (2) months after the beginning of any such Operating Year, Landlord shall deliver to Tenant a statement (hereinafter the “Expense Statement”) showing the amount of such Operating Expense Escalation payable for the then current Operating Year (the “Amount’’), which Amount shall be calculated by using the Price Index for the Index Month of the preceding Operating Year according to (2) above. Tenant shall pay the Amount to Landlord in equal monthly installments in arrears on the last day of each and every month during such Operating Year (except that the monthly installments for the months elapsing prior to the delivery of the Expense Statement shall be payable with the monthly installment next accruing after the delivery of the Expense Statement).

 

(4)         Landlord shall not be obliged to make any adjustments or recomputations, retroactive or otherwise, by reason of any revision which may later be made in the figure of the Price Index first published for any month. The Price Index published for any Index Month shall, for the purpose of this Section (A), be deemed no lower than the Base Price Index.

 

  - 19 -  

 

 

(5)         If the Price Index ceases to use the 1982-84 average equaling 100 as the basis of calculation, then the Price Index shall be appropriately adjusted to reflect the change in the Price Index from that in effect at the date of this Lease. If such Price Index shall no longer be published by said Bureau, then any substitute or successor index published by said Bureau or other governmental agency of the United States, and similarly adjusted as aforesaid, shall be used. If such Price Index (or a successor or substitute index similarly adjusted) is not available, a reliable governmental or other reputable publication selected by Landlord and Tenant jointly and evaluating the information theretofore used in determining the Price Index shall be used.

 

(6)         If the Term ends on a day other than the last day of an Operating Year, Tenant’s liability under this Subparagraph (B) shall be apportioned so that Tenant shall pay only such part of the sums required to be paid under this Subparagraph (B) that shall be included in the Term.

 

(7)          Example for calculating the Price Index change for Operating Year 2001.

 

Index point change  
   
CPI for December, 2000 140
Less CPI for December, 1999 135
Equals index point change 5
   
Percent Change  
   
Index point difference 5
Divided by CPI for December, 1999 135
Equals 0.0370x100
Equals percent change 3.70%

 

  - 20 -  

 

 

II.           REAL ESTATE TAX ESCALATIONS

 

(A)         The term “Taxes” and “Real Estate Taxes” as used herein, shall mean the real estate taxes and assessments (including special assessments) on or with respect to the Building and the land on which it stands (“Land”) which are assessed, levied, or imposed by any governmental authority having jurisdiction including, without limitation, (i) assessments made upon or with respect to any “air” and “development” rights now or hereinafter appurtenant to or affecting the Land; (ii) any fee, tax or charge imposed by any governmental authority for any vaults, vault space or other space within or outside the boundaries of the Land; and (iii) any taxes or assessments levied after the date of this Lease in whole or in part for the public benefits to the Land or the Building, including, without limitation, Business Improvement District taxes and assessments; without taking into account any discount that Landlord may receive by virtue of any early payment of Taxes, in each case, calculated as if the Land and Building were the only asset of Landlord; provided, that if because of any change in the taxation of real estate, any other tax or assessment however denominated (including, without limitation any franchise, income, profit, sales, use, occupancy, gross receipts or rental tax) is imposed upon Landlord or the owner of the Land or the Building, or the occupancy, rents or income therefrom, in substitution for any of the foregoing Taxes, such other tax or assessment shall be deemed part of Taxes computed as if Landlord’s sole asset were the Land and Building. Excluded from the foregoing enumerations of Taxes and Real Estate Taxes will be (i) any income, franchise, inheritance, capital stock, excise, excess profits, occupancy or rent, gift, estate, payroll or stamp taxes or foreign ownership or control taxes and any capital gains tax and deed tax or transfer tax imposed by Article 29 of the New York State Tax Law, and any mortgage recording tax imposed by Article 11 of the New York State Tax Law, and (ii) any Taxes resulting from an increase of the assessed value of the Building attributable to additions to the Building which increase the rentable area of the Building. As of the date hereof, to the best of Landlord’s knowledge, the only Taxes affecting the Building and/or the Land are the real estate taxes payable to the City of New York.

 

  - 21 -  

 

 

(B)         Tenant covenants and agrees that commencing as of July 1, 2001, Tenant shall pay to Landlord, as Additional Rent, an annual sum (the “Tax Payment ”) equal to the product of: (x) Tenant’s Proportionate Share ( 63.4% , assuming Substantial Completion and/or delivery and/or occupancy by Tenant for the conduct of its business, of the entire Demised Premises as provided hereinbelow in Article 6, but otherwise pro rata based on the percentages set forth in Section (F) of Article 3 herein,), and (y) the amount by which the annual Real Estate Taxes for the current July 1 - June 30 period (each such period, a “Tax Year” ) exceed the amount of Real Estate Taxes finally imposed or assessed on the Land and Building (but not including the Parking Lot, which is covered by Subsection (E) below )for the July 2000—June 2001 Tax Year (“ Base Taxes ”). Tenant shall pay the Tax Payment in two (2) equal installments, each of which shall be due within thirty (30) days after Landlord presents to Tenant a copy of an official Real Estate Tax bill from the applicable governmental authority. The Tax Payment payable for the Tax Year during which the Term hereof expires shall be prorated based on the number of days of the Term which fall within such Tax Year.

 

(C)         Appropriate adjustment shall be made for any refund obtained by reason of a reduction in the assessed valuation made by the assessors or the courts for any period falling within the Term, including with respect to Base Taxes. In calculating the amount of such adjustment, Landlord may deduct therefrom, any expenses incurred by Landlord, or Landlord’s estate, including payments to consultants, attorneys and appraisers, in contesting, or otherwise seeking a reduction of, the Taxes and Real Estate Taxes or assessed value of the Land or Buildings by tax certiorari proceedings or otherwise; provided, however, that Landlord shall not deduct payments to any consultant, attorney or appraiser for performing the same function as another consultant, attorney or appraiser for which Landlord is deducting its costs. The original computations, as well as payments of Additional Rent, if any, under the provisions of this Article, shall be based on the original assessed valuation with adjustments to be made if and when the Tax refund, if any, has been paid to Landlord. All rights and obligations of the parties hereto respecting any Tax Payments shall survive the expiration or earlier termination of the Term hereof.

 

  - 22 -  

 

 

(D)         If the Base Taxes shall be reduced or increased as a result of protests of proceedings filed therefor, then the Base Taxes shall be amended to the amount actually collectible by the City of New York, and all previously made Tax Payments shall be appropriately adjusted and any additional payments or credits shall be due and payable within thirty (30) days after billed or credited by Landlord. Landlord shall use best efforts to promptly notify Tenant in writing each time a tax assessment is challenged, but Landlord’s failure to do so shall not affect the parties’ rights or obligations hereunder.

 

III. RIGHT TO WITHHOLD AND AUDIT

 

(A)         If Landlord fails to furnish any statements, schedules, forms (collectively “Statements”) under this Article relating to Base Year Operating Expenses, Operating Expense Escalations or Real Estate Taxes or Tax Payments, Tenant may, after thirty (30) days’ written notice to Landlord specifying the missing Statements and Landlord’s failure to furnish the missing Statements within such thirty (30) day period, withhold all Additional Rent due and owing to Landlord, including but not limited to Tax Payments and Operating Expense Escalations above, until Landlord furnishes the foregoing Statements. Tenant’s liability for Operating Expense Escalations and Tax Payments due pursuant to this Article and/or Landlord’s liability for refunding any overpayment by Tenant shall survive the expiration of the Term.

 

  - 23 -  

 

 

Pending any audit by the Tenant or Comptroller of Operating Expense Escalations and Tax Payments for any calendar and/or fiscal year, including the Base Year Operating Expenses and Base Taxes, Tenant shall pay Operating Expense Escalations and Tax Payments pursuant to the provisions hereof for such year as billed by Landlord, provided, however, that once Tenant notifies Landlord as to a dispute Tenant shall have the right to withhold only the disputed amount on account of Operating Expense Escalations or Tax Payments until the dispute in question is resolved; and upon completion of such audit Tenant shall be allowed to deduct immediately overcharges detected upon audit from any installment of rent then becoming due. or, if at the end of the Term, Tenant shall be entitled to a payment from Landlord for such amounts within seven (7) days of Termination or expiration.

 

(B)         Any right of Tenant to audit Base Year Operating Expenses shall be conditioned upon such audit being commenced by Tenant (without reference to the Comptroller’s right to audit) within one (1) year after Landlord furnishes the Expense Schedule and such audit being conducted in a reasonably expeditious manner. Any amount overpaid by Tenant shall bear interest at the Default Rate ( as hereinafter defined) from the date of payment to the date of refund. Any amount wrongfully withheld by Tenant shall bear interest at the Default Rate from the date such amount was first withheld until actually paid.

 

  - 24 -  

 

 

(C)         Tenant and its authorized representative, at Tenant’s sole expense, shall have the right to examine and copy and, with respect to computation of Base Year Operating Expenses Operating Expense Escalations, Base Taxes and Tax Payments, audit any and all relevant books and records of Landlord, including, but not limited, original invoices, originals of executed contracts, original canceled checks, general ledgers and books of original entry, for the purpose of verifying the accuracy of any Statement furnished by Landlord to Tenant with respect to the Base Year Operating Expenses, computation of Operating Expense Escalations, Base Taxes and Tax Payments hereunder, upon reasonable prior notice, during regular business hours. All such Statements are subject to verification by the occupying agency or its representative and post-audit by the Office of the Comptroller, it being agreed that such verification and audit rights shall not extend to an audit of Landlord’s operating expenses, except for Base Year Operating Expenses (since Tenant’s payment obligations are based on the Price Index escalation above the Base Year Operating Expenses and not on Landlord’s actual expenses). Landlord shall be required to retain the books and records required herein at its main office(s) or such other locations within New York City as it may designate, for six (6) years after the period to which they relate.

 

(D)         Landlord shall notify Tenant of (i) any protest filed by any other tenant of the Building regarding amounts billed for Base Year Operating Expenses and/or Tax Payments pursuant to this Article; and (ii) with respect to any Base Year Operating Expenses and Base Taxes and Tax Payments pursuant to this Article, any audits, resolution of audits, claims for a refund of overpayments, settlements of overpayments, refunds of overpayments, and litigation and arbitration proceedings for recovery of overpayments, where such audits and other actions result in a determination that overcharges have occurred. For litigation and arbitration proceedings for recovery of overpayments, “determination” shall mean the trial-lower court or arbitrator’s determination, respectively, prior to appeals. Tenant shall complete any examination or audit initiated for the verification of any Statement within a reasonable time. If, at the end of such period, Tenant has not claimed in good faith to have found a miscalculation relating to such Statement, Tenant shall be deemed to have accepted such Statement and shall, within ten (10) days thereafter, remit all disputed withheld amounts (with interest as hereinabove provided). If Tenant does, within such period, claim in good faith to have found a miscalculation, Tenant shall notify Landlord. Landlord and Tenant shall use good faith efforts to resolve any disagreement within ten (10) business days after Tenant’s notice and, if they fail to do so, either party may submit such disagreement to arbitration in accordance with Article 6 (X) below.

 

  - 25 -  

 

 

IV.           REAL ESTATE TAX ESCALATION FOR PARKING LOT

 

Upon delivery to Tenant for its exclusive use of the Parking Lot, Tenant shall pay Tax Payments with respect to the Parking Lot (Block 165, Lot 68)pursuant to all the terms and conditions of Paragraph II above, except that the Base Taxes shall be those applicable to the Parking Lot only and Tenant’s Proportionate Share of Tax Payments for the Parking Lot shall be 100%.

 

ARTICLE 5

 

LANDLORD’S INTEREST IN PREMISES

 

Landlord warrants and represents that it is the owner in fee of the Building, the Demised Premises, and the Land and is empowered and authorized to lease the Demised Premises as provided herein.

 

  - 26 -  

 

 

ARTICLE 5A

 

TENANT’S OPTION WITH RESPECT

 

TO ORIGINAL STORAGE SPACE

 

Tenant shall have a one time option to extend the OSS Term for a period from January 1, 2019 through the Expiration Date (“OSS Renewal Term”), by written notice sent to Landlord no later than December 31, 2017, time being of the essence. If Tenant exercises such option, this Lease shall continue in full force and effect with respect to the Original Storage Space during the OSS Renewal Term (including, without limitation, escalation base periods and percentages) and the Base Rent for the Original Storage Space shall be $147,157.85 per annum during the OSS Renewal Term.

 

ARTICLE 6

 

BASE BUILDING AND TENANT WORK;

 

SUBSTANTIAL COMPLETION

 

(A)         Landlord agrees to make alterations and improvement in and to the Building and the Demised Premises as provided in this Article based on preliminary plans and scopes of work (collectively, “Preliminary Plans”) prepared by the Division of Real Estate Services (“DRES”), approved by the occupying agencies and attached hereto as Exhibit C and made a part hereof. Such work consists of (1) alterations and improvements in and to the Building and its systems and facilities (outside of the Demised Premises) described in Landlord’s base building scope of work, constituting a part of Exhibit C (“Base Building Work”), which shall be performed by Landlord and paid for as provided in Sections (H), (I) and (K) of this Article 6, and (2) alterations and improvements in and to the Office Space described in the Preliminary Plans (“Tenant Work”), which shall be performed by Landlord and paid for by Tenant as set forth in Sections (H), (I) and (K) of this Article 6. The Base Building Work and the Tenant Work, which are hereinafter collectively referred to as the “Work,” are both fully described in Exhibit C annexed hereto. Notwithstanding the foregoing, the Lobby Space will remain “as is,” subject, however, to the requirements of Article 7 below; the Original Storage Space will remain “as is,” except for a building standard painting, at Tenant’s request and Landlord’s sole cost and expense, with the necessary and reasonable cooperation of Tenant; and the New Storage Space is being leased “as is.”

 

  - 27 -  

 

 

(B)(1) Within one (1) business day after the Execution Date, Landlord shall solicit and deliver to DRES bids from three architects for the cost of preparing the Final Plans (as hereinafter defined) for the Work in its entirety, which bids shall be broken down into Base Building Work and Tenant Work cost components. Each such bid shall set forth the cost and itemization of the architect’s work. Within five (5) business days after receipt of such bids, DRES shall submit to Landlord either written (1) approval of one of the three bids, or (2) disapproval of all bids, accompanied by reasonable justification for such disapproval. In the event of the reasonable disapproval of all three bids, DRES shall meet with Landlord within five (5) business days after such disapproval, at which time both Landlord and DRES shall reasonably and in good faith attempt to resolve DRES’ reasonable objections constituting the basis for such disapproval. Landlord and Tenant shall continue to cooperate reasonably and in good faith with each other until a mutually acceptable architect is selected.

 

  - 28 -  

 

 

(2)         Within fifty (50) business days from (i) the date of selection of the Architect (defined below) or (ii) the Lease Execution Date, whichever is later, Landlord shall cause the mutually selected architect ( such architect being referred to herein as the “Architect”), at the approved cost set forth in said Exhibit C-1, to prepare and deliver to DRES architectural and engineering plans and specifications for the performance of the Work (“Complete Plans”). The Complete Plans must (1) be engineering and architecturally complete; (2) be coordinated with the existing conditions and facilities of the Building; (3) be in conformance with all applicable New York City codes and all other applicable requirements, including, but not limited to, the terms and conditions set forth in the professional services requirement document prepared by DRES and entitled “Guide for Design Consultant” and dated October, 1996 (a copy of which is attached hereto as Exhibit D); (4) be coordinated with and based on the Preliminary Plans; (5) create a complete set of construction documents; and (6) include a phasing plan, which shall describe the sequence of the Work to be performed (“Phasing Plan”). Concurrently with the delivery of said Complete Plans to DRES, the Complete Plans shall be filed with the Building Department, the Fire Department and all other governmental authorities having jurisdiction.

 

(C)         Within fifteen (15) business days after delivery of the Complete Plans to Tenant, DRES will review and either approve or disapprove such initial Complete Plans (including, without limitation, the Phasing Plan), which approval shall not be unreasonably withheld or delayed. If DRES fails to respond within such fifteen (15) business day period, such Complete Plans and the accompanying Phasing Plan shall be deemed approved. If DRES does not approve such initial Complete Plans in their entirety, it shall, within such fifteen (15) business day period, indicate in writing which aspects or portions of such Complete Plans it does approve, if any, and the corrections reasonably required for its furnishing of such approval with respect to the remainder of such Complete Plans. Landlord shall, within fifteen (15) business days after receipt of such proposed corrections, resubmit revised Complete Plans and DRES shall, within ten (10) business days after the receipt of such Complete Plans, either approve or disapprove such revised Complete Plans in the same manner set forth above. If DRES does not approve such revised Complete Plans in their entirety, the foregoing process shall continue, Landlord preparing revised Complete Plans and Tenant responding thereto, all within the time constraints and following the procedures set forth in the immediately preceding two sentences, until Tenant shall have approved the revised Complete Plans in their entirety, which approved revised Complete Plans are herein referred to as the “Final Plans.” Within ten (10) business days after such approval is received, the Final Plans shall be filed with the Building Department, the Fire Department and all other governmental authorities having jurisdiction.

 

(D)         Within ten (10) business days after DRES’ approval of the Final Plans, and prior to the commencement of the Work, Landlord shall deliver to DRES Building Department administrative approvals with respect to the Final Plans. If Landlord has not received such Building Department administrative approvals within such ten (10) business day period, Landlord shall provide DRES with (1) reasonable written verification that it has not received such administrative approvals; (2) a list of the most recent objections by the Building Department and Landlord’s reply thereto; and (3) reasonable substantiation that Landlord is proceeding diligently to obtain such administrative approvals. Within ten (10) business days after Landlord’s receipt of Building Department administrative approval of the Final Plans, Landlord will submit to DRES a copy of the Building Department permit for the performance of the Work (“Building Permit”). If Landlord has not received the Building Permit within such ten (10) business day period, Landlord shall (4) provide DRES with reasonable written verification that it has not received the Building Permit, and (5) furnish DRES with reasonable substantiation that Landlord (a) has diligently pursued and continues to diligently pursue obtaining the Building Permit, and (b) has responded in a timely manner to objections raised by the Building Department.

 

  - 29 -  

 

 

(E)         Landlord hereby represents and warrants that it has the financial capability and/or adequate financing to complete the Work within the time frames set forth herein. Landlord’s misrepresentation with respect to such capability shall constitute a basis for rescission of this Lease.

 

(F)         During the course of the preparation and revision of the Complete Plans and approval of the Final Plans, Landlord and DRES shall agree, on a reasonable basis, with respect to not fewer than three general contractors and/or construction managers (one of which may be Landlord or an affiliated entity) which shall be requested to competitively bid the performance of the Work (“Approved Bid Contractors”). Within twenty (20) business days after DRES’ approval of the Complete Plans, Landlord shall submit DRES-supplied cost estimate forms completed by each of the Approved Bid Contractors (“Cost Proposals”) for the performance of the Work. The Cost Proposals shall indicate in reasonable detail the proposed cost of the Base Building Work (“Base Building Work Cost”) and the proposed cost of the Tenant Work (“Tenant Work Cost”). The Base Building Work Cost and the Tenant Work Cost (collectively, “Work Cost”) shall constitute all costs and expenses (excluding construction loan interest and related financing cost) charged to Landlord for:

 

(1)         The preparation and filing of the Final Plans (including, without limitation, all Architect fees and disbursements (as approved in writing by DRES) for the preparation of the Final Plans and “as built” drawings pertaining to the performance of all aspects of the Work and expediters’ fees and filing fees for the submission of the Final Plans to all governmental authorities having jurisdiction for approval thereof);

 

  - 30 -  

 

 

(2)         Fees charged by all governmental authorities having jurisdiction for approval of the Final Plans, issuance of the Building Permit and all signoffs and approvals required to satisfy the requirements of this Article 6;

 

(3)         The performance of all items of the Work in accordance with the Final Plans; and

 

(4)         One general conditions’ fee from, and one charge for overhead and profit for, the Designated Contractor (as hereinafter defined), but only to the extent indicated in the approved Cost Proposal.

 

Landlord shall not be entitled to an administrative or management fee for the performance of the Work. There shall be no double payment by Tenant of any item included in the cost of the performance of the Work, including, without limitation, any component of overhead, profit or fees charged by the Designated Contractor.

 

(G)         Once Landlord has received the Cost Proposals (which Cost Proposals shall clearly delineate the Base Building Work Cost and Tenant Work Cost, as herein defined, as well as a breakdown of the Tenant Work Cost between Floor 8 and the remainder of the Office Space), it shall within three (3) business days thereafter furnish DRES with the paperwork of the Approved Bid Contractor which furnished the lowest bid for the total of the Base Building Cost and Tenant Work Cost, as herein defined. DRES may, within ten (10) business days after its receipt of such Cost Proposals, approve or disapprove same, so long as any disapproval is predicated on a reasonable basis and is consistent with the scope of work (constituting a part of Exhibit C annexed hereto) for the Base Building Work and the Tenant Work. If DRES fails to disapprove the Base Building Work Cost and/or the Tenant Work Cost within such ten (10) business day period, it shall be deemed to have approved both the Base Building Work Cost and the Tenant Work Cost. If DRES reasonably disapproves, it shall meet with Landlord within five (5) business days thereafter and Landlord and Tenant shall negotiate reasonably and in good faith and thereby agree upon the Base Building Work Cost and the Tenant Work Cost. As part of such negotiation, DRES shall meet with the Approved Bid Contractor which furnished the lowest bid for the total of the Base Building Work Cost and the Tenant Work Cost (“Designated Contractor”) and resolve (on a reasonable basis) any discrepancies in unit prices and quantities.

 

  - 31 -  

 

 

 

(H)         Landlord shall pay the first $1,456,760.00 of the Work Cost (the “Landlord’s Contribution”) and Tenant, shall pay any additional Work Cost (“Excess Work Cost”) which Excess Work Cost shall be paid as provided in Section (I) of this Article 6.

 

(I)         Tenant’s share of the Work Cost shall not exceed $10,310,429.00 ( Not to Exceed Amount” ) . Although Tenant shall be ultimately responsible for the payment, by way of reimbursement, to Landlord, in accordance with the provisions of this Article 6, of the entire Work Cost in excess of the Landlord’s Contribution, i.e., the Excess Work Cost, limited as hereinabove provided, the maximum amount which Landlord shall be required to have advanced at any one time on account of Tenant’s share of the Work Cost shall not exceed $9,750,000.00 (“Landlord’s Work Cost Advance”). Notwithstanding the foregoing, the Tenant Work Cost may be further modified at a later date by DRES requesting changes beyond the Final Plans, provided Tenant’s share thereof does not exceed the Not To Exceed Amount and the limitation of the Landlord’s Work Cost Advance is not exceeded, and provided that, with respect to such changes, Tenant and Landlord shall have agreed as to the nature, amount and cost thereof. If Tenant’s share of the Work Cost exceeds the Not To Exceed Amount, Landlord shall promptly notify DRES and DRES shall meet with Landlord, the Architect and the Designated Contractor to reasonably and in good faith resolve the overage, including, but not limited, to reducing the Base Building and/or Tenant Scope of Work. However, Tenant may not reduce the scope of the Base Building Work without Landlord’s prior written consent. With respect to items of such scope which involve elevator, HVAC and fire safety, Landlord’s consent may be unreasonably withheld. With respect to all other items of such scope of work, Landlord’s consent shall not be unreasonably withheld.

 

  - 32 -  

 

 

Landlord’s Initial Work Cost Advance shall be repaid by Tenant to Landlord in the following manner:

 

(1)         The portion of Landlord’s Work Cost Advance applicable to the Work for Portion 1 shall be repaid in a lump sum within forty-five (45)days after the Commencement Dale for Portion 1; and

 

(2)         One-half of the portion of Landlord’s Work Cost Advance, viz. that portion which is applicable to the Work for Portion 2, shall be repaid over five (5) years from the Commencement Date for Portion 2, as hereinafter provided; and

 

(3)         One-half of portion of the Landlord’s Work Cost Advance, viz. that portion which is applicable to the Work for Portion 3, shall be paid over five (5) years from the Commencement Date for Portion 3, as hereinafter provided.

 

Following the Commencement Date for each of Portion 2 or Portion 3, Tenant shall reimburse Landlord for the portion of Landlord’s Work Cost Advance applicable to the Work for Portion 2 or Portion 3, as the case may be, on a self-liquidating basis, in sixty (60) equal monthly installments of the portion of Landlord’s Work Cost Advance applicable to Portion 2 or Portion 3, together with interest on each such portion, at the rate of two percent (2%) in excess of the so-called “ prime” or “base” interest rate as established by the Citibank, N.A., or its successor, or if it ceases to exist the corresponding rate published in the New York Times in effect on the Commencement Date for the applicable portion (“Loan Interest Rate”), provided, however, that Tenant may at any time make additional payments in reduction of the outstanding balance of the portion of Landlord’s Work Cost Advance applicable to either Portion 2 or Portion 3 without penalty, in which case the amount of any remaining monthly payments shall be appropriately adjusted.

 

  - 33 -  

 

 

Notwithstanding the foregoing, Tenant in its sole discretion, may elect to reimburse Landlord for the portion of Landlord’s Work Cost Advance applicable to both Portions 2 and 3 by a lump sum payment made within forty-five (45) days following the applicable Commencement Date. Otherwise interest, as set forth above, shall be computed from the date of Substantial Completion until repayment in full of the portion of Landlord’s Work Cost Advance applicable to Portions 2 and 3. In the event this Lease is terminated pursuant to Article 3 hereof, Tenant shall reimburse the Landlord for the remaining balance of the portion of Landlord’s Work Cost Advance applicable to Portions 2 and 3 of the Work in one lump sum on or before the effective date of termination.

 

If Tenant fails to make any lump sum payment within the applicable forty-five (45) day grace period, such payment shall bear interest at the Loan Interest Rate from the end of such forty-five (45) day period until paid in full.

 

(4)         The entire then unpaid Landlord’s Work Cost Advance shall become due and payable, at the option of Landlord, upon (i) Tenant’s failure to make any payment due under this Section (1) and the continuance of such failure for ten (10) business days after Landlord’s written notice to DRES of such failure, unless such failure to make such payment is due to to the once yearly registration of this Lease with the Comptroller’s Office (subject to a thirty (30) day limitation), or (ii) the occurrence of any material monetary default by Tenant under this Lease that continues beyond any applicable notice and/or grace period and which results in the termination of this Lease, or (iii) the termination of this Lease for any reason whatsoever (other than pursuant to Section (Q) or (R) hereinbelow).

 

  - 34 -  

 

 

(J)         The Base Building Work Cost and the Tenant Work Cost shall be subject to audit by the Department of Citywide Administrative Services and/or its authorized representative but only if and so long as Tenant continues to make payment (which payment may be made on a “without prejudice” basis) in accordance with Section (I) hereinabove, and, at the discretion of the Comptroller of the City of New York, also may be post-audited by the Comptroller.

 

(K)         Landlord’s Contribution and Tenant’s share of the Work Cost shall be paid for initially by Landlord (but only as and to the extent set forth in Section (I) hereinabove). Landlord shall have a continuing obligation to make regular periodic payments to the Designated Contractor, at approximately thirty (30) day intervals, in amounts reasonably commensurate with the amount of progress toward Substantial Completion (as hereafter defined), during the period from the commencement of the performance of the Work through the Substantial Completion of the Work so as to assure diligent and timely completion of the Work.

 

(L)         The parties agree that the Demised Premises (other than the Original Storage Space) shall be renovated and delivered in the following stages: (1) Portion 1 - Floor 8, and the Parking Lot; (2) Portion 2 - two additional floors of the Office Space and the New Storage Space; and (3) Portion 3-the final two floors of the Office Space.

 

Subject to Sections (M) and (N) hereinbelow, portions of the Work shall be deemed “Substantially Complete,” and “Substantial Completion” of each of the several Portions of the Demised Premises (not including the Original Storage Space and the Parking Lot, which is dealt with in Section (P) hereinbelow) shall be deemed to have occurred, upon:

 

  - 35 -  

 

 

(1)         Certification by DRES (which certification shall not be unreasonably withheld or delayed) of Landlord’s completion of the Tenant Work for the applicable Portion (together with such portion of the Base Building Work as is necessary for the occupancy by Tenant of such Portion), excepting minor details of construction or decoration which do not materially adversely affect Tenant’s occupancy of such Portion; and

 

(2)         Delivery to DRES of (a) all applicable Building Department and Fire Department inspection signoffs (including, without limitation, Building Department Post Permit TR-1, equipment use permits, electrical and plumbing signoffs and compliance with the terms and conditions of Article 26 of this Lease pertaining to Asbestos) with respect to such Portion (together with such portion of the Base Building Work as is necessary for the occupancy by Tenant of such Portion) (self-certification by Landlord’s Architect and/or Landlord’s engineer, with respect to items for which Building and Fire Department shall accept self- certification, shall be sufficient if permitted by law or code), and (b) a certified air balancing report approved by Landlord’s engineer as being in conformance with the portion of the Final Plans that are applicable to such Portion. DRES agrees to use reasonable efforts to assist Landlord in scheduling prompt Building Department and Fire Department inspections, provided, however, Landlord has (i) submitted to the Building and/or Fire Department all applicable papers and (ii) completed all necessary Work for sign-offs and (iii) requested said inspections in a timely manner. Failure by DRES to use such reasonable efforts to assist Landlord in scheduling said inspections, where Landlord has submitted all applicable papers and completed all necessary work for sign-offs, shall be deemed a Tenant Delay.

 

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DRES shall certify or deny certification of Substantial Completion pursuant to subsection (1) above within five (5) business days after DRES receives written notice from Landlord that Landlord believes that the applicable Portion is Substantially Complete (which notice must be accompanied by all applicable documents required pursuant to subdivisions (a) and (b) of this subsection (2)). If DRES fails to respond within such five (5) business day period, and provided all signoffs have been submitted, Substantial Completion of the applicable Portion shall be deemed to have occurred on the day following such five (5) business day period. If signoffs are temporary, Landlord will keep them in full force and effect. Prior to each applicable Substantial Completion Date, Landlord shall remove all violations of record (including, without limitation, Building Code and Fire Code violations) then pending against the applicable Portion and/or affecting Tenant’s access to and use of said applicable Portion, except those violations caused by Tenant’s violation of any of the terms and conditions of this Lease or caused by other tenants in the Building, which violations Landlord shall diligently proceed to advise such other tenant to remove.

 

(M)         Notwithstanding anything to the contrary contained in this Article : (a) if Substantial Completion of any Portion is delayed by reason of any one or more Tenant Delay(s), as hereinafter defined, the Rent Commencement Date for such Portion shall be advanced, following achievement of Substantial Completion of such Portion in accordance with the terms of this Article 6, by the number of days for such Tenant Delay(s) remaining after having deducted from such number of days of Tenant Delay any one or more days of Landlord Delays, as hereinafter defined; (b) if Substantial Completion of any Portion is delayed by reason of any one or more days of Landlord Delays, as hereinafter defined, the Commencement Date for such Portion shall be delayed, following Substantial Completion of such Portion in accordance with the terms of this Article 6, by the number of days of such Landlord Delay (s) remaining after having deducted from such number of days of Landlord Delay any one or more days of Tenant Delay as hereinafter defined; and (c) any time period for either party to perform any obligation under this Article 6 automatically shall be deemed extended by the period of delay in such party’s ability to perform the applicable obligation caused by an Unavoidable Delay, as defined in Article 22 hereof.

 

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(N)         (1) For purposes of this Lease, a “ Tenant Delay ” shall mean any delay of one or more days (not due to an Unavoidable Delay or Landlord Delay, as hereinafter defined), exceeding an aggregate of thirty (30) days, as a result of any of the following, provided Landlord has notified DRES of same in writing by fax or mail: (i) any request by Tenant that Landlord delay in proceeding with any segment or part of the Work; (ii) any changes or requests for changes, by or on behalf of, Tenant, to the Final Plans pursuant to change order procedures set forth in Subparagraph (3) below; (iii) any failure by Tenant to timely respond to submissions and timely complete its review and reasonably approve Complete Plans pursuant to the time frames and other provisions set forth herein; (iv) any delay in the selection of materials to be made by Tenant; (v) any failure by Tenant to make any payment when due as described in this Article; (vi) any failure by Tenant to respond reasonably, in good faith or within the time frames set forth herein or to respond with reasonable specificity where required herein; or (vii) anything else expressly stated in this Lease to be a Tenant Delay.

 

(2)          If Landlord shall be delayed in Substantially Completing any portion of the Tenant Work by reason of one or more Unavoidable Delays or Tenant Delay or Tenant Delays in the aggregate, then Landlord’s time to complete the Work, as set forth in Sections (Q) or (R) of this Lease, shall be extended one (1) day for each day of Unavoidable Delays and for each day of a Tenant Delay or Tenant Delays in the aggregate. In that connection, the number of days of Tenant Delays shall be reduced by the number of days of delay that Landlord has failed, due to any act or omission of Landlord, or its employees, agents, representatives or contractors, including, but not limited to, the Architect, Landlord’s engineer, or the Designated Contractor (not due to an Unavoidable Delay or Tenant Delay), to meet deadlines or respond reasonably, in good faith or timely perform obligations imposed on Landlord under any provision of this Article, exceeding an aggregate of thirty (30) days of such delay, (“ Landlord Delays ”), except that no day shall be counted as a day of Landlord Delay until Tenant has notified Landlord thereof in writing by fax or mail. In calculating the number of days of Tenant Delay and Landlord Delay, each calendar day shall only be counted as one day, regardless of whether more than one category of Tenant Delay or Landlord Delay is occurring on that calendar day.

 

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(3)          DRES may request changes in the Final Plans (subject to the limitations hereinabove set forth with respect to Tenant’s right to reduce the scope of the Base Building Work) consisting of additions, deletions or other changes in the Complete Plans. If DRES desires to make a change, the same shall be communicated to Landlord by a written change order request. Provided that Landlord otherwise approves such changes, Landlord shall promptly prepare and furnish to DRES a statement, setting forth Landlord’s good faith estimate of the increase in the Tenant Work Cost, if any, as well as Landlord’s good faith estimate of any changes in the progress of the Tenant Work (including the number of days of Tenant Delay), which would result by reason of such change. If, within five (5) business days after DRES’s receipt of said statement, DRES issues a letter approving the aforesaid statement, such statement shall constitute a mutually binding change order and such change order shall be included in the Final Plans. The failure of DRES to so notify Landlord within said five (5) business day period shall be deemed a withdrawal by DRES of the request for the change in question. Any increase in the Work Cost resulting from a change order requested by Tenant shall be deemed to constitute a portion of Tenant’s Work Cost provided it does not exceed the Not To Exceed Amount. In addition, any delays resulting from a change order or a request for a change order shall ( following the expiration of the thirty (30) day period of delays referred to above in Section (N) (1) hereinabove be deemed to constitute a Tenant Delay.

 

(O)         The Portion Commencement Date for each Portion (other than the Parking Lot) shall be the earlier of the date such Portion is or is deemed Substantially Completed or the date on which Tenant commences business operations in any part of such Portion.

 

(P)         (1 )There is no Work with respect to the Parking Lot, except for the completion of the pending subsurface repairs (“Current Repair Work”), which Landlord will complete with reasonable diligence. Landlord agrees to deliver to Tenant a vacant Parking Lot with the Current Repair Work completed upon the Substantial Completion of the Work for Floor 8 (“Floor 8 Completion Date”). Tenant acknowledges that it is aware that the Parking Lot is currently leased to a third party. If any occupant of the Parking Lot fails to vacate the Parking Lot on or before the Floor 8 Completion Dale, Landlord shall, at Landlord’s sole cost and expense, diligently, using best efforts, immediately pursue all available legal remedies in order to obtain vacant possession of the Parking Lot, including, without limitation, the commencement and diligent prosecution of a holdover proceeding, and shall keep Tenant apprised of the status of such efforts. Landlord and Tenant hereby agree and acknowledge that Tenant cannot effectively use the Demised Premises without full use of the Parking Lot. If Landlord cannot deliver the Parking Lot to Tenant vacant and ready for use by Tenant, with Current Repair Work completed, by the Floor 8 Completion Date, Landlord shall procure, at its sole cost and expense, and rent free to Tenant, alternative parking spaces for the same proportionate number of vehicles as the capacity of the applicable portion of the Parking Lot (“Substitute Parking Spaces”), all within a radius of not more than two ( 2) blocks from the Building, in stages, in the following proportions depending on which Portion of the Work has been Substantially Completed, viz. 50% of the Substitute Parking Spaces shall be made available upon Substantial Completion of Portion 1, 25% of the Substitute Parking Spaces shall be made available upon the Substantial Completion of Portion 2, and 25% of the Substitute Parking Spaces shall be made available upon Substantial Completion of Portion 3 of the Work. In the event that, after four (4) months have elapsed since the Last Portion Commencement Date, Landlord has still not delivered the Parking Lot vacant and ready for Tenant’s use, with Current Repair s completed, Landlord shall continue to provide the Substitute Parking Lot (s) for Tenant’s use, at Landlord’s sole cost and expense and rent free to Tenant, at no expense to Tenant, and, in addition, the Base Rent for the Office Space as provided for in Article 2 (B) above shall be reduced by twenty percent (20%) at the end of such four (4) month period until such time as Landlord has delivered such Parking Lot vacant and ready for Tenant’s exclusive use.

 

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(2)          After the fourth (4 th ) anniversary of the Last Portion Commencement Date, if the then Landlord under this Lease decides to develop the Parking Lot, it may terminate this Lease with respect to the Parking Lot provided it provides Tenant, within a three (3) block radius of the Building, with the same number of alternative parking spaces that Tenant is then utilizing in the Parking Lot. The parties shall act reasonably and in good faith to work out the details of this arrangement. Any dispute in connection with this Subsection shall be submitted to arbitration under Section (X) hereinbelow.

 

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(Q)         If, prior to Substantial Completion thereof, Landlord fails with respect to any Portion either to (i) meet any applicable time period set forth in Sections (B), (C), (D) or (G) of this Article 6, or (ii) commence performance of the Work within ten (10) business days after its receipt of Tenant’s approval of the Final Plans, the Base Building Work Cost and the Tenant Work Cost and the agreed upon final Phasing Plan, and the issuance of all necessary governmental permits and approvals for the performance of the entire Work, (subject, however, in each of clauses (i) and (ii), to Sections (M) and (N) hereinabove), Tenant may give Landlord written notice advising Landlord of its failure to comply with any of the foregoing requirements (“Delay Notice”), which Delay Notice shall specify, in reasonable detail, the unperformed requirement. If Landlord fails to commence compliance with the requirement specified in the applicable Delay Notice (“Delay Notice Requirement”) within fifteen (15) business days after its receipt of such Delay Notice and thereafter diligently and without interruption complete the performance of the Delay Notice Requirement (subject, however, to Sections (M) and (N) hereinabove), Tenant may send Landlord a second notice of Landlord’s failure to perform such Delay Notice Requirement (“Second Delay Notice”). If Landlord fails to commence the performance of such Delay Notice Requirement within ten (10) business days after its receipt of the Second Delay Notice and thereafter diligently and without interruption complete the performance of such Delay Notice Requirement (subject, however, to Sections (M) and (N) hereinabove), Tenant, in addition to its rights and remedies hereinabove set forth, may terminate this Lease on thirty (30) days’ written notice to Landlord.

 

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(R)         Anything herein to the contrary notwithstanding, subject to the last paragraph of this Section (R), if Landlord fails to Substantially Complete the entire Work within six (6) months after Tenant’s approval of the Complete Plans, the Base Building Work Cost, the Tenant Work Cost and the agreed upon final Phasing Plan and the issuance of all necessary permits and approvals for the performance of the entire Work, assuming Landlord and/or its agents, the Architect, et al are acting diligently and without interruption to obtain same and are using reasonable efforts in that regard (subject, however, to Sections (M) and (N) hereinabove), Tenant may give Landlord written notice advising Landlord of its failure to timely Substantially Complete the entire Work (“Completion Delay Notice”). If Landlord, following receipt of said Completion Delay Notice, fails to diligently continue, without interruption, to Substantially Complete the entire Work (subject, however, to Sections (M) and (N) hereinabove), Tenant may send Landlord a second written notice (“Second Completion Delay Notice”). If Landlord does not thereafter resume diligently and without interruption and continuity performance of the Work Tenant may terminate this Lease by giving notice to Landlord to that effect, such termination to be effective ten (10) days after such notice is given. The foregoing remedy may not be exercised by Tenant if Landlord has completed the entire Work (except for Punch List Items) and has timely filed all necessary paper work, but has not received the necessary governmental signoffs within the time frames set forth in this Section (R), and has reasonably demonstrated to DRES in writing that it is diligently pursuing receipt of such necessary signoffs, including, but not limited to, the use of Landlord’s reasonable and diligent efforts. The provisions of this Section shall not apply to Landlord’s failure to complete Punch List Items, as hereinafter defined.

 

Landlord and Tenant hereby agree that certain components of the Base Building Work will lake more than the aforesaid six (6) month period to Substantially Complete (the “Long Lead Items”). Such Long Lead Items shall be Substantially Completed within time frames mutually agreed to by Landlord and Tenant, acting reasonably and in good faith, no later than ten (10) business days from the approval of the Final Plans by the Building Department.

 

(S)         After Substantial Completion of the entire Work and as part of the Punch List below, Landlord shall furnish Tenant with “as built” drawings covering the entire Demised Premises and other portions of the Building materially affecting access to the Demised Premises.

 

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(T)         After Substantial Completion of the entire Work and /or each Portion thereof, with respect to minor details of construction or decoration which do not materially adversely affect Tenant’s use of the Demised Premises, Tenant may submit to Landlord a written list of such minor details, including such comments to “as built” drawings following completion of the entire Work, which it reasonably deems to be incomplete (collectively, “Punch List Items”). Landlord shall, within thirty (30) days after receipt of such list of Punch List Items (subject, however, to Sections (M) and (N) hereinabove), commence performance of and thereafter diligently proceed in a continuous manner to complete the Punch List Items. If Landlord fails to do so. Tenant may give notice thereof to Landlord (“Punchlist Delay Notice”) specifying in reasonable detail the Punch List Items which Tenant believes Landlord is not performing (subject to Sections (M) and (N) hereinabove). If Landlord fails to commence performance of such specified Punch List Items within ten (10) business days after receipt of such notice and thereafter diligently proceed in a continuous manner to complete such performance, Tenant may, (1) as agent for Landlord, perform such specified Punch List Items and deduct the reasonable cost thereof from the Base Rent next accruing under this Lease, or (2) withhold 150% of the reasonably estimated cost of the performance of such specified Punch List Items until Landlord completes the performance thereof to the reasonable satisfaction of Tenant (and upon completion of such Punch List Items. Tenant shall immediately pay such withheld amount to Landlord).

 

(U)         Landlord acknowledges that the Demised Premises may be occupied and used by Tenant, its employees and invitees during the performance of the Punch List Items. Accordingly, Landlord shall, and shall cause its contractors to, use good faith efforts to minimize noise, dust and other conditions which may adversely affect Tenant, its invitees, employees and workers; and take every reasonable precaution (i) against injuries to persons or damage to property and (ii) to provide for the safety of persons at the Demised Premises. Landlord shall be responsible for the initiation, maintenance and supervision of reasonable safety precautions and programs in connection with the performance of the Punch List Items. Prior to the commencement of performance of the Punch List Items, Landlord shall designate a qualified person to carry out such programs and notify Tenant of the person so designated.

 

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(V)         Landlord agrees to name, or cause its contractors to name, the City of New York as an additional named insured on their respective policies of public liability insurance, and to furnish the Tenant with certificates of insurance to that effect, provided there is no additional charge therefor or. if there is such a charge, Tenant pays such charge.

 

(W)         (1)         Landlord shall permit Tenant, upon reasonable prior notice, during business hours, to (a) inspect the progress of construction of the Work, (b) have its cabling and telephone equipment installed in the Demised Premises, and (c) affix any fixtures; provided that any of the above does not interfere beyond a de   minimis extent with Landlord’s contractors’ performance of the Work. Any such interference with Landlord’s performance of the Work shall be deemed to be a Tenant Delay.

 

(2)          With respect to Tenant’s repair obligations, upon completion of the Work, Landlord shall assign to Tenant the beneficial interest in all warranties and guarantees received by Landlord from contractors and materialmen engaged in the performance of the Work, as well as the right to enforce any contracts made with such contractors and materialmen. Landlord hereby appoints Tenant as its attorney-in-fact to institute suit in Landlord’s name and for Tenant’s benefit with respect to such assigned rights and agrees to cooperate fully with Tenant if Tenant seeks to enforce them. Notwithstanding anything to the contrary in Article 13 hereof, Landlord shall be solely responsible for the performance and cost of all repairs resulting from defects of materials and workmanship in construction and/or alterations and improvements of the Demised Premises or of the Building (except for work performed by or for Tenant, other than the Tenant Work).

 

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(3)          Notwithstanding anything to the contrary in Article 13 hereof, Landlord shall be solely responsible, as between Landlord and Tenant, for the performance and cost of all repairs resulting from defects of materials and workmanship in the performance of the Base Building Work and Tenant Work, for (a) a period of one (1) year from the date of Substantial Completion of the Last Portion of the Work or (b) the duration of any warranties or guarantees of its contractors or subcontractors with respect to the Work, whichever is longer; provided Landlord has obtained commercially customary and standard covenants, warranties and guarantees with respect to the performance of the Work, Landlord’s sole obligation to Tenant with respect to such defects, however, shall be to use commercially reasonable efforts to enforce any covenants or guaranties of its contractors or subcontractors with respect thereto.

 

(X)          Any disputes between Tenant and Landlord as to any Unavoidable Delay, Landlord Delay or Tenant Delay shall be decided by arbitration in accordance with the procedures set forth in this Section X. In the event of any dispute under this Article or any other Article of this Lease with respect to the determination of the issue of Substantial Completion, or under any other Section of this Lease that provides for resolution of a dispute in accordance with this Section X. either party may submit the dispute for resolution in the City of New York in accordance with the Expedited Arbitration Rules of the American Arbitration Association, its successor or, if it shall cease to exist, an entity performing similar functions (the “ AAA ”), provided, however, that (1) the list of arbitrators referred to in Rule 54 shall be returned within five (5) business days from the date of mailing, (2) the parties shall notify the AAA, by telephone, within three (3) business days, of any objections to the arbitrator appointed and will have no right to object thereto if the arbitrator so appointed was on the list submitted by the AAA and was not objected to in accordance with Rule 54, (3) the Notice of Hearing referred to in Rule 55 shall be four business days in advance of the hearing, (4) the hearing shall be held within seven (7) business days after the appointment of the arbitrator and (5) the decision and award of the arbitrator shall be final and conclusive on Landlord and Tenant. Judgment shall be entered on the decision and award of the arbitrator so rendered in any court of competent jurisdiction. The fees and disbursements of respective counsel engaged by the parties shall be paid by the respective parties and the fees of the arbitrators and the expenses incident to the proceedings (except the fees of expert witness and other witnesses called or engaged by the parties, which shall be borne by the party calling such witnesses) shall be paid fifty percent (50%) by Landlord and fifty percent (50%) by Tenant.

 

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ARTICLE 7

 

CERTIFICATE OF OCCUPANCY: COMPLIANCE WITH LAWS

 

(A)          Landlord has delivered to the Department of Citywide Administrative Services Certificates of Occupancy or other sufficient indicia of legality for use of the Demised Premises for the purposes set forth in this Lease, copies of which are attached hereto as Exhibit F.

 

(B)          From and after the Commencement Date, at Landlord’s sole cost and expense, Landlord shall, except as otherwise herein set forth (i) comply with all requirements, rules, laws, regulations and orders of Federal, State and local authorities and of any board of fire underwriters having jurisdiction over the Demised Premises or the real property of which they form a part (including, without limitation, the Americans With Disabilities Act of 1990 (“ADA”)) as in effect during the Term hereof, as the same may be extended (collectively, the “Requirements”), and (ii) remove all violations which may be placed against the Demised Premises or the real property of which they form a part, including, but not limited to, Building Code and Fire Code violations, except those violations which are caused by Tenant’s manner of use thereof or its breach of the terms of this Lease, which Tenant is required to comply with under the terms of this Lease or which are caused by other tenants in the Building (which latter violations Landlord shall diligently proceed to cause to be removed).

 

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Anything herein to the contrary notwithstanding, (iii) with respect to the ADA and regulations promulgated pursuant thereto, Landlord shall comply with and perform the Landlord’s obligations, if any, as a public accommodation pursuant to Title III of the ADA (but it shall be Tenant’s obligation to comply with and perform all obligations with respect to Tenant’s obligation as a public entity pursuant to Title II of the ADA for the Demised Premises and all common areas that service the Demised Premises in and around the Building); and (iv) Tenant shall comply with all Requirements applicable to its manner of use of all or any part of the Demised Premises.

 

(C)          If Landlord fails to fulfill its obligations pursuant to this Article, Tenant may, in addition to its other remedies, give written notice to Landlord specifying the respects in which Landlord so failed to perform its obligations and Landlord shall commence performance of such obligations within three (3) business days after the giving of such notice and diligently proceed to complete the performance thereof. (For the purpose of all provisions of this Article 7 and Articles 9 and 13, if Landlord’s on-site employees are not capable of performing an obligation of Landlord, then Landlord’s initiating necessary telephone calls shall be deemed commencement of performance, provided that Landlord diligently and in a continuous manner follows up such telephone calls with appropriate action.) If Landlord fails so to commence or diligently proceed in a continuous manner to complete the performance of such obligations after receipt of said written notice, Tenant, in addition to any other remedy it may have, may (i) as agent of Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (ii) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord.

 

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If the obligations to be performed by Landlord are required to correct a condition that is hazardous to Tenant’s personnel or to end an emergency, either of which also renders one full floor or more of the Demised Premises unusable for Tenant’s business purposes (collectively, “Hazardous Default”). Tenant shall give Landlord and its managing agent immediate notice in writing by hand delivery and facsimile, and Landlord shall commence the performance of such obligations by the next business day (or, if the present owners of Landlord still then control Landlord, within the next two (2) business days) after receipt of such notice and diligently proceed in a continuous manner to complete the performance thereof. If Landlord fails so to commence and complete the performance of such obligations within the applicable time period after receipt of said notice, as aforesaid, Tenant may (i) as agent for Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (ii) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of the performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord, or (iii) give Landlord and its managing agent a second notice (the “Second Notice”) of said default in the manner above provided.

 

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Furthermore, if Tenant provides a Second Notice to Landlord of a Hazardous Default and Landlord thereafter fails to commence to cure such Hazardous Default within three (3) days following receipt of the Second Notice, or fails thereafter diligently to proceed with continuity to cure said default and, as a result of Landlord’s failure, (a) at least 28,754 rentable square feet of the Demised Premises is rendered unusable for Tenant’s business purposes and (b) Tenant removes its personnel from such portion of the Demised Premises, then Tenant may terminate this Lease on five (5) days written notice to Landlord.

 

If Tenant discontinues use of any part or all of the Demised Premises because of Landlord’s failure to perform its obligations under this Article, the rent shall be reduced proportionately to the space not being used by Tenant by reason of such failure until such obligations are substantially completed (or, if earlier, until Tenant resumes use of such space).

 

If Tenant is still able to use the Demised Premises for the purposes set forth in this Lease, but Landlord’s failure timely to perform its obligations under this Article adversely affects Tenant’s operations within the Demised Premises in a material manner, Tenant shall be entitled, during such period, to a bona fide equitable reduction in rent.

 

Anything herein to the contrary notwithstanding, (i) Tenant’s rights under the foregoing provisions are conditioned upon it having sent a copy of all of the above notices to the first mortgagee of the Building as provided in Article 21 hereof at the same time as it sends any such notice to Landlord; and (ii) all of the above time periods and Tenant’s rights for Landlord’s failure to perform its obligations are subject to extension by reason of Unavoidable Delay(s).

 

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Once Tenant has sent Landlord notice of a default under this Article, Landlord will keep Tenant advised of the status of Landlord’s performance of its defaulted obligations.

 

ARTICLE 8

 

REAL ESTATE TAXES, ASSESSMENTS, WATER RATES,

 

SEWER RENTS, ARREARS

 

(A)          Landlord shall pay, on or before the due date thereof, all real estate taxes, assessments, water rates and sewer rents levied against the Building and Land and Parking Lot or that may be liens thereon. Landlord shall provide Tenant with receipted bills, payment receipts or other back-up information reasonably satisfactory to Tenant evidencing Landlord’s payment thereof within fifteen (15) business days after Tenant shall give notice to Landlord requesting such evidence of payment. Should Landlord fail to pay said taxes, assessments, water rates and sewer rents when due, then Tenant, in addition to any and all other remedies it may have, may, after not less than thirty (30) days notice to Landlord, apply any rent due or that may become due and payable under this Lease to the payment of said taxes, assessments, water rates and sewer rents and so long as any of such items are unpaid, no action or proceeding may be maintained by Landlord against Tenant for nonpayment of rent so applied.

 

(B)          Additionally, if Landlord is in any other arrears to the City of New York on the Land, Building and/or Demised Premises, including but not limited to rents, mortgage payments, taxes, water and sewer charges and other payments or obligations payable to the City of New York after thirty (30) days notice from Tenant to Landlord and Landlord’s failure to make such payment within such thirty (30) day period, then Tenant may apply any rent due or that may become due and payable under this Lease to the payment of such arrears and as long as such arrears are unpaid, no action or proceeding may be maintained by Landlord against Tenant for nonpayment of rent so applied.

 

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ARTICLE 9

 

LANDLORD’S SERVICES

 

(A)          Landlord shall (consistent with the operation of a similar office building) provide hot and cold water for ordinary lavatory, drinking and cleaning purposes, adequate elevator service ( i.e. , elevator service at least substantially equal to that set forth in Exhibit C annexed hereto and in compliance with the ADA), maintain the public entrances, passageways, doors, doorways, elevators, stairs or other public parts of the building (collectively “common areas”), perform regular monthly extermination services to the common areas, and ( except as otherwise herein provide d) maintain the bathrooms on each floor of the Office Space and the heating, ventilation and air-conditioning equipment serving the Office Space in good working order so as (i) to provide air conditioning during the summer months at an average inside design temperature of seventy-five (75) degrees Fahrenheit dry bulb and a room relative humidity of fifty percent (50%) when the outside temperature is ninety-five (95) degrees Fahrenheit dry bulb coincident with a wet bulb temperature of seventy-five (75) degrees Fahrenheit, provided that, with respect to air conditioning, Tenant keeps all windows in the Demised Premises fully closed, keeps the blinds closed in all windows exposed to direct sunlight and maintains a lighting and equipment load of not more than 4 ½ watts per rentable square foot ( except for air-conditioning electrical load) and a people load of not more than one person per 100 square feet; and (ii) to provide heating during the winter months at an average inside design temperature of seventy-two (72) degrees Fahrenheit dry bulb when the outside temperature is zero (0) degrees Fahrenheit dry bulb with a wind velocity of fifteen (15) miles per hour.

 

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Notwithstanding the foregoing, necessary repairs and maintenance to the bathrooms in the Office Space due to negligence or improper conduct of Tenant, its employees, agents, contractors or invitees, shall be performed by Landlord, at Tenant’s request and at Tenant’s reasonable expense, which shall be paid by Tenant to Landlord within forty-five (45) days after Landlord bills Tenant ( with reasonable supporting documentation).

 

The foregoing Landlord’s services shall be provided during the hours of 8:00 a.m. to 6:00 p.m. on Monday through Friday, and Saturday 8:00 a.m. to 1:00 p.m. inclusive, New York City holidays excluded (“Normal Business Hours”), except that elevator service and access to the Demised Premises shall be provided twenty-four (24) hours per day, seven (7) days per week, subject to Landlord’s reasonable rules and regulations. Upon Tenant’s timely request, Landlord shall provide overtime air-conditioning outside of Normal Business Hours at 103% of Landlord’s reasonably necessary actual cost of providing said service, for which cost Tenant shall reimburse Landlord within forty-five (45) days of receiving Landlord’s bill therefor (with reasonable supporting documentation).

 

No later than the Commencement Date, Landlord shall enter into a separate agreement for the maintenance of the Units, subject to Tenant’s prior reasonable approval and at Tenant’s expense. Such agreement shall remain in effect during the Term of and shall provide that the contractor shall perform all of the preventive maintenance measures set forth in Exhibit G, attached hereto and made a part hereof. The contractor shall adhere to industry-wide standards in performing its obligations under the maintenance agreement. The maintenance agreement shall further provide that within ten (10) business days after inspecting the Units the contractor shall prepare a written report. Such report shall (1) summarize the contractor’s findings and recommendations for maintenance service and (2) state whether maintenance service has been rendered. The contractor shall submit a copy of the report to Tenant within fifteen (15) days after it is completed.

 

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Landlord also shall maintain the Parking Lot. Necessary structural repairs shall be made at Landlord’s expense. Non-structural repairs and repaving, when reasonably deemed necessary by Landlord, shall be performed by Landlord, subject to Tenant’s reasonable prior approval, and Tenant shall, within forty-five (45) days after being billed therefor, reimburse Landlord for the reasonable costs so incurred, provided Landlord supplies reasonable supporting documentation.

 

(B)          If Landlord fails to fulfill its obligations pursuant to this Article, Tenant may, in addition to its other remedies, give written notice to Landlord specifying the respects in which Landlord so failed to perform its obligations and Landlord shall commence performance of such obligations (including, but not limited, to placing necessary phone calls to staff or contractors) within three (3) business days after the giving of such notice and diligently proceed to complete the performance thereof. If Landlord fails so to commence or diligently proceed in a continuous manner to complete the performance of such obligations after receipt of said written notice, Tenant, in addition to any other remedy it may have, may (1) as agent of Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (2) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord.

 

  - 53 -  

 

 

If the obligations to be performed by Landlord are required to correct a Hazardous Default, Tenant shall give Landlord and its managing agent immediate notice in writing by hand delivery and facsimile, and Landlord shall commence the performance of such obligations by the next business day after receipt of such notice and diligently proceed in a continuous manner to complete the performance thereof. If Landlord fails to so commence and complete the performance of such obligations within the applicable time period after receipt of said notice, as aforesaid, Tenant may (1) as agent for Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (2) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of the performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord, or (3) give Landlord and its managing agent a second notice (the “Second Notice”) of said default in the manner above provided.

 

Furthermore, if Tenant provides a Second Notice to Landlord of a Hazardous Default and Landlord thereafter fails to commence to cure such Hazardous Default within three (3) days following receipt of the Second Notice, or fails thereafter diligently to proceed with continuity to cure said default and, as a result of Landlord’s failure, (a) at least 28,754 rentable square feet of the Demised Premises is rendered unusable for Tenant’s business purposes and (b) Tenant removes its personnel from such portion of the Demised Premises, then Tenant may terminate this Lease on five (5) days written notice to Landlord.

 

If Tenant discontinues use of any part or all of the Demised Premises because of Landlord’s failure to perform its obligations under this Article, the rent shall be reduced proportionately to the space not being used by Tenant by reason of such failure until such obligations are substantially completed (or, if earlier, until Tenant resumes use of such space).

 

  - 54 -  

 

 

 

If Tenant is still able to use the Demised Premises for the purposes set forth in this Lease, but Landlord’s failure timely to perform its obligations under this Article adversely affects Tenant’s operations within the Demised Premises in a material manner, Tenant shall be entitled, during such period, to a bona fide equitable reduction in rent.

 

Anything herein to the contrary notwithstanding, (1) Tenant’s rights under the foregoing provisions are conditioned upon it having sent a copy of all of the above notices to the first mortgagee of the Building as provided in Article 21 hereof at the same time as it sends any such notice to Landlord; and (2) all of the above time periods and Tenant’s rights for Landlord’s failure to perform its obligations are subject to extension by reason of Unavoidable Delay(s).

 

Once Tenant has sent Landlord notice of a default under this Article, Landlord will keep Tenant advised of the status of Landlord’s performance of its defaulted obligations.

 

ARTICLE 10

 

TENANT’S SERVICES

 

Tenant shall pay for its electricity directly to the public utility company, as measured by meters and wiring to be provided by Landlord as part of the Work set forth in Article 6 above unless already in place. Tenant shall provide its own cleaning and rubbish removal services .

 

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ARTICLE 11

 

ALTERATIONS BY TENANT

 

Except for (i) carpeting, painting and cosmetic alterations, and (ii) non-structural alterations which do not impact or affect any Building systems and do not require plans and/or a building permit, neither of which shall require Landlord’s prior consent, Tenant, upon written notice to Landlord and with Landlord’s prior written consent, which consent shall not be unreasonably withheld or delayed, may make alterations, installations, additions and improvements in and to the Demised Premises at Tenant’s sole expense. All such work performed by Tenant shall be performed in compliance with all applicable Requirements. Tenant may make decorations and erect signs within the Demised Premises not visible from outside the Demised Premises without Landlord’s prior written consent, and Landlord agrees not unreasonably to withhold its consent to any such decorations and signs that are visible from outside the Demised Premises. All property of whatever kind or nature in or on the Demised Premises owned, installed or paid for by Tenant shall be and remain the property of Tenant and upon the termination of this Lease or any holdover period, Tenant shall have the option of removing such property or of surrendering such property (including partition systems and/or furniture located in the Demised Premises) to Landlord, in either event without any liability to Landlord; provided, however, if any moveable personal property, refuse or rubbish is surrendered, it may be removed by Landlord at Tenant’s expense. Tenant shall exercise its option by giving written notice to Landlord within thirty (30) days prior to the termination of this Lease or any holdover period. If Tenant shall fail to give such notice or shall fail to remove such property upon termination of this Lease or any holdover period, the property shall be deemed to be surrendered.

 

ARTICLE 12

 

END OF TERM

 

Upon the expiration or other termination of the Term, Tenant shall quit and surrender the Demised Premises in good order and condition with ordinary wear and tear, and damage by the elements, including fire or other casualty, excepted, and in accordance with the provisions of Article 11.

 

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ARTICLE 13

 

REPAIRS

 

(A)          Landlord shall remove all graffiti from the common areas of the Building and its exterior, make all exterior and structural repairs including maintenance, repair or replacement of the windows, roof, plumbing, electrical, heating, ventilation and air conditioning systems, and all repairs needed because of Landlord’s negligence or because of defective materials or workmanship in the construction and/or improvement by Landlord of the Demised Premises or of the Building of which they are a part, and repair and maintain any sidewalks, curbs and passageways adjoining and/or appurtenant to the Building in good, clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstruction. Notwithstanding the foregoing, Landlord shall not be required to perform any such graffiti removal, repairs, maintenance or replacement necessitated by the negligence or improper conduct of Tenant or its invitees.

 

(B)          If Landlord fails to fulfill its obligations pursuant to this Article, Tenant may, in addition to its other remedies, give written notice to Landlord specifying the respects in which Landlord so failed to perform its obligations and Landlord shall commence performance of such obligations (including, but not limited to placing necessary phone calls with staff or contractors) within three (3) business days after the giving of such notice and diligently proceed to complete the performance thereof. If Landlord fails to so commence or diligently proceed in a continuous manner to complete the performance of such obligations after receipt of said written notice, Tenant, in addition to any other remedy it may have, may (1) as agent of Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (2) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord.

 

  - 57 -  

 

 

 

If the obligations to be performed by Landlord are required to correct a Hazardous Default, Tenant shall give Landlord and its managing agent immediate notice in writing by hand delivery and facsimile, and Landlord shall commence the performance of such obligations by the next business day after receipt of such notice and diligently proceed in a continuous manner to complete the performance thereof. If Landlord fails so to commence and complete the performance of such obligations within the applicable time period after receipt of said notice, as aforesaid, Tenant may (1) as agent for Landlord, perform the same and deduct the reasonable cost thereof from any rent due or that may become due and payable under this Lease, or (2) withhold an amount of rent equal to one hundred fifty (150%) percent of the reasonable cost of the performance of such obligations as reasonably determined by Tenant until Landlord performs such obligations to the reasonable satisfaction of Tenant, at which time any amounts so withheld shall be promptly paid to Landlord, or (3) give Landlord and its managing agent a second notice (the “Second Notice”) of said default in the manner above provided.

 

Furthermore, if Tenant provides a Second Notice to Landlord of a Hazardous Default and Landlord thereafter fails to commence to cure such Hazardous Default within three (3) days following receipt of the Second Notice, or fails thereafter diligently to proceed with continuity to cure said default and, as a result of Landlord’s failure, (1) at least 28,754 rentable square feet of the Demised Premises is rendered unusable for Tenant’s business purposes and (2) Tenant removes its personnel from such portion of the Demised Premises, then Tenant may terminate this Lease on five (5) days written notice to Landlord.

 

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If Tenant discontinues use of any part or all of the Demised Premises because of Landlord’s failure to perform its obligations under this Article, the rent shall be reduced proportionately to the space not being used by Tenant by reason of such failure until such obligations are substantially completed (or, if earlier, until Tenant resumes use of such space).

 

If Tenant is still able to use the Demised Premises for the purposes set forth in this Lease, but Landlord’s failure to timely perform its obligations under this Article adversely affects Tenant’s operations within the Demised Premises in a material manner, Tenant shall be entitled, during such period, to a bona fide equitable reduction in rent.

 

Anything herein to the contrary notwithstanding, (1) Tenant’s rights under the foregoing provisions are conditioned upon it having sent a copy of all of the above notices to the first mortgagee of the Building as provided in Article 21 hereof at the same time as it sends any such notice to Landlord; and (2) all of the above time periods and Tenant’s rights for Landlord’s failure to perform its obligations are subject to extension by reason of Unavoidable Delay(s).

 

Once Tenant has sent Landlord notice of a default under this Article, Landlord will keep Tenant advised of the status of Landlord’s performance of its defaulted obligations.

 

(C)          Tenant shall make ordinary and non-structural interior repairs, excluding any such repairs the necessity for which is caused by Landlord or Landlord’s employees, agents or invitees, for which Landlord shall be responsible.

 

ARTICLE 14

 

CONDEMNATION

 

If the whole of the Demised Premises shall be taken in condemnation, this Lease shall terminate upon the vesting of title in the condemnor and all rent and other charges paid or payable by Tenant shall be apportioned as of the date of vesting of title in such condemnation proceeding.

 

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If only part of the Demised Premises shall be so taken in condemnation, then Tenant may either (1) terminate this Lease as to the remainder of the Demised Premises on ten (10) days written notice to Landlord if the balance of the Demised Premises cannot be used in Tenant’s reasonable judgment for their intended purpose (except that Tenant may not so terminate this Lease if all or any portion of the Parking Lot, but none of the internal space, is taken), or (2) remain in possession of the remaining portion of the Demised Premises under all of the terms, conditions and covenants of this Lease, except that the rent thereafter shall be apportioned and reduced from the date of each such partial taking based on the number of square feet in the part remaining. The proceeds of any award for partial taking shall be applied by Landlord to the repair, restoration or replacement of the remaining premises, and if there be any deficiency, it shall be made up by Landlord, but if there be any surplus, it shall belong to Landlord. Said repairs, restoration or replacement of the remaining premises shall be completed within six (6) months after the aforesaid taking in condemnation ( subject to Unavoidable Delays) pursuant to plans and specifications approved by the DRES unless prevented by the condemning authority. In the event said repairs, restoration or replacement are not completed within said six (6) months period, Tenant, in addition to any other remedy it may have, may terminate this Lease or perform said repairs, restoration and replacement and deduct the cost thereof from any rent which may be due and payable under this Lease. Tenant shall be entitled to file a claim for an award solely for its trade fixtures.

 

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ARTICLE 15

 

DESTRUCTION BY FIRE OR OTHER CASUALTY

 

(A)          If (1) the whole of the Demised Premises is totally destroyed or damaged by fire or other casualty, or (2) the Demised Premises are damaged to such an extent that an independent licensed architect or engineer retained by Landlord estimates and so certifies to both parties that they will be unsuitable or untenantable for use for the purpose for which they are leased for a period of more than nine (9) months (which estimate Landlord will obtain with reasonable diligence after the casualty), then from the date of such damage or destruction (the damage or destruction described in clauses (1) and (2) being called a “Total Casualty”), the rent shall cease until such time as Landlord fully repairs and restores the same to suitable and tenantable condition as certified by the DRES, such certification not to be unreasonably withheld or delayed (or, if earlier, the date on which Tenant actually occupies the Demised Premises or any part thereof).

 

In the event of a Total Casualty, either party may terminate this Lease by notice to the other within thirty (30) days after the date of such Total Casualty (or, if later, after the date on which the certification of the independent architect or engineer is received). If no such notice is given. Landlord shall, within fifteen (15) days after settlement of its insurance claim (which Landlord shall promptly and diligently prosecute in good faith), commence and diligently proceed with continuity to complete the repairs and restoration of the Demised Premises to their condition prior to said Total Casualty, suitable for use for the purpose for which the Demised Premises were leased. If Landlord fails to commence said repairs and restoration as above provided, or to complete the same within nine (9) months after such commencement (subject to Unavoidable Delays), Tenant may terminate this Lease on thirty (30) days written notice (unless such failure is cured within such thirty (30) days) or, in addition to any other remedy it may have, may perform such repairs and restoration and reimburse itself for the cost thereof from any rent due or that may become due and payable under this Lease.

 

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(B)          If the Demised Premises are partially damaged by fire or other casualty not described in Section (A) above, Landlord shall, within fifteen (15) days after settlement of its insurance claim (which Landlord shall promptly and diligently prosecute in good faith), commence and diligently proceed to complete the repairs and restoration of the Demised Premises to their condition prior to said fire or casualty. If Landlord fails to commence as aforesaid or to complete the same within six (6) months after such commencement (subject to Unavoidable Delays), Tenant, in addition to any other remedy it may have, may terminate this Lease by giving Landlord thirty (30) days’ written notice (unless such failure is cured within such thirty (30) days) or may perform such repairs and restoration and reimburse itself for the cost thereof from any rent due or which may become due under this Lease.

 

From the dale of such damage to the date that the entire Demised Premises have been completely restored as certified by DRES, such certification not to be unreasonably withheld or delayed (or, if earlier, the date on which Tenant actually occupies the damaged portion of the Demised Premises or any part thereof), Tenant shall pay rent for that part of the Demised Premises it is using during the alterations and repairs on a square foot basis in an amount equal to the product of the dollar amount of rent per square foot allocable to such space payable on such date and the number of square feet being occupied by Tenant.

 

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ARTICLE 16

 

NO EMPLOYEE OF CITY HAS ANY INTEREST IN LEASE

 

Landlord warrants and represents that no officer, agent, employee or representative of The City of New York has received any payment or other consideration for the making of this Lease and that no officer, agent, employee or representative of The City of New York has any interest, directly or indirectly, in this Lease or the proceeds thereof.

 

ARTICLE 17

 

QUIET ENJOYMENT

 

Landlord covenants that Tenant, paying the rent reserved herein, and performing all of the other terms, covenants and conditions on its part to be performed, shall and may peaceably and quietly have, hold and enjoy the Demised Premises for the use and purpose stated in this Lease or for such other similar purposes as the Commissioner of City wide Administrative Services may determine.

 

ARTICLE 18

 

ACCESS BY DISABLED PERSONS

 

Landlord covenants that, during the Term, access to the Building and the path of travel to the Demised Premises shall be suitable for use by disabled persons in accordance with the ADA.

 

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ARTICLE 19

 

SUBORDINATION AND NON-DISTURBANCE

 

(A)          This Lease shall be subject and subordinate to all present and future mortgages and/or ground and underlying leases, that may affect the Land and/or Building and/or Parking Lot, provided, and as a condition precedent to the subordination of this Lease to any present or future mortgages and/or ground and/or underlying leases, that the mortgagee under any such mortgage and/or lessor and/or lessees under any such ground or underlying lease, shall execute and deliver to Tenant an agreement in recordable form and substantially in the form attached hereto as Exhibit “H” and made a part hereof (the “SNDA”), whereby said mortgagees and/or lessor and/or lessees, agree that should it become necessary to foreclose such mortgage or should the mortgagee and/or lessor and/or lessee under any ground or underlying lease, otherwise come into possession of the Land and/or Building and/or Parking Lot, such mortgagee and/or lessor or lessees will not join Tenant under this Lease in foreclosure or summary proceedings and will not disturb the use and occupancy of Tenant under this Lease so long as Tenant is not in default under any of the terms, covenants and conditions of this Lease, beyond any applicable notice or grace period, and Tenant agrees to attorn to such mortgagee and/or lessor and/or lessee as Tenant’s landlord hereunder.

 

(B)         Landlord represents that there are no mortgages or ground or underlying leases presently affecting the Building, Land and/or Parking Lot. Notwithstanding the foregoing, if there are any such mortgages, underlying or ground leases when Tenant advises Landlord that it has received all necessary government approvals and is ready to execute this Lease, Landlord will cause its mortgagee (s) and/or underlying or ground lessors and/or lessees to execute the SNDA forthwith and deliver it to Tenant as a pre-condition of Tenant executing this Lease. Landlord’s failure to notify Tenant of the existence of any such mortgage and/or underlying or ground lease, and obtain the SNDA from such mortgagee and/or underlying or ground lessor and/or lessee, promptly alter notice from Tenant shall be grounds for rescission of this Lease by Tenant at any time, prior to Landlord obtaining the SNDA.

 

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(C)          To the extent that the provisions of any applicable SNDA are inconsistent with the provisions of this Article, then, as between the parties to such SNDA, the SNDA shall govern.

 

ARTICLE 20

 

TENANT NOT A HOLDOVER TENANT

 

Landlord agrees not to hold Tenant liable as holdover tenant should it continue to occupy the Demised Premises or any portion thereof after the expiration of the Term or any renewal thereof, if any, but, in any such event, Tenant shall be deemed to be a tenant from month to month at a rental not less than the same rental (including escalation rent payable pursuant to Article 4) as that of the last month of the demised Term and the liability of Tenant shall in no event be greater than that of a Tenant from month to month, any law to the contrary notwithstanding.

 

ARTICLE 21

 

NOTICES

 

(A)          Any notice (not including rent bills, and except where a specific provision of this Lease provides otherwise) required to be given shall be in writing and shall be sent by certified mail, return receipt requested or by overnight delivery, or, in connection with Article 6 in addition by facsimile, at the following numbers for Landlord : Robert Getreu (212) 716-3522 and Ken Levien (212) 702-8758, and for Tenant (DRES) at (212) 669-3640 and (212) 669-3191 , and addressed as follows:

 

(1)          If to Landlord, to Landlord at the address hereinbefore set forth with a copy to the attention of Howard Glatzer, c/o Blackacre Capital Management, LLC, 450 Park Avenue, New York, N.Y. 10022, and with a second copy to the managing agent of the Building (currently, attention of Robert Getreu, c/o Williams Real Estate Co. Inc., 380 Madison Avenue, New York, N.Y. 10017) and, in the case of all notices of an alleged default, with a copy to each first mortgagee of which Tenant has received notice of such mortgagee’s name and address; and

 

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(2)         If to Tenant, to Tenant addressed to:

 

ASSISTANT COMMISSIONER FOR

LEASING AND SPACE DESIGN

Department of Citywide Administrative Services

Division of Real Estate Services

1 Centre Street, 20th Floor North

New York, N.Y. 10007

and

Human Resources Administration

Office of Facilities Management

180 Water Street

New York, NY 10038

and Department of Environmental Protection

Facilities Management

59-17 Junction Boulevard

Flushing, New York 11368

Landlord and its managing agent shall at all times maintain an address in Manhattan or Brooklyn for the purpose of receiving notices by hand delivery.

 

Either party may change its address as set forth herein by notice to the other in the manner provided for herein, provided that no notice of change of address shall be effective until the month following the month in which notice is given. Notices shall be deemed given as of the third (3rd) business day after mailing or the next day if mailed by overnight courier, except that notices sent by hand delivery and facsimile shall be deemed given when received.

 

(B)          Special Notices: In addition to any other notices expressly required under this Lease to be given by Landlord to Tenant, Landlord shall immediately give written notice to Tenant of (1) the giving of any notice or the taking of any action by the holder of any mortgage of the Building, the result of which may be the foreclosure of, or the sale or taking of possession of, all or any part of the Building, (2) the commencement of a case in bankruptcy or under the laws of any slate naming Landlord as the debtor, or (3) the making by Landlord of an assignment or any other arrangement for the benefit of creditors under any state statute.

 

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(C)          Notwithstanding the foregoing, service of process to commence a summary proceeding pursuant to Article 7 of the Real Property Actions and Proceeding Law relating to an occupancy by the City of New York or its agencies or officers of the Demised Premises which at its commencement was authorized under this Lease shall be served in the manner required by CPLR. Section 311.

 

ARTICLE 22

 

FORCE MAJEURE

 

Landlord, Tenant or any fee or leasehold mortgagee shall not be deemed in default if it is delayed in the performance of any act, matter or thing which it is obligated to perform hereunder (other than Tenant’s obligation to pay rent and additional rent and Landlord’s monetary obligations to Tenant, if any), if such delay is an “Unavoidable Delay.” An “Unavoidable Delay” shall mean (i) strikes, lockouts, or labor disputes, (ii) acts of God, governmental restrictions, regulations or controls, enemy or hostile governmental actions, civil commotion, insurrection, revolution, sabotage, fire, other casualty or other conditions similar to those enumerated in this Article, (iii) shortages of labor or materials, or (iv) any other circumstance beyond the applicable party’s reasonable control. In the event of any Unavoidable Delay, all dates for performance shall automatically be extended by a period equal to the aggregate period of all such Unavoidable Delays.

 

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ARTICLE 23

 

SAVE HARMLESS

 

Landlord and Tenant shall each indemnify and hold harmless the other party from and against any and all liability, fines, suits, claims, demands, expenses and actions of any kind or nature arising by reason of injury to person or property occurring on or about the Demised Premises, the Building or the Land, occasioned in whole or in part by its acts or omissions or the acts or omissions of any person present by its license and/or permission, express or implied, or by reason of performing preventive maintenance pursuant to a maintenance contract, or by reason of Landlord’s failure to comply with obligations arising under the ADA as set forth in Article 7 of this Lease.

 

ARTICLE 24

 

INVESTIGATIONS

 

(A)          The parties to this agreement agree to cooperate fully and faithfully with any investigation, audit or inquiry conducted by a State of New York (State) or City of New York (City) governmental agency or authority that is empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath, or conducted by the Inspector General of a governmental agency that is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license that is the subject of the investigation, audit or inquiry.

 

(B)          (1) If any person who has been advised that his or her statement, and any information from such statement, will not be used against him or her in any subsequent criminal proceeding refuses to testify before a grand jury or other governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to examine witnesses under oath concerning the award of or performance under any transaction, agreement, lease, permit, contract, or license entered into with the City, the State, or any political subdivision or public authority thereof, or the Port Authority of New York and New Jersey, or any local development corporation within the City, or any public benefit corporation organized under the laws of the State of New York; or

 

  - 68 -  

 

 

(2)          If any person refuses to testily for a reason other than the assertion of his or her privilege against self-incrimination in an investigation, audit or inquiry conducted by a City or State governmental agency or authority empowered directly or by designation to compel the attendance of witnesses and to take testimony under oath, or by the Inspector General of the governmental agency that is a party in interest in, and is seeking testimony concerning the award of, or performance under, any transaction, agreement, lease, permit contract, or license entered into with the City, the State, or any political subdivision thereof or any local development corporation within the City, then the commissioner or agency head whose agency is a party in interest to the transaction, submitted bid, submitted proposal, contract, lease, permit, or license shall convene a hearing, upon not less than five (5) days written notice to the parties involved to determine if any penalties should attach for the failure of a person to testify.

 

(3)          If any non-governmental party to the hearing requests an adjournment, the commissioner or agency head who convened may, upon granting the adjournment, suspend any contract, lease, permit, or license pending the final determination pursuant to Section (D) below without the City incurring any penalty or damages for delay or otherwise.

 

(C)          The penalties which may attach after a final determination by the commissioner or agency head may include but shall not exceed:

 

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(a)          The disqualification for a period not to exceed five (5) years from the date of an adverse determination for any person, or any entity of which such person was a member at the time the testimony was sought, from submitting bids for, or transacting business with, or entering into or obtaining any contract, lease, permit or license with or from the City; and/or

 

(b)           The cancellation or termination of any and all such existing City contracts, leases, permits or licenses that the refusal to testify concerns and that have not been assigned as permitted under this agreement, nor the proceeds of which pledged, to an unaffiliated and unrelated institutional lender for fair value prior to the issuance of the notice scheduling the hearing, without the City incurring any penalty or damages on account of such cancellation or termination; monies lawfully due for goods delivered, work done, rentals, or fees accrued prior to the cancellation or termination shall be paid by the City.

 

(D)          The commissioner or agency head shall consider and address in reaching his or her determination and in assessing an appropriate penalty the factors in paragraphs (1) and (2) below. He or she may also consider, if relevant and appropriate, the criteria established in paragraphs (3) and (4) below in addition to any other information which may be relevant and appropriate:

 

(1)          The party’s good faith endeavors or lack thereof to cooperate fully and faithfully with any governmental investigation or audit, including but not limited to the discipline, discharge, or disassociation of any person failing to testify, the production of accurate and complete books and records, and the forthcoming testimony of all other members, agents, assignees or fiduciaries whose testimony is sought.

 

(2)          The relationship of the person who refused to testify to any entity that is a party to the hearing, including, but not limited to, whether the person whose testimony is sought has an ownership interest in the entity and/or the degree of authority and responsibility the person has within the entity.

 

(3)          The nexus of the testimony sought to the subject entity and its contracts, leases, permits or licenses with the City.

 

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(4)          The effect a penalty may have on an unaffiliated and unrelated party or entity that has a significant interest in an entity subject to penalties under 1.4 above, provided that the party or entity has given actual notice to the commissioner or agency head upon the acquisition of the interest, or at the hearing called for in 1.3(a) above gives notice and proves that such interest was previously acquired. Under either circumstance the party or entity must present evidence at the hearing demonstrating the potential adverse impact a penalty will have on such person or entity.

 

(E)          (1)         The term “license” or “permit” as used herein shall be defined as a license, permit, franchise or concession not granted as a matter of right.

 

(2)          The term “person” as used herein shall be defined as any natural person doing business alone or associated with another person or entity as a partner, director, officer, principal or employee.

 

(3)          The term “entity” as used herein shall be defined as any firm, partnership, corporation, association, or person that receives monies, benefits, licenses, leases, or permits from or through the City or otherwise transacts business with the City.

 

(4)          The term “member” as used herein shall be defined as any person associated with another person or entity as a partner, director, officer, principal or employee.

 

(F)          In addition to and notwithstanding any other provision of this Lease, the Commissioner or agency head may in his or her sole discretion terminate this Lease upon not less than three (3) days written notice in the event contractor fails to promptly report in writing to the Commissioner of Investigation of the City of New York any solicitation of money, goods, requests for future employment of other benefit or thing of value, by or on behalf of any employee of the City or other person, firm, corporation or entity for any purpose which may be related to the procurement or obtaining of this Lease by Landlord, or affecting the performance of this Lease.

 

  - 71 -  

 

 

ARTICLE 25

 

SIGNIFICANT RELATED PARTY TRANSACTIONS

 

Landlord shall be required to disclose and notify Tenant of any transactions with significant related parties, including subsidiaries and affiliates of Landlord, the costs of which are charged to Tenant as rent, including, but not limited to, Base Year Operating Expenses, overtime HVAC, Tenant repairs and common area electricity. Landlord shall provide Tenant with written notice of such transactions upon submission of invoices for Rent or at the end of the twelve (12) month period in which the transactions to be billed as rent were performed by significant related parties. When such transactions occur, prices of the same must be in line with normal industry practice in New York City. Landlord’s failure to notify Tenant of such related party transactions shall result in a disallowance of such costs that would otherwise be billed as rent. If such related party transactions occurred and were disclosed, but it is found by Tenant that the costs thereof exceed normal industry costs in an arms length third party transaction in New York City, then such excessive charges shall be disallowed.

 

  - 72 -  

 

 

ARTICLE 26

 

ASBESTOS

 

Landlord and Tenant acknowledge that the entire Office Space has been demolished and that Landlord has delivered to Tenant an ACP-5 pertaining to the entire Office Space. Landlord agrees, with respect to the floor tiles identified on the Citywide Office of Safety and Health Report, consisting of two (2) pages, dated February 10, 1999, annexed hereto as Exhibit I and made a part hereof, at its sole cost and expense, to carpet any such un-demolished floor tiles or cover same with new non-asbestos floor tiles, as part of Substantial Completion under Article 6 above. Landlord shall, at its sole cost and expense, perform an operations and maintenance program with respect to the ACM in the Demised Premises and areas of the Building through which Tenant has access to the Office Space. If, at any time during the Term, asbestos or asbestos-containing material that has deteriorated and/or is required to be removed or encapsulated under existing law or code, or New York City rules and regulations, or uniformly applicable policy (“ACM”) is discovered in the Demised Premises (except for ACM introduced into the Demised Premises by Tenant or those claiming through Tenant, which shall be Tenant’s responsibility). Landlord, at Landlord’s sole cost and expense, and as Tenant’s sole and exclusive remedy, will immediately (subject to Article 22) cause such ACM to be removed or encapsulated in accordance with all applicable laws. Rent shall be abated for any portion of the Demised Premises that becomes untenantable during such encapsulation or removal.

 

ARTICLE 27

 

LANDLORD’S REPRESENTATIONS

 

Landlord hereby warrants that, to the best of its knowledge, it is not in default of any obligation to the City of New York, nor is Landlord, its officers, principals or stockholders a defendant in any action instituted by the City. Tenant acknowledges that Landlord is the plaintiff in a pending action against the City involving responsibility for the cost of the pending repairs to, and repaving of the Parking Lot (including the Current Repair Work).

 

The members, directors and officers of the Landlord currently are as follows: Blackacre Livingston LLC (member of Landlord), whose managing member is Blackacre Capital Group, L.P., whose general partner is Blackacre Capital Management Corp., whose directors and officers are as follows: (a) Director: Jeffrey B. Citrin; (b) Officers: President—Jeffrey B. Citrin; President-Stephen Feinberg; Vice President—Ronald Kravit; Vice President—Howard Glatzer.

 

  - 73 -  

 

 

Any misrepresentation by Landlord with regard to the above warranty shall constitute a basis for rescission of this Lease.

 

ARTICLE 28

 

NO WAIVER

 

The failure by either party to insist, in one or more instances upon the full performance of any of the covenants, conditions or obligations hereunder of the other party shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent or approval by either party to or of any act by the other party requiring the consent or approval of the first party shall not be construed to waive or render unnecessary the consent or approval of the first party to or of any subsequent similar act by the other party. No provision of this Lease shall be deemed to have been waived by either party unless such waiver be in writing signed by such party.

 

ARTICLE 29

 

EXCULPATORY CLAUSE

 

Anything herein to the contrary notwithstanding, the liability of Landlord and the partners, members or other owners of Landlord for negligence, failure to perform Lease obligations or otherwise under or in connection with this Lease shall be limited to their respective interests in the Land and Building and Parking Lot. Tenant shall neither seek to enforce nor enforce any judgment or other remedy against any other asset of Landlord, any partner in Landlord or any party that holds any interest in Landlord.

 

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ARTICLE 30

 

LEASE ENTIRE AGREEMENT

 

This Lease sets forth the entire agreement between the parties, superseding all prior agreements and understandings, written or oral, and may not be altered or modified except by a writing signed by both parties. This Lease shall be binding upon the parties hereto, their successors, legal representatives and assigns.

 

ARTICLE 31

 

APPLICABLE LAW

 

This Lease shall be governed by and construed in accordance with the internal laws of the State of New York.

 

ARTICLE 32

 

ESTOPPEL CERTIFICATE

 

Each party, at any time, and from time to time (but in the case of Landlord being the requesting party only in connection with a financing, refinancing, sale, purchase or transfer of the Building or its interest in this Lease or other comparable transaction), upon at least forty-five (45) days prior notice by the requesting party, shall execute, acknowledge and deliver to the requesting party and/or any other person, firm or corporation specified by the requesting party (“Recipient”), a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, stating whether or not to the best knowledge of the certifying party there exists any defaults by the requesting party under this Lease, and, if so, specifying each such default, and any other matters reasonably requested by the requesting party or the Recipient.

 

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ARTICLE 33

 

MISCELLANEOUS

 

(A)          Landlord and its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause, unless such injury, loss or damage was caused by or due to the negligence of Landlord or its agents, servants or employees. Landlord and its agents shall not be liable for any such injury, loss or damage caused by other tenants or persons in, upon or about the Building or by any construction work performed by those tenants or persons.

 

(B)          Landlord and its agents shall have the right (but not the obligation) to enter upon the Demised Premises, in an emergency at any time and at other reasonable times upon prior notice to Tenant, to examine the same and to make such repairs, replacements and improvements as Landlord may deem necessary or desirable to the Demised Premises or any other portion of the Building. Tenant shall permit Landlord to use, maintain and replace the present pipes and conduits in and to the Demised Premises and to erect new pipes and conduits therein provided they are concealed within the walls, floors and/or ceilings. Landlord may (but subject to Article 23), during the process of any work in the Demised Premises, take all necessary materials and equipment therein without the same constituting an eviction or entitling Tenant to any damages or abatement of rent while such work is in progress, except as may be provided for in Articles 9 and 13 above. Landlord agrees to use reasonable efforts to minimize interference with Tenant’s conduct of its operations and business. Notwithstanding anything to the contrary in the foregoing, and in addition thereto, if Tenant cannot use more than 50% of any floor or 20% of any storage space in the Demised Premises for more than five (5) consecutive business days by reason of the foregoing circumstance the pro rata portion of the Base Rent, as set forth in Article 2 hereof, for such entire floor (s) or entire storage space (s) so affected shall be abated until such time as Tenant can again fully use such space.

 

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(C)          Throughout the Term, Landlord shall have the right to enter the Demised Premises at reasonable hours upon reasonable prior notice to Tenant for the purpose of showing the same to respective purchasers or mortgagees of the Building and, during the last eighteen (18) months of the Term, for the purpose of showing the same to prospective tenants. Landlord agrees to use reasonable efforts to minimize interference with Tenant’s conduct of its operations and business and with due regard for Tenant’s security needs.

 

(D)          For the purposes of this Lease, the term “Landlord,” as used in this Lease, means only the owner or the mortgagee in possession from time to time of the Land and Building and/or Parking Lot (or the owner of a lease of the Building or of the Land and Building and/or of the Parking Lot), so that in the event of any sale or sales of said Land and Building and/or Parking Lot, or of said lease, or in the event of a lease of said Building, or the Land and Building, and/or the Parking Lot. the then Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord thereafter accruing, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the said lessee, that said purchaser or lessee has assumed and agreed to carry out all covenants and obligations of Landlord hereunder.

 

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(E)          Landlord and Tenant represent to the other that neither has dealt with any broker in connection with this Lease other than (i) Cushman & Wakefield, Inc. (“C&W”) and (ii) Williams Real Estate Co., Inc. (“WILLIAMS”) and (iii) JULIEN STUDLEY, INC. (“JS”) AND ((iv) DIANA & YURAS (“D&Y”) (collectively, “Broker”). Landlord shall pay any commissions owing to the Broker pursuant to separate agreements. Tenant shall in no event be responsible to pay Broker any commissions. Tenant and Landlord hereby indemnify and hold each other harmless against all loss, damage, liability, cost and expense of any nature (including reasonable attorneys’ fees and disbursements) based on any claim by any party (other than the Broker) with whom such indemnifying party has dealt for a commission or other compensation in connection with this Lease which is based on the actions of such party or its agents or representatives. The indemnified party shall cooperate with the indemnifying party in any defense; and the indemnified party shall not settle a claim, liability or action for which the indemnifying party has the obligation to defend or indemnify without the indemnifying party’s consent. The foregoing indemnifications shall survive any expiration or termination of this Lease. For the purposes of possible reimbursement under Article 3 above, in connection with a termination of this Lease under said Article 3, Landlord has provided Tenant a certified copy of the fully executed original of the brokerage commission agreement(s), dated June 21, 1999, which provides for payment of the commission to C&W on which Schedule 1 annexed hereto is based.

 

(F)          (1) In addition to other rights and remedies available under this Lease and applicable law, this Lease and the Term and estate hereby granted are subject to the further limitations that:

 

(a)           if Tenant shall default in the payment of any Base Rent or Additional Rent or other charges under this Lease and such default shall continue for twenty (20) business days in the case of Base Rent or thirty (30) business days in the case of Additional Rent after Landlord shall have given Tenant notice specifying such failure, except that if Landlord shall have given three (3) such notices in any twelve (12) month period, Tenant shall not be entitled to any further notice of its delinquency in the payment of Base Rent and Additional Rent until such time as twelve (12) consecutive months shall have elapsed without Tenant having defaulted in any such payment; or

 

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(b)           if Tenant shall, whether by action or inaction, be in default of any of its obligations under this Lease (other than a default in the payment of Base Rent, Additional Rent or other charges under this Lease) and such default shall continue and not be remedied within thirty (30) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to any risk of forfeiture, penalties, or criminal liability or of default under any superior lease or superior mortgage (or permit the lender not to fund the same), if Tenant shall not (i) within said thirty (30) days period acknowledge the existence of such default and advise Landlord of Tenant’s intention to take all steps necessary to remedy such default, (ii) duly commence within said thirty (30) day period, and thereafter continuously and diligently prosecute to completion all steps necessary to remedy the default and (iii) complete such remedy within a reasonable lime after the date of said notice to Tenant;

 

(c)           then in any of the above cases, Landlord may give to Tenant a notice of intention to end the Term at the expiration of twenty (20) business days from the date of the service of such notice of intention, and, upon the expiration of said twenty (20) business days, this Lease and the Term and estate hereby granted shall terminate with the same effect as if that day was the day herein definitely fixed for the end of expiration of this Lease. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which Landlord may be lawfully entitled by reason of Tenant’s default hereunder. Suit or suits for the recovery of such damages, or any installment thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term of would have expired if it had not been so terminated under the provisions of this Article 33.

 

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(2)          Without limiting any other rights or remedies of Landlord under this Lease, if Tenant shall fail to pay any installment of Base Rent, Additional Rent or any other item of rent within twenty (20) business days after any of the same shall be due in the case of Base Rent or thirty (30) business days after the same shall be due in the case of Additional Rent, with one (1) additional grace period of up to thirty (30) days each year for delays in payment due to the annual re-registration of this Lease by the Comptroller, Tenant shall pay to Landlord, as the case may be, as a late charge and as Additional Rent, a sum equal to interest at the Default Rate on the amount unpaid, computed from the date such payment was due to and including the date of payment. For purposes of this Lease, the term “ Default Rate ” shall mean the greater of (a) the statutory rate for judgments which, as of the date hereof, is currently nine percent (9%) and (b) the annual interest rate publicly announced by Citibank, N.A. (or any successor thereto) at its principal place of business in New York City as its locally applicable so-called “base rate” (the “ Prime Rate ”).

 

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IN WITNESS WHEREOF , the said parties have caused this Lease to be executed the day and year first above written.

 

  LIVINGSTON ACQUISITION, LLC,
  Landlord
   
  By:   BLACKACRE LIVINGSTON, LLC
    Managing Member
         
    By:   BLACKACRE CAPITAL GROUP, L.P.
      Manager  
         
      By:   BLACKACRE CAPITAL MANAGEMENT
        CORP.
        General Partner
         
      By: /s/ Howard M. Glatzer

 

  THE CITY OF NEW YORK,
  Tenant
   
  By:      /s/ Lori Fierstein
    Deputy Commissioner
    Department of Citywide Administrative Services
     

 

Approved as to Form:  
   
/s/ [ILLEGIBLE]  
Acting Corporation Counsel  
JDC  

  

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STATE OF NEW YORK )  
                             ) ss.:  
COUNTY OF NEW YORK)  

 

On this 1st day of July , 1999, before me personally came before me Howard M. Glatzer, Vice President of Blackacre Capital Management Corp., the General Partner of Blackacre Capital Group, L.P. (“Blackacre”), the sole member of Landlord, that he signed his name thereto by authority of the resolution of Blackacre dated June 30, 1999.

 

  /s/ Robert Silberstein
  Notary Public
   
   

 

STATE OF NEW YORK )  
                             ) ss.:  
COUNTY OF NEW YORK )  

 

On this 30 th day of July,1999, before me personally came Lori Fierstein, to me known to be the Deputy Commissioner of Citywide Administrative Services of the City of New York, the person described in and who executed the foregoing instrument and (s)he acknowledged to me that (s)he executed the same.

 

  /s/ Jewel Nurse-Huntley
  Notary Public
   
   

 

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Exhibit 10.42

 

CONSENT AGREEMENT

(GSMS 2013-GCJ12; Loan No. 300460008)

  

THIS CONSENT AGREEMENT (the “ Agreement ”) is executed as of December 7, 2015 (the “ Effective Date ”), by and among DEUTSCHE BANK TRUST COMPANY AMERICAS, AS TRUSTEE ON BEHALF OF THE REGISTERED HOLDERS OF GS MORTGAGE SECURITIES CORPORATION II, COMMERCIAL MORTGAGE PASS THROUGH CERTIFICATES, SERIES 2013-GCJ12 (“ Lender ”), having an address at c/o Wells Fargo Bank, National Association, Commercial Mortgage Servicing, MAC D 1086, 550 Tryon Street, 14th Floor, Charlotte, North Carolina 28202, Re: GSMS 2013-GCJ12; Loan No. 300460008 and 250 LIVINGSTON OWNER LLC , a Delaware limited liability company (“ Borrower ”), having an address at c/o Clipper Realty L.P., 4611 12th Avenue, Suite 1L, Brooklyn, New York, New York 11219. All capitalized terms used herein but not defined herein shall have the meaning ascribed to such terms in the Loan Agreement (as hereinafter defined), as modified by the terms of this Agreement.

 

RECITALS

 

A.           Borrower is the current owner of fee title to that certain real property (“ Land ”) and the buildings and improvements thereon (“ Improvements ”), commonly known as “ 250 Livingston Street ” located in the Borough of Brooklyn, County of Kings, State of New York, more particularly described in Exhibit A attached hereto and made a part hereof (the Land and the Improvements are hereinafter sometimes collectively referred to as the “ Project ”).

 

B.           Lender is the current owner and holder of a loan (“ Loan ”) in the original principal amount of $37,500,000.00 made pursuant to the terms of that certain Loan Agreement (the “ Loan Agreement ”) dated as of May 1, 2013, between Borrower and Citigroup Global Markets Realty Corp. (“ Original Lender ”), and is evidenced and/or secured by the Loan Documents described in the Loan Agreement some of which are also described on Exhibit B attached hereto, as all of the same have been or may be amended, restated, supplemented or otherwise modified from time to time (collectively referred to as the “ Loan Documents ”). The Loan is secured in part by the Project, which Project is described in and encumbered by the “ Security Instrument ” described on Exhibit B.

 

C.           Borrower requested Lender consent to the following actions (the “ Requested Actions ”): (i) the issuance of membership interests in Berkshire Equity LLC, a Delaware limited liability company (“ Berkshire Equity ”), the sole economic member of Borrower, to Clipper Realty L.P., a Delaware limited partnership (“ New Indemnitor ”), and (ii) the replacement of David Bistricer (“ Current Indemnitor ”) by New Indemnitor as the sole managing member of Berkshire Equity  

 

D.           Certain of the Requested Actions are prohibited by the terms of the Loan Documents without first obtaining the written consent of Lender thereto.

 

E.           Lender has consented to the Requested Actions, pursuant and subject to the terms hereinafter set forth.

 

EXECUTION COPY  

 

 

 

  

NOW, THEREFORE , in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

 

ARTICLE 1

BORROWER ACKNOWLEDGMENTS, WARRANTIES,

 

REPRESENTATIONS AND COVENANTS

 

As a material inducement to Lender to enter into this Agreement and to consent to the Requested Actions, Borrower acknowledges, represents and warrants to, and covenants and agrees with, Lender as follows:

 

1.1            Incorporation of Recitals . Each of the Recitals set forth above in this Agreement are true and correct and incorporated into this Agreement by reference.

 

1.2            Authority of Borrower . Borrower is a duly organized, validly existing limited liability company in good standing under the laws of the State of Delaware and is qualified to transact business in the State of New York. Berkshire Equity is the sole equity member of Borrower. David Bistricer is, and following the execution of this Agreement, Berkshire Equity will become, the managing member of Berkshire Equity. David Bistricer, as the President of Borrower, acting alone without the joinder of any member or manager of Borrower or any other party, has the power and authority to execute this Agreement on behalf of and to duly bind Borrower under this Agreement. The execution and delivery of, and performance under, this Agreement and the other documents listed on Exhibit C attached hereto (collectively, the “ Consent Documents ”) by Borrower have been duly and properly authorized pursuant to all requisite limited liability company action and will not (x) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower or the articles of organization, certificate of formation, operating agreement, limited liability company agreement or any other organizational document of Borrower or (y) result in a material breach of or constitute or cause a default under any indenture, agreement, lease or instrument to which Borrower is a party or by which the Project may be bound or affected.

 

EXECUTION COPY  

 

  2  

 

 

1.3            Loan Documents . The Loan Documents to which Borrower is a party constitute the valid and legally binding obligations of Borrower, enforceable against Borrower and the Project in accordance with their terms. This Agreement and the execution of other documents contemplated hereby do not constitute the creation of a new debt or the extinguishment of the debt evidenced by the Loan Documents, nor will they in any way affect or impair the liens and security interests created by the Loan Documents, which Borrower acknowledges to be valid and existing liens and security interests in the Project. Borrower agrees that the lien and security interests created by the Loan Documents continue to be in full force and effect, unaffected and unimpaired by this Agreement or by the Requested Actions and that said liens and security interests shall so continue in their perfection and priority until the debt secured by the Loan Documents is fully discharged. As of the Effective Date, Borrower has no defenses, setoffs, claims, counterclaims or rights of defense, rights of setoff or counterclaim, whether legal, equitable or otherwise, to the obligations evidenced by or set forth in the Loan Agreement, the Security Instrument, the Note (as described on Exhibit B ), or any of the other Loan Documents or causes of action of any kind or nature whatsoever against Lender, and Wells Fargo Bank, National Association (“ Master Servicer ”) and Rialto Capital Advisors, LLC (“ Rialto ”) and any and all other parties appointed and/or serving as servicers of the Loan (collectively, “ Servicer ”), all subsidiaries, parents and affiliates of Lender and Servicer and each of the foregoing parties’ predecessors in interest, and each and all of their respective past, present and future partners, members, certificateholders, officers, directors, employees, agents, contractors, representatives, participants and heirs and each and all of the successors and assigns of each of the foregoing (collectively, “ Lender Parties ”) with respect to (i) the Loan, (ii) the Note, (iii) the Security Instrument, (iv) any of the other Loan Documents, (v) the indebtedness secured by the Loan Documents (“ Indebtedness ”), and (vi) any other documents or instruments now or previously evidencing, securing or in any way relating to the Loan. To the extent Borrower would be deemed to have any such defenses, affirmative defenses, setoffs, claims, counterclaims, crossclaims or causes of action as of the Effective Date, Borrower knowingly waives and relinquishes them.

 

1.4            Affirmation of Obligations of Borrower . Borrower hereby affirms the existence and the validity of its obligations and the other provisions in the Security Instrument, the Loan Agreement, the Note and the other Loan Documents in accordance with their respective terms and conditions. Borrower further confirms that nothing in this Agreement nor the Requested Actions shall release, waive, lessen, compromise or otherwise affect its obligations under, and Borrower agrees to continue to abide by and be bound by all of the terms of the Loan Documents to which it is a party, including but not limited to, the representations, warranties, covenants, assurances and indemnifications therein. Borrower further agrees to pay, perform, and discharge each and every obligation of payment and performance under, pursuant to and as set forth in the Security Instrument, the Loan Agreement, the Note and the other Loan Documents at the time, in the manner and otherwise in all respects as therein provided.

 

1.5            Transfer of Interests . Except for the Requested Actions, no holder of a direct or indirect beneficial ownership interest in Borrower has assigned, transferred, pledged or otherwise disposed of all or any part of its beneficial ownership or economic interest in Borrower in a manner that would violate the requirements of Section 6.2 or any other applicable provision of the Loan Agreement or any of the other Loan Documents.

 

1.6            No Event of Default or Trigger Period . To the best of knowledge of Borrower, no event, fact or circumstance has occurred or failed to occur which constitutes, or with the lapse or passage of time, giving of notice or both, would constitute an Event of Default or a Trigger Period under the Loan Documents.

 

1.7            Condemnation . There are no pending or, to the best of knowledge of Borrower, threatened condemnation proceedings or annexation proceedings affecting the Project, nor any agreements to convey any portion of the Project, or any rights thereto to any person or entity, including, without limitation, any government or governmental agency.

 

EXECUTION COPY  

 

  3  

 

 

1.8            Liens .  Borrower has not received written notice, and has no actual knowledge of, any lien (statutory or otherwise), encumbrance, easement, restrictive covenant or any other encumbrance (each a “ Lien ”) encumbering all or any portion of the Project, other than unpaid taxes or assessments that are not yet due and payable, the Permitted Encumbrances and any matters reflected on any title commitment, title report or title endorsement delivered to and accepted in writing by Lender in connection with this Agreement. Lender’s execution of this Agreement shall not be deemed Lender’s acceptance in writing of any Lien not shown in Lender’s title insurance policy as of the date of this Agreement. Borrower has also not received written notice of a Lien or notice of intent to file a Lien against all or any portion of the Project that is prohibited under the Loan Documents.  Borrower has not filed or caused to be filed or conducted any acts or omitted to perform any obligations which would cause others to have the right to file a Lien against all or any portion of the Project. Borrower and Current Indemnitor, jointly and severally, agree to reimburse, indemnify and hold Lender Parties harmless from and against any and all liabilities, judgments, costs, claims, damages, penalties, expenses, losses or charges (including, but not limited to, all legal fees and court costs) (collectively, “ Indemnification Costs ”)” which may now or in the future be undertaken, suffered, paid, awarded, assessed or otherwise incurred as a result of or arising out of any breach of any of the representations or warranties made in this Section 1.8 .

 

1.9            Financial Statements . The financial information regarding Borrower, New Indemnitor and the Project supplied by, or on behalf of, Borrower in connection with Borrower’s request for Lender consent to the Requested Actions (collectively, the “ Financial Information ”) were, in all material respects, true and correct on the dates of such items, and since such dates, no material adverse change in the financial condition of Borrower or the Project has occurred, and there is no pending or, to the best knowledge of Borrower, threatened litigation or proceedings of any kind which, if determined adversely to Borrower, New Indemnitor or the Project would reasonably likely to have a Material Adverse Effect on Borrower, New Indemnitor or the Project. Borrower acknowledges that the Financial Information has been provided to Lender to induce Lender to consent to the Requested Actions and to enter into this Agreement and any of the other Consent Documents to which it is a party and is being relied upon by Lender for such purposes.

 

1.10          Organization of Borrower . Neither Borrower nor any SPE Component Entity has modified any of its organizational documents since true and correct copies were delivered to Lender at Loan origination. The organizational chart attached hereto as Schedule 3.31 is a true and correct representation of Borrower’s ownership structure immediately following the consummation of the Requested Actions.

 

1.11          Legal Proceedings . There is no action, proceeding or investigation pending or, to the best knowledge of Borrower, threatened in writing which questions, directly or indirectly, the validity or enforceability of this Agreement, any of the other Consent Documents or any of the Loan Documents applicable to Borrower, or any action taken or to be taken pursuant hereto or thereto, in each case, which may have a Material Adverse Effect.

 

EXECUTION COPY  

 

  4  

 

 

1.12          Acknowledgement of Indebtedness . Borrower confirms that, and by its execution hereof, Lender confirms that, to its actual knowledge: (a) as of October 19, 2015, 2015, the outstanding principal balance of the Note was $35,913,625.52, and (b) and the following escrow and reserve balances are being held by Lender: (i) a tax escrow balance of $408,107.88; (ii) an insurance escrow balance of $261,705.61, (iii) a required violation removal reserve balance of $33,193.22, (iv) a leasing reserve balance of $643,037.73, (v) an office replacement reserve balance of $128,607.82, (vi) a residential replacement reserve balance of $16,326.25, and (vii) an immediate repair reserve balance of $41,336.87. In the event of any error in, or omission from, the foregoing, Lender shall not be prejudiced, limited, or estopped, in any way in its right to charge, collect and receive any and all monies lawfully due Lender under the Loan Documents. Borrower acknowledges and agrees that the Loan, as evidenced and secured by the Note and the other Loan Documents, is a valid and existing indebtedness payable by Borrower to Lender.

 

1.13          Reserved .

 

1.14          Leases . The NYC EPA Lease and the NYC HRA Lease (collectively, the “ Leases ”) are the only Major Leases affecting the Project and are currently in full force and effect. Borrower has not been notified of any landlord default under any of the Leases; there are no leasing broker’s or finder’s commissions of any kind due or to become due with respect to the Leases or the Project; Borrower has not received any prepaid rents or given any concessions for free or reduced rent under the Leases and will not accept any prepaid rents for more than one month in advance. The tenant under the Leases is currently in possession of and is operating businesses from its leased premises.

 

1.15          Project Management . There is no Management Agreement affecting the Project..

 

1.16          Independent Director . There will be no change in the Independent Directors of Borrower in connection with the Requested Actions. Michelle A. Dreyer is and shall continue to be the Independent Director of Borrower.

 

1.17          Bankruptcy . None of Borrower or, to the best of knowledge of Borrower or New Indemnitor or any managers, members, affiliates or other entities which may be owned or controlled directly or indirectly by Borrower or New Indemnitor (collectively, the “ Borrower Parties ”), presently has any intent (a) to file any voluntary petition under any Chapter of the Bankruptcy Code, Title 11, U.S.C.A. (“ Bankruptcy Code ”), or in any manner to seek any proceeding for relief, protection, reorganization, liquidation, dissolution or similar relief for debtors (“ Debtor Proceeding ”) under any local, state, federal or other insolvency law or laws providing relief for debtors, (b) directly or indirectly to intentionally cause any involuntary petition under any Chapter of the Bankruptcy Code to be filed against Borrower, or (c) directly or indirectly to intentionally cause the Project or any portion or any interest of Borrower in the Project to become part of any bankrupt estate or the subject of any Debtor Proceeding.

 

1.18          Single Purpose Entity Status . The Requested Actions shall not result in any changes to the single purpose nature and bankruptcy remoteness of Borrower. Borrower has been and is in compliance in all material respects with the covenants set forth in Section 5.1 of the Loan Agreement. Borrower’s organizational documents have not been modified since the origination of the Loan, nor were they modified in connection with the Requested Actions other than to reflect the change in the ownership as described in the Requested Actions.

 

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1.19          Non-Consolidation Opinion . Borrower has conducted its business so that all of the assumptions made with respect to Borrower set forth in the non-consolidation opinion delivered in connection with the origination of the Loan (the “ Original Non-Consolidation Opinion ”) and in that certain bring-down non-consolidation opinion letter dated as of the Effective Date by Backenroth, Frankel & Krinsky, LLP (the “ Bring Down Opinion ”), in connection with the Requested Actions (the Original Non-Consolidation Opinion, as updated by the Bring Down Opinion, the “ New Non-Consolidation Opinion ”) are true and correct in all material respects. Further, all of the factual assumptions in the New Non-Consolidation Opinion are true and correct in all material respects relating to Borrower or any of the other Borrower Parties.

 

1.20          No Modification . Except as expressly provided herein, all of the terms, covenants and conditions of the Loan Documents shall continue in full force and effect unmodified notwithstanding the consummation of the Requested Actions.

 

1.21          Assets of Borrower . The only assets of Borrower are the Project, the remainder of the Property, the Leases and cash or cash equivalents and incidental personal property of the Project necessary for the operation of the Project.

 

1.22          Consents . Borrower has obtained, and provided Lender true and correct copies of, all consents to the Requested Actions required to be obtained by Borrower under any applicable agreement, instrument, document, law, rule, or regulation, or, no consents to the Requested Actions are required to be obtained by Borrower under any applicable agreement, instrument, document, law, rule, or regulation, including, but not limited to, the consent of the City of New York under the NYC EPA Lease or the NYC HRA Lease.

 

1.23          Inspections . None of Borrower Parties nor any other person on behalf of Borrower or any of Borrower Parties has obtained any written environmental assessment, property inspection or condition reports for all or any portion of the Project in connection with the Requested Actions.

 

1.24          OFAC List. Borrower Parties will not knowingly permit the transfer of any interests in Borrower Parties to any person or entity (or any beneficial owner of such entity) who is listed on the specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, Department of the Treasury pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of Office of Foreign Asset Control, Department of the Treasury or pursuant to any other applicable Executive Orders (such lists are collectively referred to as the “ OFAC Lists ”). Borrower will not knowingly enter into a lease with any party who is listed on the OFAC Lists. Borrower shall promptly notify Lender if Borrower has knowledge that any of Borrower Parties is listed on the OFAC Lists or (A) is indicted on or (B) arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower shall promptly notify Lender if Borrower knows that any tenant is listed on the OFAC Lists or (A) is convicted on, (B) pleads nolo contendere to, (C) is indicted on or (D) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower further represents and warrants to Lender on behalf of itself and the other Borrower Parties that none of the Borrower Parties is currently listed on the OFAC Lists.

 

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1.25          Release and Covenant Not To Sue . Borrower, on behalf of itself and each of the other Borrower Parties, Current Indemnitor, and each of their respective successors and assigns, remise, release, acquit, satisfy and forever discharge Lender Parties from any and all manner of debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, liabilities, obligations, expenses, damages, judgments, executions, actions, inactions, claims, demands and causes of action of any nature whatsoever, at law or in equity, known or unknown, either now accrued or subsequently maturing, which any of Borrower Parties may now have or hereafter can, shall or may have by reason of any matter, cause or thing, from the beginning of the world to and including the date of this Agreement, arising out of or relating to (a) the Loan, (b) the Security Instrument, (c) the Loan Agreement, (c) the Note, (d) any of the other Loan Documents, (e) the Indebtedness, or (f) any other documents or instruments now or previously evidencing, securing or in any way relating to the Loan. Borrower, on behalf of itself and each of the other Borrower Parties, and each of their respective successors and assigns, covenant and agree never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against any of Lender Parties by reason of or in connection with any of the foregoing matters, claims or causes of action, but excluding any claims or causes of action resulting from or in connection with this Agreement or the other Consent Documents.

 

1.26          Information .  All information provided to Servicer by any of Borrower Parties and/or Current Indemnitor, or any of their respective employees, officers, directors, partners, members, managers or representatives, in connection with or relating to (a) the Requested Actions, (b) this Agreement or the transactions contemplated hereby or (c) the Project, contains no untrue statement of material fact and does not omit a material fact necessary in order to make such information not misleading, and the provision of any such information by Lender or any Servicer,  including, but not limited to, Master Servicer or Rialto, to any rating agency is expressly consented to by Borrower Parties and will not infringe upon or violate any intellectual property rights of any party.  Borrower Parties, by their execution of this Agreement or the Joinder attached hereto, jointly and severally, agree to reimburse, indemnify and hold Lender Parties harmless from and against any and all Indemnification Costs, which may now or in the future be undertaken, suffered, paid, awarded, assessed or otherwise incurred as a result of or arising out of any breach or inaccuracy in any material respect of the foregoing representations and warranties or any fraudulent or tortious conduct of any Borrower Parties in connection with the Requested Actions, this Agreement or the transactions contemplated hereby, including the misrepresentation of financial data presented to Lender in connection herewith.

 

1.27          Insurance . There have been no changes to the insurance coverages, insureds, loss payees, additional insureds, certificateholders, deductibles or carriers since the last date such insurance was approved by Lender, other than the addition of Clipper Realty, Inc. as an additional insured.

 

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1.28        Immediate Repairs . Borrower has timely and fully completed the Immediate Repairs described in Section 8.1 of and Schedule 8.1 to the Loan Agreement, and has provided evidence of such completion to Lender.

 

1.29        Required Violation Removal Work . Borrower has caused the removal of each of the violations set forth in Schedule 4.2(a) to the Loan Agreement with respect to the Property and has provided evidence of such removal to Lender.

 

1.30        Reaffirmations . Borrower reaffirms, affirms and confirms the truth and accuracy of all representations and warranties set forth in the Loan Documents as if made on the Effective Date, in all material respects, except for such representations and warranties for matters which by their nature can no longer be true and correct as a result of the passage of time and those matters no longer true and correct as a result of actions or occurrences not expressly prohibited by the Loan Documents, and further agrees to continue to abide by all of the covenants set forth in the Loan Documents.

 

ARTICLE 2

ADDITIONAL PROVISIONS

 

2.1          Modification to Loan Documents. From and after the Effective Date, provided Borrower continues to own the Project and Sponsor directly or indirectly owns more than 50% of and controls Borrower, the Loan Documents shall be modified as follows.

 

(a)          Loan Agreement

 

(i)          The definition of the terms “ Guarantor ,” in Section 1.1 of the Loan Agreement is hereby revised to read as follows:

 

““ Guarantor ” shall mean collectively and jointly and severally David Bistricer, an individual, and Clipper Realty, L.P., a Delaware limited partnership.”

 

(ii)         The organizational chart attached as Schedule 3.31 to the Loan Agreement is hereby replaced with the organizational chart attached hereto as Schedule 3.31

 

(iii)        Section 6.3 of the Loan Agreement is hereby amended to read as follows:

 

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Permitted Equity Transfers. Notwithstanding the restrictions contained in this Article 6, the following equity transfers shall be permitted without Lender’s consent: (a) a transfer (but not a pledge) by devise or descent or by operation of law upon the death of a Restricted Party or any member, partner or shareholder of a Restricted Party (provided that Lender shall receive written notice of such transfer within thirty (30) days following such transfer), (b) the transfer (but not the pledge), in one or a series of transactions, of the stock, partnership interests or membership interests (as the case may be) in a Restricted Party (provided that Lender shall receive not less than thirty (30) days prior written notice of such transfer), (c) the sale, transfer or issuance of limited partnership interests in Clipper Realty L.P. (provided, that, the foregoing provisions of this clause (c) shall not be deemed to waive, qualify or otherwise limit Borrower’s obligation to comply (or to cause the compliance with) the other covenants set forth herein and in the other Loan Documents (including, without limitation, the covenants contained herein relating to ERISA matters) and provided that Lender shall receive written notice of any transfer resulting in a transferee acquiring in one or a series of transfers 20% or more of the limited partnership interests in Clipper Realty L.P. within thirty (30) days following such transfer), (d) the sale, transfer or issuance of shares of common stock of Clipper Realty Inc. (provided, that, the foregoing provisions of this clause (d) shall not be deemed to waive, qualify or otherwise limit Borrower’s obligation to comply (or to cause the compliance with) the other covenants set forth herein and in the other Loan Documents (including, without limitation, the covenants contained herein relating to ERISA matters) and provided that Lender shall receive written notice of any transfer resulting in a transferee acquiring in one or a series of transfers 20% or more of the limited partnership interests in Clipper Realty Inc. within thirty (30) days following such transfer); or (e) the sale, transfer or issuance of shares of common stock in any Restricted Party that is a publicly traded entity, provided the shares of common stock of such Restricted Party are listed on the New York Stock Exchange or another nationally recognized stock exchange (provided, that, the foregoing provisions of this clause (e) shall not be deemed to waive, qualify or otherwise limit Borrower’s obligation to comply (or to cause the compliance with) the other covenants set forth herein and in the other Loan Documents (including, without limitation, the covenants contained herein relating to ERISA matters)); provided, further, that with respect to the transfers listed in clauses (a), (b), (c) and/or (d) above, (A) Clipper Realty Inc. shall continue to be the general partner of Clipper Realty L.P., (B) no such transfers shall result in a change in Control of Clipper Realty Inc., Clipper Realty L.P., Sponsor or Affiliated Manager; (C) after giving effect to such transfers, Sponsor shall (I) own at least a 51% direct or indirect equity ownership interest in each of Borrower and any SPE Component Entity; (II) Control Borrower and any SPE Component Entity and (III) control the day-to-day operation of the Property; (D) after giving effect to such transfers, Clipper Realty Inc. shall own at least a 16.5% direct or indirect equity ownership interest in Borrower; (E) after giving effect to such transfers, and in the event Borrower has entered into a Management Agreement, the Property shall continue to be managed by Manager or a New Manager approved in accordance with the applicable terms and conditions hereof; (F) in the case of the transfer of any direct equity ownership interests in Borrower or in any SPE Component Entity, such transfers shall be conditioned upon continued compliance with the relevant provisions of Article 5 hereof; (G) in the case of (1) the transfer of the management of the Property to a new Affiliated Manager in accordance with the applicable terms and conditions hereof, or (2) the transfer of any equity ownership interests (I) directly in Borrower or in any SPE Component Entity, or (II) in any Restricted Party whose sole asset is a direct or indirect equity ownership interest in Borrower or in any SPE Component Entity, such transfers shall be conditioned upon delivery to Lender of a New Non-Consolidation Opinion addressing such transfer; and (H) such transfers shall be conditioned upon Borrower’s ability to, after giving effect to the equity transfer in question (I) remake the representations contained herein relating to ERISA matters (and, upon Lender’s request, Borrower shall deliver to Lender an Officer’s Certificate containing such updated representations effective as of the date of the consummation of the applicable equity transfer) and (II) continue to comply with the covenants contained herein relating to ERISA matters. Upon request from Lender, Borrower shall promptly provide Lender a revised version of the organizational chart delivered to Lender in connection with the Loan reflecting any equity transfer consummated in accordance with this Section 6.3.”.

 

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2.2            Representations and Warranties . No representation or warranty of Borrower Parties made in this Agreement contains any untrue statement of material fact or intentionally omits to state a material fact necessary in order to make such representations and warranties not misleading in light of the circumstances under which they are made. Any breach by Borrower or by any of the other Borrower Parties of any of the representations, warranties or covenants set forth herein or in the Joinder hereto, after expiration of all applicable notice and cure periods, shall constitute an Event of Default under the Security Instrument, the Loan Agreement, the Note and the other Loan Documents.

 

2.3            Consent of Lender . Subject to the terms of this Agreement, Lender hereby consents to the Requested Actions. Each of Borrower Parties agrees that neither this Agreement nor Lender’s consent to the Requested Actions shall be deemed Lender’s consent or a waiver of Lender’s right to consent to any other action requiring Lender consent under the Loan Documents. Failure to obtain Lender’s consent prior to taking any such actions requiring Lender consent under the Loan Documents shall constitute a default under the Loan Documents. Neither this Agreement nor Lender’s consent to the Requested Actions shall constitute a modification of any of the terms or conditions of the Loan Documents, except as expressly set forth herein.

 

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2.4            Payment of Fees and Expenses . Simultaneously with or prior to the execution of this Agreement, Borrower shall pay to or shall have paid to Lender (a) a consent fee in the amount of $359,136.26, which is 1.0% of the outstanding principal balance of the Loan as of the Effective Date, and (b) an administration and processing fee equal to $150.00, each of which are fees for new consideration and are not interest charged in connection with the Loan. Borrower shall also pay at the time of execution of this Agreement the (i) legal fees and expenses of Lender’s counsel, Bilzin Sumberg Baena Price & Axelrod LLP, in connection with the preparation of this Agreement and the transactions contemplated in this Agreement and (ii) Rating Agency review fees and costs, if any, incurred by Lender and the legal fees and costs of any such Rating Agency’s counsel, if any.

 

2.5            Further Assurances . Each party hereto shall execute and deliver to the other party such agreements, instruments, documents, financing statements and other writings as may be reasonably requested from time to time by such other party to consummate the transactions contemplated by this Agreement

 

2.6            References to Loan Documents . All references to the term “ Loan Documents ” herein, including in the Joinders attached hereto, in the Loan Agreement, the Note, the Security Instrument and the other Loan Documents shall hereinafter mean and refer to: (i) the Loan Documents described therein, as may have been modified by the terms of this Agreement; (ii) this Agreement, including any Joinders attached hereto; and (iii) the Certificate of 250 Livingston Owner LLC dated as of August 3, 2015, issued to Lender in connection with the Clipper REIT Investment described therein.

 

ARTICLE 3

MISCELLANEOUS PROVISIONS

 

3.1            Relationship with Loan Documents . To the extent that this Agreement is inconsistent with the Loan Documents, this Agreement will control and the Loan Documents will be deemed to be modified hereby. Except as modified hereby, the Loan Documents shall remain unchanged and in full force and effect.

 

3.2            No Limitation of Remedies . No right, power or remedy conferred upon or reserved to or by Lender in this Agreement is intended to be exclusive of any other right, power or remedy conferred upon or reserved to or by Lender under this Agreement, the Loan Documents or at law, but each and every remedy shall be cumulative and concurrent, and shall be in addition to each and every other right, power and remedy given under this Agreement, the Loan Documents or now or subsequently existing at law.

 

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3.3            No Waivers . Except as otherwise expressly set forth in this Agreement, nothing contained in this Agreement shall constitute a waiver of any rights or remedies of any party under the Loan Documents or at law. No delay or failure on the part of any party hereto in the exercise of any right or remedy under this Agreement shall operate as a waiver, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action or forbearance by any party hereto contrary to the provisions of this Agreement shall be construed to constitute a waiver of any of the express provisions. Any party hereto may in writing expressly waive any of such party’s rights under this Agreement without invalidating this Agreement.

 

3.4            Successors or Assigns . Whenever any party is named or referred to in this Agreement, the heirs, executors, legal representatives, successors, successors-in-title and assigns of such party shall be included. All covenants and agreements in this Agreement shall bind and inure to the benefit of the heirs, executors, legal representatives, successors, successors-in-title and assigns of the parties, whether so expressed or not.

 

3.5            Construction of Agreement . Each party hereto acknowledges that it has participated in the negotiation of this Agreement and no provision shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured, dictated or drafted such provision. Each party has at all times had access to an attorney in the negotiation of the terms of and in the preparation and execution of this Agreement. Each party has had the opportunity to review and analyze this Agreement for a sufficient period of time prior to execution and delivery. No representations or warranties have been made by or on behalf of Lender, or relied upon by Borrower, pertaining to the subject matter of this Agreement, other than those set forth in this Agreement. No representations or warranties have been made by or on behalf of Borrower, or relied upon by Lender, pertaining to the subject matter of this Agreement, other than those set forth in this Agreement. All oral statements, representations and warranties, if any, are superseded and merged into this Agreement, which represents the final agreement of the parties with respect to the subject matter herein. All of the terms of this Agreement were negotiated at arm’s length, and this Agreement was prepared and executed without fraud, duress, undue influence or coercion of any kind exerted by any of the parties upon the others. The execution and delivery of this Agreement is the free and voluntary act of Borrower and Lender.

 

3.6            Invalid Provision to Affect No Others . If, from any circumstances whatsoever, fulfillment of any provision of this Agreement or any related transaction at the time performance of such provision shall be due, shall involve transcending the limit of validity presently prescribed by any applicable usury statute or any other applicable law, with regard to obligations of like character and amount, then ipso   facto , the obligation to be fulfilled shall be reduced to the limit of such validity. If any clause or provision operates or would prospectively operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be deemed deleted, as though not contained, and the remainder of this Agreement shall remain operative and in full force and effect.

 

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3.7            Notices . The Loan Documents are hereby modified to provide that any and all notices, elections, approvals, consents, demands, requests and responses (“ Communications ”) permitted or required to be given under this Agreement and the Loan Documents shall be given in the manner provided in the Loan Agreement, provided that any Communications, if given to Lender, must be addressed as follows, subject to change as provided above:

 

Deutsche Bank Trust Company Americas, as Trustee

c/o Wells Fargo Bank, National Association

Commercial Mortgage Servicing, MAC D 1086

550 Tryon Street, 14th Floor

Charlotte, North Carolina 28202

Attn: GSMS 2013-GCJ12, Asset Manager

Re: GSMS 2013-GCJ12; Loan No.: 300460008

 

With a copy to:

 

Rialto Capital Advisors, LLC

790 NW 107th Avenue, Suite 400

Miami, Florida 33172

Attn: Niral Shah, Director

Facsimile: (305) 485-2724

Re: GSMS 2013-GCJ12; Loan No.: 300460008

 

and, if given to Borrower, must be addressed as follows, notwithstanding any other address set forth in the Loan Documents to the contrary, subject to change as provided in the Loan Documents:

 

250 Livingston Owner LLC

c/o Berkshire Capital

4611 12th Avenue, Apt. 1L

Brooklyn, New York 11219

Attention: David Bistricer

Facsimile: (718) 435-3848

Telephone: (718) 438-2804

Email: DBistricer@clipperequity.com

 

With a copy to:

 

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attention: Robert W. Downes

 

Facsimile: (212) 291-9043

Telephone: (212) 558-4312

 

Email: downesr@sullcrom.com

 

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3.8            Governing Law . This Agreement shall be interpreted, construed and enforced in accordance with the laws of the State in which the Project is located.

 

3.9            Headings; Exhibits . The headings of the articles, sections and subsections of this Agreement are for the convenience of reference only, are not to be considered a part of this Agreement and shall not be used to construe, limit or otherwise affect this Agreement.

 

3.10          Modifications . The terms of this Agreement may not be changed, modified, waived, discharged or terminated orally, but only by an instrument or instruments in writing, signed by the party against whom the enforcement of the change, modification, waiver, discharge or termination is asserted.

 

3.11          Counterparts . This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument.

 

3.12          Current Indemnitor Joinder . It shall be a condition to Lender’s agreement to consent to the Requested Actions that Current Indemnitor execute and deliver to Lender, simultaneously with Borrower Parties’ execution hereof, the Joinder by and Agreement of Current Indemnitor attached hereto.

 

3.13          New Indemnitor Joinder . It shall be a condition to Lender’s agreement to consent to the Requested Actions that New Indemnitor execute and deliver to Lender, simultaneously with Borrower Parties’ execution hereof, the Joinder by and Agreement of New Indemnitor attached hereto.

 

3.14          WAIVER OF JURY TRIAL . BORROWER AND LENDER, BY ACCEPTANCE OF THIS AGREEMENT, HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT. TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN, THIS AGREEMENT, THE LOAN AGREEMENT, THE NOTE, THE SECURITY INSTRUMENT OR THE OTHER LOAN DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER OR BORROWER.

 

[NO FURTHER TEXT APPEARS ON THIS PAGE; SIGNATURE PAGES FOLLOW]

 

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The parties have executed and delivered this Agreement as of the day and year first above written.

 

Witnesses:   LENDER:
     
    DEUTSCHE BANK TRUST COMPANY AMERICAS, AS TRUSTEE ON BEHALF OF THE REGISTERED HOLDERS OF GS MORTGAGE SECURITIES CORPORATION II, COMMERCIAL MORTGAGE PASS THROUGH CERTIFICATES, SERIES 2013-GCJ12

 

    By: Rialto Capital Advisors, LLC, a Delaware limited liability company, as attorney-in-fact
         
/s/ Kim Schmuggerow     By: /s/ Adam Singer
Print Name: Kim Schmuggerow       Adam Singer
           

 

/s/ Illegible  
Print Name: Illegible  

 

STATE OF FLORIDA )
  ) SS:
COUNTY OF MIAMI-DADE )

 

The foregoing instrument was acknowledged before me this 30th day of October, 2015, by Adam Singer, as Managing Director of Rialto Capital Advisors, LLC , a Delaware limited liability company, on behalf of the said limited liability company as attorney-in-fact for DEUTSCHE BANK TRUST COMPANY AMERICAS, AS TRUSTEE ON BEHALF OF THE REGISTERED HOLDERS OF GS MORTGAGE SECURITIES CORPORATION II, COMMERCIAL MORTGAGE PASS THROUGH CERTIFICATES, SERIES 2013-GCJ12, on behalf of the Trust. He P is personally known to me or _____ has produced a driver’s license as identification.

 

 

Aileen Y. Perez

NOTARY PUBLIC

STATE OF FLORIDA

Comm# FF215384

Expires 3/30/2019

/s/ Aileen Perez
Notary Public, State of Florida
Print Name: Aileen Perez
My Commission Expires:     3/30/19   
 
       

[AFFIX NOTARY STAMP ABOVE]

 

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Witnesses: BORROWER:
   
  250 LIVINGSTON OWNER LLC ,
  a Delaware limited liability company

 

/s/ Lawrence Kreider   By: /s/ David Bistricer
Print Name: Lawrence Kreider   Name: David Bistricer
      Title: President
/s/ Shoshana Yavneh      
Print Name: Shoshana Yavneh      

 

State of New York )

County of _______ ) ss.:

 

On the 2 day of Dec in the year 2015 before me, the undersigned, personally appeared DAVID BISTRICER, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(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 capacity(ies), and that by his/her their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

 

/s/ Chaya Sara Beer  
Signature and Office of individual  
taking acknowledgment  

 

CHAYA SARA BEER

Notary Public, State of New York

No. 24-4960111

Qualified in Kings County

Commission Expires Dec. 18, 2018

 

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EXHIBIT A

 

LEGAL DESCRIPTION

 

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ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Brooklyn, City of New York, County of Kings, State of New York, bounded and described as follows:

 

BEGINNING at a point on the southerly side of Livingston Street, which point is 142 feet 5 inches west of the corner formed by the southerly side of Livingston Street with the westerly side of Bond Street, 65 feet wide, as laid out on map entitled, “Map of Property in the 6th Ward of the City of Brooklyn belonging to the heirs of Johannes Debevoise, deceased, Brooklyn, April 1 836, surveyed by Isaac T. Ludlam, C.S.”, and filed in the Kings County Register’s Office as Map No. 906;

 

RUNNING THENCE southerly parallel with Bond Street, 71 feet 3 inches;

 

THENCE easterly parallel with Schermerhorn Street, 49 feet 2 inches;

 

THENCE southerly at right angles to Schermerhorn Street, 95 feet 3 inches;

 

THENCE easterly parallel with Schermerhorn Street, 0 feet 5 inches;

 

THENCE southerly at right angles to Schermerhorn Street, 5 feet to the northerly side of Schermerhorn Street at a point which is distant 92 feet 6 inches from the corner formed by the northerly side of Schermerhorn Street with the westerly side of Bond Street, as laid out as aforesaid;

 

THENCE westerly along the northerly side of Schermerhorn Street, 197 feel 10 inches to a point which is distant 290 feel 4 inches from the corner formed by the intersection of the northerly side of Schermerhorn Street with the westerly side of Bond Street, as laid out as aforesaid;

 

THENCE northerly parallel with Bond Street 100 feet 9 inches;

 

THENCE easterly parallel with Schermerhorn Street 8 feet 4 inches;

 

THENCE northerly parallel with Bond Street 70 feet 9 inches to a point in the southerly side of Livingston Street, which point is distant 282 feet from the corner formed by the intersection of the southerly side of Livingston Street with the westerly side of Bond Street, as laid out as aforesaid; and

 

THENCE easterly along the southerly side of Livingston Street, 139 feet 7 inches to the point or place of BEGINNING.

 

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NOTE: Being District, Section, Block(s) I65, Lot(s) 22, Tax Map of the Borough of Brooklyn, County of Kings.

 

NOTE: Lot and Block shown for informational purposes only.

 

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EXHIBIT B

 

LOAN DOCUMENTS

 

1.          GAP Promissory Note dated May 1, 2013, in the original principal amount of $2,990,710.30 executed by Borrower in favor of Original Lender, endorsed to the order of Lender (the “ GAP Note ”).

 

2.          Consolidated, Amended and Restated Promissory Note dated May 1, 2013, in the principal amount of $ 37,500,000, executed by Borrower in favor of Original Lender, endorsed to the order of Lender (together with the GAP Note, the “ Note ”).

 

3.          GAP Mortgage and Security Agreement dated as of May 1, 2013, executed by Borrower in favor of Original Lender and recorded June 26, 2013 under CRFN 2013 000252301 with the King’s County Clerk/Register’s Office (the “ Records ”), as assigned to Lender (the “ GAP Mortgage ”)

 

4.          Consolidated Amended and Restated Mortgage and Security Agreement dated as of May 1, 2013, executed by Borrower in favor of Original Lender and recorded June 26, 2013 under CRFN 2013 000252302 with the Records, as assigned to Lender (together with the GAP Mortgage, the “ Security Instrument ”).

 

5.          Loan Agreement dated as of May 1, 2013, between Borrower and Original Lender, as assigned to Lender (the “ Loan Agreement ”).

 

6.          Assignment of Leases and Rents dated as of May 1, 2013, executed by Borrower in favor of Original Lender and recorded on June 26, 2013 under CRFN 2013 000252303

 

7.          Reserved.

 

8.          UCC Financing Statement reflecting Borrower, as debtor, and Original Lender, as secured party and filed with the Secretary of State of Delaware under File No. 2013 1678920, as amended and/or assigned.

 

9.          Limited Recourse Guaranty dated May 1, 2013 executed by Current Indemnitor in favor of Original Lender, as assigned to Lender (the “ Guaranty ”).

 

10.         Environmental Indemnity Agreement dated as of May 1, 2013, executed by Borrower and Current Indemnitor in favor of Original Lender, as assigned to Lender (the “ Environmental Indemnity ”).

 

11.         Deposit Account Control Agreement dated as of May 1, 2013, executed by Borrower, Original Lender and PNC Bank, National Association, as assigned to Lender.

 

EXECUTION COPY

 

 

 

  

JOINDER BY AND AGREEMENT OF CURRENT INDEMNITOR

 

The undersigned, DAVID BISTRICER (“ Current Indemnitor ”), being the Current Indemnitor referred to in the Consent Agreement (the “ Consent Agreement ”) to which this Joinder by and Agreement of Current Indemnitor (the “ Current Indemnitor Joinder ”) is attached, hereby joins in the execution of the Consent Agreement to reaffirm his obligations under the Guaranty and the Environmental Indemnity, and to represent and warrant to, and acknowledge and agrees with, Lender the following:

 

1.           Defined Terms . All capitalized terms used in this Current Indemnitor Joinder, unless defined herein, shall have the meanings given such terms in the Consent Agreement.

 

2.           Reaffirmation of Guaranty and Environmental Indemnity . The Guaranty and the Environmental Indemnity constitute the valid, legally binding obligation of Current Indemnitor, enforceable against Current Indemnitor in accordance with their terms. By Current Indemnitor’s execution hereof, Current Indemnitor waives and releases any and all defenses, affirmative defenses (other than payment or performance in full), setoffs, claims, counterclaims and causes of action of any kind or nature which Current Indemnitor has asserted, or might assert, against any of Lender Parties which in any way relate to or arise out of the Guaranty, the Environmental Indemnity or any of the other Loan Documents.

 

3.           Agreements of Current Indemnitor . Current Indemnitor consents to the execution and delivery of the Consent Agreement by Borrower and agrees and acknowledges that the liability of Current Indemnitor under the Guaranty and the Environmental Indemnity shall not be diminished in any way by the execution and delivery of the Consent Agreement or by the consummation of any of the transactions contemplated therein, including but not limited to the Requested Actions.

 

4.           Confirmation of Representations and Covenants . By his execution hereof, Current Indemnitor confirms the representations and warranties and agrees to the covenants regarding Current Indemnitor set forth in the Consent Agreement, including, but not limited to, the obligation to pay the Indemnification Costs under Sections 1.8 and 1.26 of the Consent Agreement.

 

5.           Authority Representations by the Current Indemnitor . The execution and delivery of, and performance under, this Current Indemnitor Joinder by Current Indemnitor will not (a) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to any Current Indemnitor or (b) result in a breach of or constitute or cause a default under any indenture, agreement, lease or instrument to which any Current Indemnitor is a party or by which the Project may be bound or affected.

 

EXECUTION COPY

 

 

 

 

6.           Governing Law . This Current Indemnitor Joinder shall be governed, interpreted, construed and enforced in accordance with the laws of the State of New York.

 

The undersigned Current Indemnitor has executed and delivered this Current Indemnitor Joinder to be effective as of the date of the Consent Agreement.

 

    CURRENT INDEMNITOR:
     
/s/ Lawrence Kreider   /s/ David Bistricer
Print Name: Lawrence Kreider   DAVID BISTRICER
     
/s/ Shoshana Yavneh    
Print Name: Shoshana Yavneh    

 

State of New York )

County of_____) ss.:

 

On the 2 day of Dec in the year 2015 before me, the undersigned, personally appeared DAVID BISTRICER, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(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 capacity(ies), and that by his/her their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

 

/s/ Chaya Sara Beer  
Signature and Office of individual  
taking acknowledgment  

 

CHAYA SARA BEER

Notary Public, State of New York

No. 24-4960111

Qualified in Kings County

Commission Expires Dec. 18, 2018

 

EXECUTION COPY

 

  2  

 

 

JOINDER BY AND AGREEMENT OF NEW INDEMNITOR

 

The undersigned, CLIPPER REALTY L.P., a Delaware limited liability company (“New Indemnitor”), being the New Indemnitor referred to in the Consent Agreement (the “Consent Agreement”) to which this Joinder by and Agreement of New Indemnitor (the “New Indemnitor Joinder”) is attached, hereby joins in the execution of the Consent Agreement to assume, on a joint and several basis with Current Indemnitor, all of Current Indemnitor’s obligations under the Guaranty and the Environmental Indemnity, and to represent and warrant to, and acknowledge and agrees with, Lender the following:

 

1.            Defined Terms . All capitalized terms used in this New Indemnitor Joinder, unless defined herein, shall have the meanings given such terms in the Consent Agreement or the Current Indemnitor Joinder attached thereto.

 

2.            Benefit to New Indemnitor . New Indemnitor owns a direct and/or indirect interest in Borrower as a result of the Requested Actions and has received substantial benefit from Lender’s consent to the Requested Actions.

 

3.            Assumption by New Indemnitor of Guaranty . New Indemnitor hereby assumes and agrees, on a joint and several basis with Current Indemnitor, to be liable and responsible for and bound by all of Current Indemnitor’s obligations, agreements and liabilities under the Guaranty, as amended hereby, including but not limited to the jury waiver and other waivers set forth therein, as fully and completely as if New Indemnitor had originally executed and delivered such Guaranty, as amended hereby, as the guarantor/indemnitor thereunder. New Indemnitor further agrees to pay, perform and discharge each and every obligation of payment and performance of Current Indemnitor under, pursuant to and as set forth in the Guaranty, as amended hereby, at the time, in the manner and otherwise in all respects as therein provided. From and after the Effective Date, the Guaranty is amended to provide that all references to the term “Guarantor” used in the Guaranty shall mean and refer to New Indemnitor.

 

4.           Assumption by New Indemnitor of Environmental Indemnity .  New Indemnitor hereby assumes and agrees, on a joint and several basis with Current Indemnitor, to be liable and responsible for and bound by all of the Current Indemnitor’s obligations, agreements and liabilities, including but not limited to the jury waiver and other waivers set forth therein, under the Environmental Indemnity as fully and completely as if New Indemnitor had signed such Environmental Indemnity, as amended hereby, as the indemnitor/guarantor thereunder, including without limitation, all of those obligations, agreements and liabilities which would have been the obligations, agreements and liabilities of Current Indemnitor, without regard to when such obligations, agreements and liabilities arise, accrue or have arisen or accrued and without regard to Current Indemnitor’s responsibility therefore, if any. New Indemnitor further agrees to pay, perform, and discharge each and every obligation of payment and performance of any guarantor/indemnitor under, pursuant to and as set forth in the Environmental Indemnity, as amended hereby, at the time, in the manner and otherwise in all respects as therein provided. The liability of New Indemnitor under this paragraph shall be joint and several with that of each other and with that of Borrower.

  

EXECUTION COPY 

 

 

 

 

5.            Confirmation of Representations and Covenants . By its execution hereof, New Indemnitor confirms the representations and warranties and agrees to the covenants regarding New Indemnitor set forth in the Consent Agreement, including, but not limited to, the obligation to pay the Indemnification Costs under Section 1.8 of the Consent Agreement.

 

6.            Notices to New Indemnitor . From and after the date of completion of the Requested Actions, Lender shall deliver any notices to New Indemnitor which are required to be delivered pursuant to the Guaranty and/or the Environmental Indemnity, or are otherwise delivered by the Lender thereunder at Lender’s sole discretion, to the New Indemnitor at the following address:

 

Clipper Realty, L.P.

c/o Clipper Realty, Inc.

4611 12th Avenue, Apt. 1L

Brooklyn, New York 11219

Attention: David Bistricer

Facsimile: (718) 435-3848

Telephone: (718) 438-2804

Email: DBistricer@clippereauitv.com

 

With a copy to:

 

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attention: Robert W. Downes

Facsimile: (212) 291-9043

Telephone: (212) 558-4312

Email: downesr@sullcrom.com

 

7.            All notices to be sent by New Indemnitor to Lender under the Guaranty and/or the Environmental indemnity shall be sent to Lender in the manner set forth in and at the address shown in Section 3.7 of the Agreement to which this New Indemnitor Joinder is attached

 

8.            Governing Law . This New Indemnitor Joinder shall be governed, interpreted, construed and enforced in accordance with the laws of the State of New York.

 

[SIGNATURE ON FOLLOWING PAGE]

 

EXECUTION COPY  

 

  2  

 

 

The undersigned New Indemnitor has executed and delivered this New Indemnitor Joinder to be effective as of the date of the Consent Agreement

 

    NEW INDEMNITOR:
     
    CLIPPER REALTY L.P., a Delaware limited liability company
       
    By: Clipper Realty Inc., a Maryland corporation, its General Partner
         
/s/ Lawrence Kreider     By: /s/ David Bistricer
Print Name: Lawrence Kreider     Name:  
      Title:  
/s/ Shoshana Yavneh        
Print Name: Shoshana Yavneh        

 

State of New York )

County of________) ss.:

 

On the 2 day of Dec in the year 2015 before me, the undersigned, personally appeared David Bistricer, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(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 capacity(ies), and that by his/her their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

 

/s/ Chaya Sara Beer  
Signature and Office of individual  
Taking acknowledgment  

 

  CHAYA SARA BEER
  Notary Public, State of New York
  No. 24-4960111
  Qualified in Kings County
  Commission Expires Dec. 18, 2018

 

 

 

 

Exhibit 10.43

EXECUTION VERSION

 

AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT

 

THIS amendment no. 1 TO REGISTRATION RIGHTS agreement (this “ Amendment ”), dated as of July 7, 2016, is entered into by Clipper Realty Inc., a Maryland corporation (together with any successor entity thereto, the “ Company ”), and FBR Capital Markets & Co., a Delaware corporation (“ FBR ”) for the benefit of FBR, the purchasers (the “ Participants ”) of the Company’s common stock, $0.01 par value per share (the “Common Stock”), in the private offering by the Company of shares of Common Stock on August 3, 2015, and the direct and subsequent transferees of such shares of Common Stock of FBR and each of the Participants. 

 

RECITALS

 

A.              The Company and FBR are parties to the Registration Rights Agreement, dated as of August 3, 2015 (the “ Agreement ”); and

 

B.              The Company and FBR wish to amend the Agreement as set forth herein; and

 

C.              The Board of Directors of the Company has declared this Amendment to be advisable and Holders beneficially owning at least two-thirds of the Registrable Shares (as defined in the Agreement) outstanding as of the date of this Amendment have consented to this Amendment.

 

AGREEMENT

 

The parties hereby agree as follows:

 

1.   Amendment . The references to “the first anniversary of the Closing Date” in Section 2(b)(iii) and Section 3(a) of the Agreement are hereby replaced with “October 31, 2016”.

 

2.   No Other Amendments; Effect of this Amendment . Except as expressly set forth herein, the Agreement remains in full force and effect in accordance with its terms and nothing contained herein shall be deemed to be a waiver, amendment, modification or other change of any term, condition or provision of the Agreement. This Amendment shall form a part of the Agreement for all purposes, and each party thereto and hereto shall be bound hereby. From and after the execution of this Amendment by the parties, any reference to the Agreement shall be deemed a reference to the Agreement as amended by this Amendment.

 

3.   Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to principles of conflicts of law.

 

4.   Counterparts . This Amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

 

     

 

 

5.   Headings . The headings in the Amendment are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

[signature page follows]

 

  - 2 -  

 

 

IN WITNESS WHEREOF, the undersigned has entered into this Amendment as of the date first above written.

 

  CLIPPER REALTY INC.
   
  By: /s/ David Bistricer
  Name: David Bistricer
  Title: Co-Chairman and Chief Executive Officer
   
  FBR CAPITAL MARKETS & CO.
   
  By: /s/ Paul Dell’isola
  Name: Paul Dell’i'sola
  Title: Senior Managing Director and Group Head

 

[ Signature Page to Amendment No. 1 to Registration Rights Agreement ]

 

     

 

 

Exhibit 10.44

 

MULTIFAMILY LOAN AND SECURITY AGREEMENT

(NON-RECOURSE)

 

BY AND BETWEEN

 

ASPEN 2016 LLC, a
Delaware limited liability company

 

AND

 

CAPITAL ONE MULTIFAMILY FINANCE, LLC, a
Delaware limited liability company

 

DATED AS OF

 

June 27, 2016

 

 

 

 

  

TABLE OF CONTENTS

 

Article 1 - DEFINITIONS; SUMMARY OF MORTGAGE LOAN TERMS 1
     
Section 1.01 Defined Terms 1
Section 1.02 Schedules, Exhibits, and Attachments Incorporated 1
     
Article 2 - GENERAL MORTGAGE LOAN TERMS 2
     
Section 2.01 Mortgage loan origination and security 2
(a) Making of Mortgage Loan 2
(b) Security for Mortgage Loan 2
(c) Protective Advances 2
Section 2.02 Payments on Mortgage Loan 2
(a) Debt Service Payments 2
(b) Capitalization of Accrued But Unpaid Interest 3
(c) Late Charges 3
(d) Default Rate 4
(e) Address for Payments 5
(f) Application of Payments 5
Section 2.03 Lockout/Prepayment 6
(a) Prepayment; Prepayment Lockout; Prepayment Premium 6
(b) Voluntary Prepayment in Full 6
(c) Acceleration of Mortgage Loan 7
(d) Application of Collateral 7
(e) Casualty and Condemnation 7
(f) No Effect on Payment Obligations 8
(g) Loss Resulting from Prepayment 8
     
Article 3 - PERSONAL LIABILITY 8
     
Section 3.01 Non-Recourse Mortgage Loan; Exceptions 8
Section 3.02 Personal Liability of Borrower (Exceptions to Non-Recourse Provision) 9
(a) Personal Liability Based on Lender’s Loss 9
(b) Full Personal Liability for Mortgage Loan 10
Section 3.03 Personal Liability for Indemnity Obligations 10
Section 3.04 Lender’s Right to Forego Rights Against Mortgaged Property 11
     
Article 4 - BORROWER STATUS 11
     
Section 4.01 Representations and Warranties 11
(a) Due Organization and Qualification 11
(b) Location 11
(c) Power and Authority 12
(d) Due Authorization 12
(e) Valid and Binding Obligations 12
(f) Effect of Mortgage Loan on Borrower’s Financial Condition 12
(g) Economic Sanctions, Anti-Money Laundering, and Anti-Corruption 13
(h) Borrower Single Asset Status 13
(i) No Bankruptcies or Judgments 15
(j) No Actions or Litigation 15
(k) Payment of Taxes, Assessments, and Other Charges 15

 

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(l) Not a Foreign Person 16
(m) ERISA 16
(n) Default Under Other Obligations 16
(o) Prohibited Person 16
(p) No Contravention 17
(q) Lockbox Arrangement 17
Section 4.02 Covenants 17
(a) Maintenance of Existence; Organizational Documents 17
(b) Economic Sanctions, Anti-Money Laundering, and Anti-Corruption 18
(c) Payment of Taxes, Assessments, and Other Charges 18
(d) Borrower Single Asset Status 18
(e) ERISA 20
(f) Notice of Litigation or Insolvency 20
(g) Payment of Costs, Fees, and Expenses 20
(h) Restrictions on Distributions 21
(i) Lockbox Arrangement 21
     
Article 5 - THE MORTGAGE LOAN 21
     
Section 5.01 Representations and Warranties 21
(a) Receipt and Review of Loan Documents 21
(b) No Default 22
(c) No Defenses 22
(d) Loan Document Taxes 22
Section 5.02 Covenants 22
(a) Ratification of Covenants; Estoppels; Certifications 22
(b) Further Assurances 23
(c) Sale of Mortgage Loan 23
(d) Limitations on Further Acts of Borrower 24
(e) Financing Statements; Record Searches 24
(f) Loan Document Taxes 25
     
Article 6 - PROPERTY USE, PRESERVATION, AND MAINTENANCE 25
     
Section 6.01 Representations and Warranties 25
(a) Compliance with Law; Permits and Licenses 25
(b) Property Characteristics 26
(c) Property Ownership 26
(d) Condition of the Mortgaged Property 26
(e) Personal Property 26
Section 6.02 Covenants 26
(a) Use of Property 26
(b) Property Maintenance 27
(c) Property Preservation 29
(d) Property Inspections 29
(e) Compliance with Laws 30
Section 6.03 Mortgage Loan Administration Matters Regarding the Property 30
(a) Property Management 30
(b) Subordination of Fees to Affiliated Property Managers 31
(c) Property Condition Assessment 31

 

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Article 7 - LEASES AND RENTS 31
     
Section 7.01 Representations and Warranties 31
(a) Prior Assignment of Rents 31
(b) Prepaid Rents 31
Section 7.02 Covenants 32
(a) Leases 32
(b) Commercial Leases 32
(c) Payment of Rents 34
(d) Assignment of Rents 34
(e) Further Assignments of Leases and Rents 34
(f) Options to Purchase by Tenants 34
Section 7.03 Mortgage Loan Administration Regarding Leases and Rents 34
(a) Material Commercial Lease Requirements 34
(b) Residential Lease Form 35
     
Article 8 - BOOKS AND RECORDS; FINANCIAL REPORTING 35
     
Section 8.01 Representations and Warranties 35
(a) Financial Information 35
(b) No Change in Facts or Circumstances 35
Section 8.02 Covenants 36
(a) Obligation to Maintain Accurate Books and Records 36
(b) Items to Furnish to Lender 36
(c) Audited Financials 39
(d) Delivery of Books and Records 39
Section 8.03 Mortgage Loan Administration Matters Regarding Books and Records and Financial Reporting 39
(a) Lender’s Right to Obtain Audited Books and Records 39
(b) Credit Reports; Credit Score 40
     
Article 9 – INSURANCE 40
     
Section 9.01 Representations and Warranties 40
(a) Compliance with Insurance Requirements 40
(b) Property Condition 40
Section 9.02 Covenants 40
(a) Insurance Requirements 40
(b) Delivery of Policies, Renewals, Notices, and Proceeds 41
Section 9.03 Mortgage Loan Administration Matters Regarding Insurance 42
(a) Lender’s Ongoing Insurance Requirements 42
(b) Application of Proceeds on Event of Loss 42
(c) Payment Obligations Unaffected 44
(d) Foreclosure Sale 45
(e) Appointment of Lender as Attorney-In-Fact 45
     
Article 10 - CONDEMNATION 45
     
Section 10.01 Representations and Warranties 45
(a) Prior Condemnation Action 45
(b) Pending Condemnation Actions 45

 

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Section 10.02 Covenants 46
(a) Notice of Condemnation 46
(b) Condemnation Proceeds 46
Section 10.03 Mortgage Loan Administration Matters Regarding Condemnation 46
(a) Application of Condemnation Awards 46
(b) Payment Obligations Unaffected 46
(c) Appointment of Lender as Attorney-In-Fact 46
(d) Preservation of Mortgaged Property 47
     
Article 11 - LIENS, TRANSFERS, AND ASSUMPTIONS 47
     
Section 11.01 Representations and Warranties 47
(a) No Labor or Materialmen’s Claims 47
(b) No Other Interests 47
Section 11.02 Covenants 48
(a) Liens; Encumbrances 48
(b) Transfers 48
(c) No Other Indebtedness 51
(d) No Mezzanine Financing or Preferred Equity 51
Section 11.03 Mortgage Loan Administration Matters Regarding Liens, Transfers, and Assumptions 51
(a) Assumption of Mortgage Loan 51
(b) Transfers to Key Principal-Owned Affiliates or Guarantor-Owned Affiliates 53
(c) Estate Planning 53
(d) Termination or Revocation of Trust 54
(e) Death of Key Principal or Guarantor; Transfer Due to Death 54
(f) Bankruptcy of Guarantor 56
(g) Further Conditions to Transfers and Assumption 57
(h) Further Transfers Affecting Clipper Realty L.P. 57
     
Article 12 - IMPOSITIONS 61
     
Section 12.01 Representations and Warranties 61
(a) Payment of Taxes, Assessments, and Other Charges 61
Section 12.02 Covenants 61
(a) Imposition Deposits, Taxes, and Other Charges 61
Section 12.03 Mortgage Loan Administration Matters Regarding Impositions 62
(a) Maintenance of Records by Lender 62
(b) Imposition Accounts 62
(c) Payment of Impositions; Sufficiency of Imposition Deposits 62
(d) Imposition Deposits Upon Event of Default 63
(e) Contesting Impositions 63
(f) Release to Borrower 64
     
Article 13 - REPLACEMENT RESERVE AND REPAIRS 64
     
Section 13.01 Covenants 64
(a) Initial Deposits to Replacement Reserve Account and Repairs Escrow Account 64
(b) Monthly Replacement Reserve Deposits 64
(c) Payment for Replacements and Repairs 64
(d) Assignment of Contracts for Replacements and Repairs 65

 

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(e) Indemnification 65
(f) Amendments to Loan Documents 65
(g) Administrative Fees and Expenses 65
Section 13.02 Mortgage Loan Administration Matters Regarding Reserves 66
(a) Accounts, Deposits, and Disbursements 66
(b) Approvals of Contracts; Assignment of Claims 73
(c) Delays and Workmanship 73
(d) Appointment of Lender as Attorney-In-Fact 73
(e) No Lender Obligation 74
(f) No Lender Warranty 74
     
Article 14 - DEFAULTS/REMEDIES 74
     
Section 14.01 Events of Default 74
(a) Automatic Events of Default 74
(b) Events of Default Subject to a Specified Cure Period 75
(c) Events of Default Subject to Extended Cure Period 76
Section 14.02 Remedies 76
(a) Acceleration; Foreclosure 76
(b) Loss of Right to Disbursements from Collateral Accounts 77
(c) Remedies Cumulative 77
Section 14.03 Additional Lender Rights; Forbearance 78
(a) No Effect Upon Obligations 78
(b) No Waiver of Rights or Remedies 78
(c) Appointment of Lender as Attorney-In-Fact 79
(d) Borrower Waivers 80
Section 14.04 Waiver of Marshaling 81
     
Article 15 - MISCELLANEOUS 81
     
Section 15.01 Governing Law; Consent to Jurisdiction and Venue 81
(a) Governing Law 81
(b) Venue 81
Section 15.02 Notice 82
(a) Process of Serving Notice 82
(b) Change of Address 82
(c) Default Method of Notice 82
(d) Receipt of Notices 83
Section 15.03 Successors and Assigns Bound; Sale of Mortgage Loan 83
(a) Binding Agreement 83
(b) Sale of Mortgage Loan; Change of Servicer 83
Section 15.04 Counterparts 83
Section 15.05 Joint and Several (or Solidary) Liability 83
Section 15.06 Relationship of Parties; No Third Party Beneficiary 83
(a) Solely Creditor and Debtor 83
(b) No Third Party Beneficiaries 84

 

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Section 15.07 Severability; Entire Agreement; Amendments 84
Section 15.08 Construction 84
Section 15.09 Mortgage Loan Servicing 85
Section 15.10 Disclosure of Information 85
Section 15.11 Waiver; Conflict 86
Section 15.12 No Reliance 86
Section 15.13 Subrogation 86
Section 15.14 Counting of Days 86
Section 15.15 Revival and Reinstatement of Indebtedness 87
Section 15.16 Time is of the Essence 87
Section 15.17 Final Agreement 87
Section 15.18 WAIVER OF TRIAL BY JURY 87

 

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SCHEDULES & EXHIBITS

 

Schedules        
Schedule 1   Definitions Schedule (required)   Form 6101.FR
Schedule 2   Summary of Loan Terms (required)   Form 6102.FR
Schedule 2   Addenda to Schedule 2 (New York Gap Note Modification)   Form 6102.19.FR
Schedule 2   Addenda to Schedule 2 (Bond Regulatory Agreement)   Form 6102.22
Schedule 3   Interest Rate Type Provisions (required)   Form 6103.FR
Schedule 4   Prepayment Premium Schedule (required)   Form 6104.01
Schedule 5   Required Replacement Schedule (required)    
Schedule 6   Required Repair Schedule (required)    
Schedule 7   Exceptions to Representations and Warranties Schedule (required)    

 

 

Exhibits        
Exhibit A   Modifications to Multifamily Loan and Security Agreement (New York Gap Note Modification)   Form 6234
Exhibit B   Modifications to Multifamily Loan and Security Agreement (Bond Redemption and Bond Regulatory Agreement) (HDC)   Form 6238
Exhibit C   Modifications to Multifamily Loan and Security Agreement (HPD Regulatory Agreement)    
Exhibit D   Modifications to Multifamily Loan and Security Agreement (Shuttle Service Reserve)    

  

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MULTIFAMILY LOAN AND SECURITY AGREEMENT

(Non-Recourse)

 

This MULTIFAMILY LOAN AND SECURITY AGREEMENT (as amended, restated, replaced, supplemented, or otherwise modified from time to time, the “ Loan Agreement ”) is made as of the Effective Date (as hereinafter defined) by and between ASPEN 2016 LLC , a Delaware limited liability company (“ Borrower ”), CAPITAL ONE MULTIFAMILY FINANCE, LLC , a Delaware limited liability company (“ Lender ”).

 

RECITALS :

 

WHEREAS, Borrower desires to obtain the Mortgage Loan (as hereinafter defined) from Lender to be secured by the Mortgaged Property (as hereinafter defined); and

 

WHEREAS, Lender is willing to make the Mortgage Loan on the terms and conditions contained in this Loan Agreement and in the other Loan Documents (as hereinafter defined);

 

NOW, THEREFORE, in consideration of the making of the Mortgage Loan by Lender and other good and valuable consideration, the receipt and adequacy of which are hereby conclusively acknowledged, the parties hereby covenant, agree, represent, and warrant as follows:

 

AGREEMENTS :

 

Article 1 - DEFINITIONS; SUMMARY OF MORTGAGE
LOAN TERMS

 

Section 1.01               Defined Terms.

 

Capitalized terms not otherwise defined in the body of this Loan Agreement shall have the meanings set forth in the Definitions Schedule attached as Schedule 1 to this Loan Agreement.

 

Section 1.02               Schedules, Exhibits, and Attachments Incorporated.

 

The schedules, exhibits, and any other addenda or attachments are incorporated fully into this Loan Agreement by this reference and each constitutes a substantive part of this Loan Agreement.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 1
Article 1 01-16 © 2016 Fannie Mae

 

 

 

 

Article 2 - GENERAL MORTGAGE LOAN TERMS

 

Section 2.01               Mortgage Loan Origination and Security.

 

(a)          Making of Mortgage Loan.

 

Subject to the terms and conditions of this Loan Agreement and the other Loan Documents, Lender hereby makes the Mortgage Loan to Borrower, and Borrower hereby accepts the Mortgage Loan from Lender. Borrower covenants and agrees that it shall:

 

(1)         pay the Indebtedness, including the Prepayment Premium, if any (whether in connection with any voluntary prepayment or in connection with an acceleration by Lender of the Indebtedness), in accordance with the terms of this Loan Agreement and the other Loan Documents; and

 

(2)         perform, observe, and comply with this Loan Agreement and all other provisions of the other Loan Documents.

 

(b)          Security for Mortgage Loan.

 

The Mortgage Loan is made pursuant to this Loan Agreement, is evidenced by the Note, and is secured by the Security Instrument, this Loan Agreement, and the other Loan Documents that are expressly stated to be security for the Mortgage Loan.

 

(c)          Protective Advances.

 

As provided in the Security Instrument, Lender may take such actions or disburse such funds as Lender reasonably deems necessary to perform the obligations of Borrower under this Loan Agreement and the other Loan Documents and to protect Lender’s interest in the Mortgaged Property.

 

Section 2.02               Payments on Mortgage Loan.

 

(a)          Debt Service Payments.

 

(1)          Short Month Interest.

 

If the date the Mortgage Loan proceeds are disbursed is any day other than the first day of the month, interest for the period beginning on the disbursement date and ending on and including the last day of the month in which the disbursement occurs shall be payable by Borrower on the date the Mortgage Loan proceeds are disbursed. In the event that the disbursement date is not the same as the Effective Date, then:

 

(A)          the disbursement date and the Effective Date must be in the same month, and

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 2
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

(B)          the Effective Date shall not be the first day of the month.

 

(2)          Interest Accrual and Computation.

 

Except as provided in Section 2.02(a)(1), interest shall be paid in arrears. Interest shall accrue as provided in the Schedule of Interest Rate Type Provisions and shall be computed in accordance with the Interest Accrual Method. If the Interest Accrual Method is “Actual/360,” Borrower acknowledges and agrees that the amount allocated to interest for each month will vary depending on the actual number of calendar days during such month.

 

(3)          Monthly Debt Service Payments.

 

Consecutive monthly debt service installments (comprised of either interest only or principal and interest, depending on the Amortization Type), each in the amount of the applicable Monthly Debt Service Payment, shall be due and payable on the First Payment Date, and on each Payment Date thereafter until the Maturity Date, at which time all Indebtedness shall be due. Any regularly scheduled Monthly Debt Service Payment that is received by Lender before the applicable Payment Date shall be deemed to have been received on such Payment Date solely for the purpose of calculating interest due. All payments made by Borrower under this Loan Agreement shall be made without set-off, counterclaim, or other defense.

 

(4)          Payment at Maturity.

 

The unpaid principal balance of the Mortgage Loan, any Accrued Interest thereon and all other Indebtedness shall be due and payable on the Maturity Date.

 

(5)          Interest Rate Type.

 

See the Schedule of Interest Rate Type Provisions for additional provisions, if any, specific to the Interest Rate Type.

 

(b)          Capitalization of Accrued But Unpaid Interest.

 

Any accrued and unpaid interest on the Mortgage Loan remaining past due for thirty (30) days or more may, at Lender’s election, be added to and become part of the unpaid principal balance of the Mortgage Loan.

 

(c)          Late Charges.

 

(1)         If any Monthly Debt Service Payment due hereunder is not received by Lender within ten (10) days (or fifteen (15) days for any Mortgaged Property located in Mississippi or North Carolina to comply with applicable law) after the applicable Payment Date, or any amount payable under this Loan Agreement (other than the payment due on the Maturity Date for repayment of the Mortgage Loan in full) or any other Loan Document is not received by Lender within ten (10) days (or fifteen (15) days for any Mortgaged Property located in Mississippi or North Carolina to comply with applicable law) after the date such amount is due, inclusive of the date on which such amount is due, Borrower shall pay to Lender, immediately without demand by Lender, the Late Charge.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 3
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

The Late Charge is payable in addition to, and not in lieu of, any interest payable at the Default Rate pursuant to Section 2.02(d).

 

(2)         Borrower acknowledges and agrees that:

 

(A)         its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Mortgage Loan;

 

(B)         it is extremely difficult and impractical to determine those additional expenses;

 

(C)         Lender is entitled to be compensated for such additional expenses; and

 

(D)         the Late Charge represents a fair and reasonable estimate, taking into account all circumstances existing on the date hereof, of the additional expenses Lender will incur by reason of any such late payment.

 

(d)          Default Rate.

 

(1)         Default interest shall be paid as follows:

 

(A)         If any amount due in respect of the Mortgage Loan (other than amounts due on the Maturity Date) remains past due for thirty (30) days or more, interest on such unpaid amount(s) shall accrue from the date payment is due at the Default Rate and shall be payable upon demand by Lender.

 

(B)         If any Indebtedness due is not paid in full on the Maturity Date, then interest shall accrue at the Default Rate on all such unpaid amounts from the Maturity Date until fully paid and shall be payable upon demand by Lender.

 

Absent a demand by Lender, any such amounts shall be payable by Borrower in the same manner as provided for the payment of Monthly Debt Service Payments. To the extent permitted by applicable law, interest shall also accrue at the Default Rate on any judgment obtained by Lender against Borrower in connection with the Mortgage Loan. To the extent Borrower or any other Person is vested with a right of redemption, interest shall continue to accrue at the Default Rate during any redemption period until such time as the Mortgaged Property has been redeemed.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 4
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

(2)         Borrower acknowledges and agrees that:

 

(A)         its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Mortgage Loan; and

 

(B)         in connection with any failure to timely pay all amounts due in respect of the Mortgage Loan on the Maturity Date, or during the time that any amount due in respect of the Mortgage Loan is delinquent for more than thirty (30) days:

 

(i)          Lender’s risk of nonpayment of the Mortgage Loan will be materially increased;

 

(ii)         Lender’s ability to meet its other obligations and to take advantage of other investment opportunities will be adversely impacted;

 

(iii)        Lender will incur additional costs and expenses arising from its loss of the use of the amounts due;

 

(iv)        it is extremely difficult and impractical to determine such additional costs and expenses;

 

(v)         Lender is entitled to be compensated for such additional risks, costs, and expenses; and

 

(vi)        the increase from the Interest Rate to the Default Rate represents a fair and reasonable estimate of the additional risks, costs, and expenses Lender will incur by reason of Borrower’s delinquent payment and the additional compensation Lender is entitled to receive for the increased risks of nonpayment associated with a delinquency on the Mortgage Loan (taking into account all circumstances existing on the Effective Date).

 

(e)          Address for Payments.

 

All payments due pursuant to the Loan Documents shall be payable at Lender’s Payment Address, or such other place and in such manner as may be designated from time to time by written notice to Borrower by Lender.

 

(f)          Application of Payments.

 

If at any time Lender receives, from Borrower or otherwise, any payment in respect of the Indebtedness that is less than all amounts due and payable at such time, then Lender may apply such payment to amounts then due and payable in any manner and in any order determined by Lender or hold in suspense and not apply such payment at Lender’s election. Neither Lender’s acceptance of a payment that is less than all amounts then due and payable, nor Lender’s application of, or suspension of the application of, such payment, shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such payment to the Indebtedness, Borrower’s obligations under this Loan Agreement and the other Loan Documents shall remain unchanged.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 5
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

Section 2.03               Lockout/Prepayment.

 

(a)          Prepayment; Prepayment Lockout; Prepayment Premium.

 

(1)         Borrower shall not make a voluntary full or partial prepayment on the Mortgage Loan during any Prepayment Lockout Period nor shall Borrower make a voluntary partial prepayment at any time. Except as expressly provided in this Loan Agreement (including as provided in the Prepayment Premium Schedule), a Prepayment Premium calculated in accordance with the Prepayment Premium Schedule shall be payable in connection with any prepayment of the Mortgage Loan.

 

(2)         If a Prepayment Lockout Period applies to the Mortgage Loan, and during such Prepayment Lockout Period Lender accelerates the unpaid principal balance of the Mortgage Loan or otherwise applies collateral held by Lender to the repayment of any portion of the unpaid principal balance of the Mortgage Loan, the Prepayment Premium shall be due and payable and equal to the amount obtained by multiplying the percentage indicated (if at all) in the Prepayment Premium Schedule by the amount of principal being prepaid at the time of such acceleration or application.

 

(b)          Voluntary Prepayment in Full.

 

At any time after the expiration of any Prepayment Lockout Period, Borrower may voluntarily prepay the Mortgage Loan in full on a Permitted Prepayment Date so long as:

 

(1)         Borrower delivers to Lender a Prepayment Notice specifying the Intended Prepayment Date not more than sixty (60) days, but not less than thirty (30) days (if given via U.S. Postal Service) or twenty (20) days (if given via facsimile, e-mail, or overnight courier) prior to such Intended Prepayment Date; and

 

(2)         Borrower pays to Lender an amount equal to the sum of:

 

(A)         the entire unpaid principal balance of the Mortgage Loan; plus

 

(B)         all Accrued Interest (calculated through the last day of the month in which the prepayment occurs); plus

 

(C)         the Prepayment Premium; plus

 

(D)         all other Indebtedness.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 6
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

In connection with any such voluntary prepayment, Borrower acknowledges and agrees that interest shall always be calculated and paid through the last day of the month in which the prepayment occurs (even if the Permitted Prepayment Date for such month is not the last day of such month, or if Lender approves prepayment on an Intended Prepayment Date that is not a Permitted Prepayment Date). Borrower further acknowledges that Lender is not required to accept a voluntary prepayment of the Mortgage Loan on any day other than a Permitted Prepayment Date. However, if Lender does approve an Intended Prepayment Date that is not a Permitted Prepayment Date and accepts a prepayment on such Intended Prepayment Date, such prepayment shall be deemed to be received on the immediately following Permitted Prepayment Date. If Borrower fails to prepay the Mortgage Loan on the Intended Prepayment Date for any reason (including on any Intended Prepayment Date that is approved by Lender) and such failure either continues for five (5) Business Days, or into the following month, Lender shall have the right to recalculate the payoff amount. If Borrower prepays the Mortgage Loan either in the following month or more than five (5) Business Days after the Intended Prepayment Date that was approved by Lender, Lender shall also have the right to recalculate the payoff amount based upon the amount of such payment and the date such payment was received by Lender. Borrower shall immediately pay to Lender any additional amounts required by any such recalculation.

 

(c)          Acceleration of Mortgage Loan.

 

Upon acceleration of the Mortgage Loan, Borrower shall pay to Lender:

 

(1)         the entire unpaid principal balance of the Mortgage Loan;

 

(2)         all Accrued Interest (calculated through the last day of the month in which the acceleration occurs);

 

(3)         the Prepayment Premium; and

 

(4)         all other Indebtedness.

 

(d)          Application of Collateral.

 

Any application by Lender of any collateral or other security to the repayment of all or any portion of the unpaid principal balance of the Mortgage Loan prior to the Maturity Date in accordance with the Loan Documents shall be deemed to be a prepayment by Borrower. Any such prepayment shall require the payment to Lender by Borrower of the Prepayment Premium calculated on the amount being prepaid in accordance with this Loan Agreement.

 

(e)          Casualty and Condemnation.

 

Notwithstanding any provision of this Loan Agreement to the contrary, no Prepayment Premium shall be payable with respect to any prepayment occurring as a result of the application of any insurance proceeds or amounts received in connection with a Condemnation Action in accordance with this Loan Agreement.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 7
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

(f)          No Effect on Payment Obligations.

 

Unless otherwise expressly provided in this Loan Agreement, any prepayment required by any Loan Document of less than the entire unpaid principal balance of the Mortgage Loan shall not extend or postpone the due date of any subsequent Monthly Debt Service Payments, Monthly Replacement Reserve Deposit, or other payment, or change the amount of any such payments or deposits.

 

(g)          Loss Resulting from Prepayment.

 

In any circumstance in which a Prepayment Premium is due under this Loan Agreement, Borrower acknowledges that:

 

(1)         any prepayment of the unpaid principal balance of the Mortgage Loan, whether voluntary or involuntary, or following the occurrence of an Event of Default by Borrower, will result in Lender’s incurring loss, including reinvestment loss, additional risk, expense, and frustration or impairment of Lender’s ability to meet its commitments to third parties;

 

(2)         it is extremely difficult and impractical to ascertain the extent of such losses, risks, and damages;

 

(3)         the formula for calculating the Prepayment Premium represents a reasonable estimate of the losses, risks, and damages Lender will incur as a result of a prepayment; and

 

(4)         the provisions regarding the Prepayment Premium contained in this Loan Agreement are a material part of the consideration for the Mortgage Loan, and that the terms of the Mortgage Loan are in other respects more favorable to Borrower as a result of Borrower’s voluntary agreement to such prepayment provisions.

 

Article 3 - PERSONAL LIABILITY

 

Section 3.01               Non-Recourse Mortgage Loan; Exceptions.

 

Except as otherwise provided in this Article 3 or in any other Loan Document, none of Borrower, or any director, officer, manager, member, partner, shareholder, trustee, trust beneficiary, or employee of Borrower, shall have personal liability under this Loan Agreement or any other Loan Document for the repayment of the Indebtedness or for the performance of any other obligations of Borrower under the Loan Documents, and Lender’s only recourse for the satisfaction of such Indebtedness and the performance of such obligations shall be Lender’s exercise of its rights and remedies with respect to the Mortgaged Property and any other collateral held by Lender as security for the Indebtedness. This limitation on Borrower’s liability shall not limit or impair Lender’s enforcement of its rights against Guarantor under any Loan Document.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 8
Article 2 01-16 © 2016 Fannie Mae

 

 

 

 

Section 3.02              Personal Liability of Borrower (Exceptions to Non-Recourse Provision).

 

(a)          Personal Liability Based on Lender’s Loss.

 

Borrower shall be personally liable to Lender for the repayment of the portion of the Indebtedness equal to any loss or damage suffered by Lender as a result of, subject to any notice and cure period, if any:

 

(1)         failure to pay as directed by Lender upon demand after an Event of Default (to the extent actually received by Borrower):

 

(A)         all Rents to which Lender is entitled under the Loan Documents; and

 

(B)         the amount of all security deposits then held or thereafter collected by Borrower from tenants and not properly applied pursuant to the applicable Leases;

 

(2)         failure to maintain all insurance policies required by the Loan Documents, except to the extent Lender has the obligation to pay the premiums pursuant to Section 12.03(c);

 

(3)         failure to apply all insurance proceeds received by Borrower or any amounts received by Borrower in connection with a Condemnation Action, as required by the Loan Documents;

 

(4)         failure to comply with any provision of this Loan Agreement or any other Loan Document relating to the delivery of books and records, statements, schedules, and reports;

 

(5)         except to the extent directed otherwise by Lender pursuant to Section 3.02(a)(1), failure to apply Rents to the ordinary and necessary expenses of owning and operating the Mortgaged Property and Debt Service Amounts, as and when each is due and payable, except that Borrower will not be personally liable with respect to Rents that are distributed by Borrower in any calendar year if Borrower has paid all ordinary and necessary expenses of owning and operating the Mortgaged Property and Debt Service Amounts for such calendar year;

 

(6)         waste or abandonment of the Mortgaged Property; or

 

(7)         grossly negligent or reckless unintentional material misrepresentation or omission by Borrower, Guarantor, Key Principal, or any officer, director, partner, manager, member, shareholder, or trustee of Borrower, Guarantor, or Key Principal in connection with on-going financial or other reporting required by the Loan Documents, or any request for action or consent by Lender.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 9
Article 3 01-16 © 2016 Fannie Mae

 

 

 

 

Notwithstanding the foregoing, Borrower shall not have personal liability under clauses (1), (3), or (5) above to the extent that Borrower lacks the legal right to direct the disbursement of the applicable funds due to an involuntary Bankruptcy Event that occurs without the consent, encouragement, or active participation of (A) Borrower, Guarantor, or Key Principal, (B) any Person Controlling Borrower, Guarantor, or Key Principal or (C) any Person Controlled by or under common Control with Borrower, Guarantor, or Key Principal.

 

(b)          Full Personal Liability for Mortgage Loan.

 

Borrower shall be personally liable to Lender for the repayment of all of the Indebtedness, and the Mortgage Loan shall be fully recourse to Borrower, upon the occurrence of any of the following:

 

(1)         failure by Borrower to comply with the single-asset entity requirements of Section 4.02(d) of this Loan Agreement;

 

(2)         a Transfer (other than a conveyance of the Mortgaged Property at a Foreclosure Event pursuant to the Security Instrument and this Loan Agreement) that is not permitted under this Loan Agreement or any other Loan Document;

 

(3)         the occurrence of any Bankruptcy Event (other than an acknowledgement in writing as described in clause (b) of the definition of “Bankruptcy Event”); provided , however , in the event of an involuntary Bankruptcy Event, Borrower shall only be personally liable if such involuntary Bankruptcy Event occurs with the consent, encouragement, or active participation of (A) Borrower, Guarantor, or Key Principal, (B) any Person Controlling Borrower, Guarantor, or Key Principal, or (C) any Person Controlled by or under common Control with Borrower, Guarantor, or Key Principal;

 

(4)         fraud, written material misrepresentation, or material omission by Borrower, Guarantor, Key Principal, or any officer, director, partner, manager, member, shareholder, or trustee of Borrower, Guarantor, or Key Principal in connection with any application for or creation of the Indebtedness; or

 

(5)         fraud, written intentional material misrepresentation, or intentional material omission by Borrower, Guarantor, Key Principal, or any officer, director, partner, manager, member, shareholder, or trustee of Borrower, Guarantor, or Key Principal in connection with on-going financial or other reporting required by the Loan Documents, or any request for action or consent by Lender.

 

Section 3.03               Personal Liability for Indemnity Obligations.

 

Borrower shall be personally and fully liable to Lender for Borrower’s indemnity obligations under Section 13.01(e) of this Loan Agreement, the Environmental Indemnity Agreement, and any other express indemnity obligations provided by Borrower under any Loan Document. Borrower’s liability for such indemnity obligations shall not be limited by the amount of the Indebtedness, the repayment of the Indebtedness, or otherwise, provided that Borrower’s liability for such indemnities shall not include any loss caused by the gross negligence or willful misconduct of Lender as determined by a court of competent jurisdiction pursuant to a final non-appealable court order.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 10
Article 3 01-16 © 2016 Fannie Mae

 

 

 

 

Section 3.04               Lender’s Right to Forego Rights Against Mortgaged Property.

 

To the extent that Borrower has personal liability under this Loan Agreement or any other Loan Document, Lender may exercise its rights against Borrower personally to the fullest extent permitted by applicable law without regard to whether Lender has exercised any rights against the Mortgaged Property, the UCC Collateral, or any other security, or pursued any rights against Guarantor, or pursued any other rights available to Lender under this Loan Agreement, any other Loan Document, or applicable law. For purposes of this Section 3.04 only, the term “Mortgaged Property” shall not include any funds that have been applied by Borrower as required or permitted by this Loan Agreement prior to the occurrence of an Event of Default, or that Borrower was unable to apply as required or permitted by this Loan Agreement because of a Bankruptcy Event. To the fullest extent permitted by applicable law, in any action to enforce Borrower’s personal liability under this Article 3, Borrower waives any right to set off the value of the Mortgaged Property against such personal liability.

 

Article 4 - BORROWER STATUS

 

Section 4.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 4.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Due Organization and Qualification.

 

Borrower is validly existing and qualified to transact business and is in good standing in the state in which it is formed or organized, the Property Jurisdiction, and in each other jurisdiction that qualification or good standing is required according to applicable law to conduct its business with respect to the Mortgaged Property and where the failure to be so qualified or in good standing would adversely affect Borrower’s operation of the Mortgaged Property or the validity, enforceability or the ability of Borrower to perform its obligations under this Loan Agreement or any other Loan Document.

 

(b)          Location.

 

Borrower’s General Business Address is Borrower’s principal place of business and principal office.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 11
Article 3 01-16 © 2016 Fannie Mae

 

 

 

 

(c)          Power and Authority.

 

Borrower has the requisite power and authority:

 

(1)         to own the Mortgaged Property and to carry on its business as now conducted and as contemplated to be conducted in connection with the performance of its obligations under this Loan Agreement and under the other Loan Documents to which it is a party; and

 

(2)         to execute and deliver this Loan Agreement and the other Loan Documents to which it is a party, and to carry out the transactions contemplated by this Loan Agreement and the other Loan Documents to which it is a party.

 

(d)          Due Authorizat i on.

 

The execution, delivery, and performance of this Loan Agreement and the other Loan Documents to which it is a party have been duly authorized by all necessary action and proceedings by or on behalf of Borrower, and no further approvals or filings of any kind, including any approval of or filing with any Governmental Authority, are required by or on behalf of Borrower as a condition to the valid execution, delivery, and performance by Borrower of this Loan Agreement or any of the other Loan Documents to which it is a party, except filings required to perfect and maintain the liens to be granted under the Loan Documents and routine filings to maintain good standing and its existence.

 

(e)          Valid and Binding Obligations.

 

This Loan Agreement and the other Loan Documents to which it is a party have been duly executed and delivered by Borrower and constitute the legal, valid, and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as such enforceability may be limited by applicable Insolvency Laws or by the exercise of discretion by any court.

 

(f)          Effect of Mortgage Loan on Borrower’s Financial Condition.

 

The Mortgage Loan will not render Borrower Insolvent. Borrower has sufficient working capital, including proceeds from the Mortgage Loan, cash flow from the Mortgaged Property, or other sources, not only to adequately maintain the Mortgaged Property, but also to pay all of Borrower’s outstanding debts as they come due, including all Debt Service Amounts, exclusive of Borrower’s ability to refinance or pay in full the Mortgage Loan on the Maturity Date. In connection with the execution and delivery of this Loan Agreement and the other Loan Documents (and the delivery to, or for the benefit of, Lender of any collateral contemplated thereunder), and the incurrence by Borrower of the obligations under this Loan Agreement and the other Loan Documents, Borrower did not receive less than reasonably equivalent value in exchange for the incurrence of the obligations of Borrower under this Loan Agreement and the other Loan Documents.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 12
Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(g)          Economic Sanctions, Anti-Money Laundering, and Anti-Corruption.

 

(1)         None of Borrower, Guarantor, or Key Principal, nor to Borrower’s knowledge, any Person Controlling Borrower, Guarantor, or Key Principal, nor any Person Controlled by Borrower, Guarantor, or Key Principal that also has a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal, is in violation of any applicable civil or criminal laws or regulations, including those requiring internal controls, intended to prohibit, prevent, or regulate money laundering, drug trafficking, terrorism, or corruption, of the United States and the jurisdiction where the Mortgaged Property is located or where the Person resides, is domiciled, or has its principal place of business.

 

(2)         None of Borrower, Guarantor, or Key Principal, nor to Borrower’s knowledge, any Person Controlling Borrower, Guarantor, or Key Principal, nor any Person Controlled by Borrower, Guarantor, or Key Principal that also has a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal, is a Person:

 

(A)         against whom proceedings are pending for any alleged violation of any laws described in Section 4.01(g)(1);

 

(B)         that has been convicted of any violation of, has been subject to civil penalties or Economic Sanctions pursuant to, or had any of its property seized or forfeited under, any laws described in Section 4.01(g)(1); or

 

(C)         with whom any United States Person, any entity organized under the laws of the United States or its constituent states or territories, or any entity, regardless of where organized, having its principal place of business within the United States or any of its territories, is a Sanctioned Person or is otherwise prohibited from transacting business of the type contemplated by this Loan Agreement and the other Loan Documents under any other applicable law.

 

(3)         Borrower, Guarantor, and Key Principal are in compliance with all applicable Economic Sanctions laws and regulations.

 

(h)          Borrower Single Asset Status.

 

Borrower:

 

(1)         does not own or lease any real property, personal property, or assets other than the Mortgaged Property;

 

(2)         does not own, operate, or participate in any business other than the leasing, ownership, management, operation, and maintenance of the Mortgaged Property;

 

(3)         has no material financial obligation under or secured by any indenture, mortgage, deed of trust, deed to secure debt, loan agreement, or other agreement or instrument to which Borrower is a party, or by which Borrower is otherwise bound, or to which the Mortgaged Property is subject or by which it is otherwise encumbered, other than:

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 13
Article 4 01-16 © 2016 Fannie Mae

 

 

 

  

(A)         unsecured trade payables incurred in the ordinary course of the operation of the Mortgaged Property (exclusive of amounts for rehabilitation, restoration, repairs, or replacements of the Mortgaged Property) that (i) are not evidenced by a promissory note, (ii) are payable within sixty (60) days of the date incurred, and (iii) as of the Effective Date, do not exceed, in the aggregate, four percent (4%) of the original principal balance of the Mortgage Loan;

 

(B)         if the Security Instrument grants a lien on a leasehold estate, Borrower’s obligations as lessee under the ground lease creating such leasehold estate; and

 

(C)         obligations under the Loan Documents and obligations secured by the Mortgaged Property to the extent permitted by the Loan Documents;

 

(4)         has maintained its financial statements, accounting records, and other partnership, real estate investment trust, limited liability company, or corporate documents, as the case may be, separate from those of any other Person (unless Borrower’s assets have been included in a consolidated financial statement prepared in accordance with generally accepted accounting principles);

 

(5)         has not commingled its assets or funds with those of any other Person, unless such assets or funds can easily be segregated and identified in the ordinary course of business from those of any other Person;

 

(6)         has been adequately capitalized in light of its contemplated business operations (but nothing contained in this Agreement shall require any party to contribute any capital to Borrower);

 

(7)         has not assumed, guaranteed, or pledged its assets to secure the liabilities or obligations of any other Person (except in connection with the Mortgage Loan or other mortgage loans that have been paid in full or collaterally assigned to Lender, including in connection with any Consolidation, Extension and Modification Agreement or similar instrument), or held out its credit as being available to satisfy the obligations of any other Person;

 

(8)         has not made loans or advances to any other Person; and

 

(9)         has not entered into, and is not a party to, any transaction with any Borrower Affiliate, except in the ordinary course of business and on terms which are no more favorable to any such Borrower Affiliate than would be obtained in a comparable arm’s length transaction with an unrelated third party.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
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Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(i)          No Bankruptcies or Judgments.

 

None of Borrower, Guarantor, or Key Principal, nor to Borrower’s knowledge, any Person Controlling Borrower, Guarantor, or Key Principal, nor any Person Controlled by Borrower, Guarantor, or Key Principal that also has a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal, is currently:

 

(1)         the subject of or a party to any completed or pending bankruptcy, reorganization, including any receivership or other insolvency proceeding;

 

(2)         preparing or intending to be the subject of a Bankruptcy Event; or

 

(3)         the subject of any judgment unsatisfied of record or docketed in any court; or

 

(4)         Insolvent.

 

(j)          No Actions or Litigation.

 

(1)         There are no claims, actions, suits, or proceedings at law or in equity by or before any Governmental Authority now pending against or, to Borrower’s knowledge, threatened against or affecting Borrower or the Mortgaged Property not otherwise covered by insurance (except claims, actions, suits, or proceedings regarding fair housing, anti-discrimination, or equal opportunity, which shall always be disclosed); and

 

(2)         there are no claims, actions, suits, or proceedings at law or in equity by or before any Governmental Authority now pending or, to Borrower’s knowledge, threatened against or affecting Guarantor or Key Principal, which claims, actions, suits, or proceedings, if adversely determined (individually or in the aggregate) reasonably would be expected to materially adversely affect the financial condition or business of Borrower, Guarantor, or Key Principal or the condition, operation, or ownership of the Mortgaged Property (except claims, actions, suits, or proceedings regarding fair housing, anti-discrimination, or equal opportunity, which shall always be deemed material).

 

(k)          Payment of Taxes, Assessments, and Other Charges.

 

Borrower confirms that:

 

(1)         it has filed all federal, state, county, and municipal tax returns and reports required to have been filed by Borrower;

 

(2)         it has paid, before any fine, penalty, interest, lien, or costs may be added thereto, all taxes, governmental charges, and assessments due and payable with respect to such returns and reports;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 15
Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(3)         there is no controversy or objection pending, or to the knowledge of Borrower, threatened in respect of any tax returns of Borrower; and

 

(4)         it has made adequate reserves on its books and records for all taxes that have accrued but which are not yet due and payable.

 

(l)          Not a Foreign Person.

 

Borrower is not a “foreign person” within the meaning of Section 1445(f)(3) of the Internal Revenue Code.

 

(m)          ERISA.

 

Borrower represents and warrants that:

 

(1)         Borrower is not an Employee Benefit Plan;

 

(2)         no asset of Borrower constitutes “plan assets” (within the meaning of Section 3(42) of ERISA and Department of Labor Regulation Section 2510.3-101) of an Employee Benefit Plan;

 

(3)         no asset of Borrower is subject to any laws of any Governmental Authority governing the assets of an Employee Benefit Plan; and

 

(4)         neither Borrower nor any ERISA Affiliate is subject to any obligation or liability with respect to any ERISA Plan.

 

(n)          Default Under Other Obligations.

 

(1)         The execution, delivery, and performance of the obligations imposed on Borrower under this Loan Agreement and the Loan Documents to which it is a party will not cause Borrower to be in default under the provisions of any agreement, judgment, or order to which Borrower is a party or by which Borrower is bound.

 

(2)         None of Borrower, Guarantor, or Key Principal is in default under any obligation to Lender.

 

(o)          Prohibited Person.

 

None of Borrower, Guarantor, or Key Principal is a Prohibited Person, nor to Borrower’s knowledge, is any Person:

 

(1)         Controlling Borrower, Guarantor, or Key Principal a Prohibited Person; or

 

(2)         Controlled by and having a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal a Prohibited Person.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 16
Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(p)          No Contravention.

 

Neither the execution and delivery of this Loan Agreement and the other Loan Documents to which Borrower is a party, nor the fulfillment of or compliance with the terms and conditions of this Loan Agreement and the other Loan Documents to which Borrower is a party, nor the performance of the obligations of Borrower under this Loan Agreement and the other Loan Documents does or will conflict with or result in any breach or violation of, or constitute a default under, any of the terms, conditions, or provisions of Borrower’s organizational documents, or any indenture, existing agreement, or other instrument to which Borrower is a party or to which Borrower, the Mortgaged Property, or other assets of Borrower are subject.

 

(q)          Lockbox Arrangement.

 

Borrower is not party to any type of lockbox agreement or similar cash management arrangement that has not been approved by Lender in writing, and no direct or indirect owner of Borrower is party to any type of lockbox agreement or similar cash management arrangement with respect to Rents or other income from the Mortgaged Property that has not been approved by Lender in writing.

 

Section 4.02               Covenants.

 

(a)          Maintenance of Existence; Organizational Documents.

 

Borrower shall maintain its existence, its entity status, franchises, rights, and privileges under the laws of the state of its formation or organization (as applicable). Borrower shall continue to be duly qualified and in good standing to transact business in each jurisdiction in which qualification or standing is required according to applicable law to conduct its business with respect to the Mortgaged Property and where the failure to do so would adversely affect Borrower’s operation of the Mortgaged Property or the validity, enforceability, or the ability of Borrower to perform its obligations under this Loan Agreement or any other Loan Document. Neither Borrower nor any partner, member, manager, officer, or director of Borrower shall:

 

(1)         make or allow any material change to the organizational documents or organizational structure of Borrower, including changes relating to the Control of Borrower, or

 

(2)         file any action, complaint, petition, or other claim to:

 

(A)         divide, partition, or otherwise compel the sale of the Mortgaged Property, or

 

(B)         otherwise change the Control of Borrower.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 17
Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Economic Sanctions, Anti-Money Laundering, and Anti-Corruption.

 

(1)         Borrower, Guarantor, Key Principal, and any Person Controlling Borrower, Guarantor, or Key Principal, or any Person Controlled by Borrower, Guarantor, or Key Principal that also has a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal shall remain in compliance with any applicable civil or criminal laws or regulations (including those requiring internal controls) intended to prohibit, prevent, or regulate money laundering, drug trafficking, terrorism, or corruption, of the United States and the jurisdiction where the Mortgaged Property is located or where the Person resides, is domiciled, or has its principal place of business.

 

(2)         At no time shall Borrower, Guarantor, or Key Principal, or any Person Controlling Borrower, Guarantor, or Key Principal, or any Person Controlled by Borrower, Guarantor, or Key Principal that also has a direct or indirect ownership interest in Borrower, Guarantor, or Key Principal, be a Person:

 

(A)         against whom proceedings are pending for any alleged violation of any laws described in Section 4.02(b)(1);

 

(B)         that has been convicted of any violation of, has been subject to civil penalties or Economic Sanctions pursuant to, or had any of its property seized or forfeited under, any laws described in Section 4.02(b)(1); or

 

(C)         with whom any United States Person, any entity organized under the laws of the United States or its constituent states or territories, or any entity, regardless of where organized, having its principal place of business within the United States or any of its territories, is a Sanctioned Person or is otherwise prohibited from transacting business of the type contemplated by this Loan Agreement and the other Loan Documents under any other applicable law.

 

(3)         Borrower, Guarantor, and Key Principal shall at all times remain in compliance with any applicable Economic Sanctions laws and regulations.

 

(c)          Payment of Taxes, Assessments, and Other Charges.

 

Borrower shall file all federal, state, county, and municipal tax returns and reports required to be filed by Borrower and shall pay, before any fine, penalty, interest, or cost may be added thereto, all taxes payable with respect to such returns and reports.

 

(d)          Borrower Single Asset Status.

 

Until the Indebtedness is fully paid, Borrower:

 

(1)         shall not acquire or lease any real property, personal property, or assets other than the Mortgaged Property;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
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Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(2)         shall not acquire, own, operate, or participate in any business other than the leasing, ownership, management, operation, and maintenance of the Mortgaged Property;

 

(3)         shall not commingle its assets or funds with those of any other Person, unless such assets or funds can easily be segregated and identified in the ordinary course of business from those of any other Person;

 

(4)         shall maintain its financial statements, accounting records, and other partnership, real estate investment trust, limited liability company, or corporate documents, as the case may be, separate from those of any other Person (unless Borrower’s assets are included in a consolidated financial statement prepared in accordance with generally accepted accounting principles);

 

(5)         shall have no material financial obligation under any indenture, mortgage, deed of trust, deed to secure debt, loan agreement, or other agreement or instrument to which Borrower is a party or by which Borrower is otherwise bound, or to which the Mortgaged Property is subject or by which it is otherwise encumbered, other than:

 

(A)         unsecured trade payables incurred in the ordinary course of the operation of the Mortgaged Property (exclusive of amounts (i) to be paid out of the Replacement Reserve Account or Repairs Escrow Account, or (ii) for rehabilitation, restoration, repairs, or replacements of the Mortgaged Property or otherwise approved by Lender) so long as such trade payables (1) are not evidenced by a promissory note, (2) are payable within sixty (60) days of the date incurred, and (3) as of any date, do not exceed, in the aggregate, two percent (2%) of the original principal balance of the Mortgage Loan; provided, however, that otherwise compliant outstanding trade payables may exceed two percent (2%) up to an aggregate amount of four percent (4%) of the original principal balance of the Mortgage Loan for a period (beginning on or after the Effective Date) not to exceed ninety (90) consecutive days;

 

(B)         if the Security Instrument grants a lien on a leasehold estate, Borrower’s obligations as lessee under the ground lease creating such leasehold estate; and

 

(C)         obligations under the Loan Documents and obligations secured by the Mortgaged Property to the extent permitted by the Loan Documents;

 

(6)         shall not assume, guaranty, or pledge its assets to secure the liabilities or obligations of any other Person (except in connection with the Mortgage Loan or other mortgage loans that have been paid in full or collaterally assigned to Lender, including in connection with any Consolidation, Extension and Modification Agreement or similar instrument) or hold out its credit as being available to satisfy the obligations of any other Person;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 19
Article 4 01-16 © 2016 Fannie Mae

  

 

 

 

(7)         shall not make loans or advances to any other Person; or

 

(8)         shall not enter into, or become a party to, any transaction with any Borrower Affiliate, except in the ordinary course of business and on terms which are no more favorable to any such Borrower Affiliate than would be obtained in a comparable arm’s-length transaction with an unrelated third party.

 

(e)          ERISA.

 

Borrower covenants that:

 

(1)         no asset of Borrower shall constitute “plan assets” (within the meaning of Section 3(42) of ERISA and Department of Labor Regulation Section 2510.3-101) of an Employee Benefit Plan;

 

(2)         no asset of Borrower shall be subject to the laws of any Governmental Authority governing the assets of an Employee Benefit Plan; and

 

(3)         neither Borrower nor any ERISA Affiliate shall incur any obligation or liability with respect to any ERISA Plan.

 

(f)          Notice of Litigation or Insolvency.

 

Borrower shall give immediate written notice to Lender of any claims, actions, suits, or proceedings at law or in equity (including any insolvency, bankruptcy, or receivership proceeding) by or before any Governmental Authority pending or, to Borrower’s knowledge, threatened against or affecting Borrower, Guarantor, Key Principal, or the Mortgaged Property, which claims, actions, suits, or proceedings, if adversely determined reasonably would be expected to materially adversely affect the financial condition or business of Borrower, Guarantor, or Key Principal, or the condition, operation, or ownership of the Mortgaged Property (including any claims, actions, suits, or proceedings regarding fair housing, anti-discrimination, or equal opportunity, which shall always be deemed material).

 

(g)          Payment of Costs, Fees, and Expenses.

 

In addition to the payments specified in this Loan Agreement, Borrower shall pay, on demand, all of Lender’s out-of-pocket fees, costs, charges, or expenses (including the reasonable fees and expenses of attorneys, accountants, and other experts) incurred by Lender in connection with:

 

(1)         any amendment to, or consent, or waiver required under, this Loan Agreement or any of the Loan Documents (whether or not any such amendments, consents, or waivers are entered into);

 

(2)         defending or participating in any litigation arising from actions by third parties and brought against or involving Lender with respect to:

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 20
Article 4 01-16 © 2016 Fannie Mae

 

 

 

 

(A)         the Mortgaged Property;

 

(B)         any event, act, condition, or circumstance in connection with the Mortgaged Property; or

 

(C)         the relationship between or among Lender, Borrower, Key Principal, and Guarantor in connection with this Loan Agreement or any of the transactions contemplated by this Loan Agreement;

 

(3)         the administration or enforcement of, or preservation of rights or remedies under, this Loan Agreement or any other Loan Documents including or in connection with any litigation or appeals, any Foreclosure Event or other disposition of any collateral granted pursuant to the Loan Documents; and

 

(4)         any Bankruptcy Event or Guarantor Bankruptcy Event.

 

(h)          Restrictions on Distributions.

 

No distributions or dividends of any nature with respect to Rents or other income from the Mortgaged Property shall be made to any Person having a direct ownership interest in Borrower if an Event of Default has occurred and is continuing.

 

(i)          Lockbox Arrangement.

 

Borrower shall not enter into any type of lockbox agreement or similar cash management arrangement that has not been approved by Lender in writing, and no direct or indirect owner of Borrower shall enter into any type of lockbox agreement or similar cash management arrangement with respect to Rents or other income from the Mortgaged Property that has not been approved by Lender in writing. Lender’s approval of any such cash management arrangement may be conditioned upon requiring Borrower to enter into a lockbox agreement or similar cash management arrangement with Lender in form and substance acceptable to Lender with regard to Rents and other income from the Mortgaged Property.

 

Article 5 - THE MORTGAGE LOAN

 

Section 5.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 5.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Receipt and Review of Loan Documents.

 

Borrower has received and reviewed this Loan Agreement and all of the other Loan Documents.

 

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(Non-Recourse)
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Article 4 01-16 © 2016 Fannie Mae

  

 

 

 

(b)          No Default.

 

No default exists under any of the Loan Documents.

 

(c)          No Defenses.

 

The Loan Documents are not currently subject to any right of rescission, set-off, counterclaim, or defense by either Borrower or Guarantor, including the defense of usury, and neither Borrower nor Guarantor has asserted any right of rescission, set-off, counterclaim, or defense with respect thereto.

 

(d)          Loan Document Taxes.

 

All mortgage, mortgage recording, stamp, intangible, or any other similar taxes required to be paid by any Person under applicable law currently in effect in connection with the execution, delivery, recordation, filing, registration, perfection, or enforcement of any of the Loan Documents, including the Security Instrument, have been paid or will be paid in the ordinary course of the closing of the Mortgage Loan.

 

Section 5.02               Covenants.

 

(a)          Ratification of Covenants; Estoppels; Certifications.

 

Borrower shall:

 

(1)         promptly notify Lender in writing upon any violation of any covenant set forth in any Loan Document of which Borrower has notice or knowledge; provided , however , any such written notice by Borrower to Lender shall not relieve Borrower of, or result in a waiver of, any obligation under this Loan Agreement or any other Loan Document; and

 

(2)         within ten (10) days after a request from Lender, provide a written statement, signed and acknowledged by Borrower, certifying to Lender or any person designated by Lender, as of the date of such statement:

 

(A)         that the Loan Documents are unmodified and in full force and effect (or, if there have been modifications, that the Loan Documents are in full force and effect as modified and setting forth such modifications);

 

(B)         the unpaid principal balance of the Mortgage Loan;

 

(C)         the date to which interest on the Mortgage Loan has been paid;

 

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(Non-Recourse)
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(D)         that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Loan Agreement or any of the other Loan Documents (or, if Borrower is in default, describing such default in reasonable detail);

 

(E)         whether or not there are then-existing any setoffs or defenses known to Borrower against the enforcement of any right or remedy of Lender under the Loan Documents; and

 

(F)         any additional facts reasonably requested in writing by Lender.

 

(b)          Further Assurances.

 

(1)          Other Documents As Lender May Require.

 

Within ten (10) days after request by Lender, Borrower shall, subject to Section 5.02(d) below, execute, acknowledge, and deliver, at its cost and expense, all further acts, deeds, conveyances, assignments, financing statements, transfers, documents, agreements, assurances, and such other instruments as Lender may reasonably require from time to time in order to better assure, grant, and convey to Lender the rights intended to be granted, now or in the future, to Lender under this Loan Agreement and the other Loan Documents.

 

(2)          Corrective Actions.

 

Within ten (10) days after request by Lender, Borrower shall provide, or cause to be provided, to Lender, at Borrower’s cost and expense, such further documentation or information reasonably deemed necessary or appropriate by Lender in the exercise of its rights under the related commitment letter between Borrower and Lender or to correct patent mistakes in the Loan Documents, the Title Policy, or the funding of the Mortgage Loan.

 

(c)          Sale of Mortgage Loan.

 

Borrower shall, subject to Section 5.02(d) below:

 

(1)         comply with the reasonable requirements of Lender or any Investor of the Mortgage Loan or provide, or cause to be provided, to Lender or any Investor of the Mortgage Loan within ten (10) days of the request, at Borrower’s cost and expense, such further documentation or information as Lender or Investor may reasonably require, in order to enable:

 

(A)         Lender to sell the Mortgage Loan to such Investor;

 

(B)         Lender to obtain a refund of any commitment fee from any such Investor; or

 

(C)         any such Investor to further sell or securitize the Mortgage Loan;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
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(2)         ratify and affirm in writing the representations and warranties set forth in any Loan Document as of such date specified by Lender modified as necessary to reflect changes that have occurred subsequent to the Effective Date;

 

(3)         confirm that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Loan Agreement or any of the other Loan Documents (or, if Borrower is in default, describing such default in reasonable detail); and

 

(4)         execute and deliver to Lender and/or any Investor such other documentation, including any amendments, corrections, deletions, or additions to this Loan Agreement or other Loan Document(s) as is reasonably required by Lender or such Investor.

 

(d)           L imitations on Further Acts of Borrower.

 

Nothing in Section 5.02(b) and Section 5.02(c) shall require Borrower to do any further act that has the effect of:

 

(1)         changing the economic terms of the Mortgage Loan set forth in the related commitment letter between Borrower and Lender;

 

(2)         imposing on Borrower or Guarantor greater personal liability under the Loan Documents than that set forth in the related commitment letter between Borrower and Lender; or

 

(3)         materially changing the rights and obligations of Borrower or Guarantor under the commitment letter.

 

(e)          Financing Statements; Record Searches.

 

(1)         Borrower shall pay all costs and expenses associated with:

 

(A)         any filing or recording of any financing statements, including all continuation statements, termination statements, and amendments or any other filings related to security interests in or liens on collateral; and

 

(B)         any record searches for financing statements that Lender may require.

 

(2)         Borrower hereby authorizes Lender to file any financing statements, continuation statements, termination statements, and amendments (including an “all assets” or “all personal property” collateral description or words of similar import) in form and substance as Lender may require in order to protect and preserve Lender’s lien priority and security interest in the Mortgaged Property (and to the extent Lender has filed any such financing statements, continuation statements, or amendments prior to the Effective Date, such filings by Lender are hereby authorized and ratified by Borrower).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 24
Article 5 01-16 © 2016 Fannie Mae

 

 

 

 

(f)          Loan Document Taxes.

 

Borrower shall pay, on demand, any transfer taxes, documentary taxes, assessments, or charges made by any Governmental Authority in connection with the execution, delivery, recordation, filing, registration, perfection, or enforcement of any of the Loan Documents or the Mortgage Loan.

 

Article 6 - PROPERTY USE, PRESERVATION, AND MAINTENANCE

 

Section 6.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 6.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Compliance with Law; Permits and Licenses.

 

(1)         To Borrower’s knowledge, all improvements to the Land and the use of the Mortgaged Property comply with all applicable laws, ordinances, statutes, rules, and regulations, including all applicable statutes, rules, and regulations pertaining to requirements for equal opportunity, anti-discrimination, fair housing, and rent control, and Borrower has no knowledge of any action or proceeding (or threatened action or proceeding) regarding noncompliance or nonconformity with any of the foregoing.

 

(2)         To Borrower’s knowledge, there is no evidence of any illegal activities on the Mortgaged Property.

 

(3)         To Borrower’s knowledge, no permits or approvals from any Governmental Authority, other than those previously obtained and furnished to Lender, are necessary for the commencement and completion of the Repairs or Replacements, as applicable, other than those permits or approvals which will be timely obtained in the ordinary course of business.

 

(4)         All required permits, licenses, and certificates to comply with all zoning and land use statutes, laws, ordinances, rules, and regulations, and all applicable health, fire, safety, and building codes, and for the lawful use and operation of the Mortgaged Property, including certificates of occupancy, apartment licenses, or the equivalent, have been obtained and are in full force and effect.

 

(5)         No portion of the Mortgaged Property has been purchased with the proceeds of any illegal activity.

 

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(Non-Recourse)
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(b)          Property Characteristics.

 

(1)         The Mortgaged Property contains at least:

 

(A)         the Property Square Footage;

 

(B)         the Total Parking Spaces; and

 

(C)         the Total Residential Units.

 

(2)         No part of the Land is included or assessed under or as part of another tax lot or parcel, and no part of any other property is included or assessed under or as part of the tax lot or parcels for the Land.

 

(c)          Property Ownership.

 

Borrower is sole owner or ground lessee of the Mortgaged Property.

 

(d)          Condition of the Mortgaged Property.

 

(1)         Borrower has not made any claims, and to Borrower’s knowledge, no claims have been made, against any contractor, engineer, architect, or other party with respect to the construction or condition of the Mortgaged Property or the existence of any structural or other material defect therein; and

 

(2)         neither the Land nor the Improvements has sustained any damage other than damage which has been fully repaired, or is fully insured and is being repaired in the ordinary course of business.

 

(e)          Personal Property.

 

Borrower owns (or, to the extent disclosed on the Exceptions to Representations and Warranties Schedule, leases) all of the Personal Property that is material to and is used in connection with the management, ownership, and operation of the Mortgaged Property.

 

Section 6.02               Covenants

 

(a)          Use of Property.

 

From and after the Effective Date, Borrower shall not, unless required by applicable law or Governmental Authority:

 

(1)         change the use of all or any part of the Mortgaged Property;

 

(2)         convert any individual dwelling units or common areas to commercial use, or convert any common area or commercial use to individual dwelling units;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
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Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

(3)         initiate or acquiesce in a change in the zoning classification of the Land;

 

(4)         establish any condominium or cooperative regime with respect to the Mortgaged Property;

 

(5)         subdivide the Land; or

 

(6)         suffer, permit, or initiate the joint assessment of any Mortgaged Property with any other real property constituting a tax lot separate from such Mortgaged Property which could cause the part of the Land to be included or assessed under or as part of another tax lot or parcel, or any part of any other property to be included or assessed under or as part of the tax lot or parcels for the Land.

 

(b)          Property Maintenance.

 

Borrower shall:

 

(1)         pay the expenses of operating, managing, maintaining, and repairing the Mortgaged Property (including insurance premiums, utilities, Repairs, and Replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added;

 

(2)         keep the Mortgaged Property in good repair and marketable condition (ordinary wear and tear excepted) (including the replacement of Personalty and Fixtures with items of equal or better function and quality) and subject to Section 9.03(b)(3) and Section 10.03(d) restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition or condition immediately prior to the damage (if improved after the Effective Date), whether or not any insurance proceeds or amounts received in connection with a Condemnation Action are available to cover any costs of such restoration or repair;

 

(3)         commence all Required Repairs, Additional Lender Repairs, and Additional Lender Replacements as follows:

 

(A)         with respect to any Required Repairs, promptly following the Effective Date (subject to Force Majeure, if applicable), in accordance with the timelines set forth on the Required Repair Schedule, or if no timelines are provided, as soon as practical following the Effective Date;

 

(B)         with respect to Additional Lender Repairs, in the event that Lender determines that Additional Lender Repairs are necessary from time to time or pursuant to Section 6.03(c), promptly following Lender’s written notice of such Additional Lender Repairs (subject to Force Majeure, if applicable), commence any such Additional Lender Repairs in accordance with Lender’s timelines, or if no timelines are provided, as soon as practical;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 27
Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

(C)         with respect to Additional Lender Replacements, in the event that Lender determines that Additional Lender Replacements are necessary from time to time or pursuant to Section 6.03(c), promptly following Lender’s written notice of such Additional Lender Replacements (subject to Force Majeure, if applicable), commence any such Additional Lender Replacements in accordance with Lender’s timelines, or if no timelines are provided, as soon as practical;

 

(4)         make, construct, install, diligently perform, and complete all Replacements and Repairs:

 

(A)         in a good and workmanlike manner as soon as practicable following the commencement thereof, free and clear of any Liens, including mechanics’ or materialmen’s liens and encumbrances (except Permitted Encumbrances and mechanics’ or materialmen’s liens which attach automatically under the laws of any Governmental Authority upon the commencement of any work upon, or delivery of any materials to, the Mortgaged Property and for which Borrower is not delinquent in the payment for any such work or materials);

 

(B)         in accordance with all applicable laws, ordinances, rules, and regulations of any Governmental Authority, including applicable building codes, special use permits, and environmental regulations;

 

(C)         in accordance with all applicable insurance and bonding requirements; and

 

(D)         within all timeframes required by Lender, and Borrower acknowledges that it shall be an Event of Default if Borrower abandons or ceases work on any Repair at any time prior to the completion of the Repairs for a period of longer than twenty (20) days (except when Force Majeure exists and Borrower is diligently pursuing the reinstitution of such work, provided, however, any such abandonment or cessation shall not in any event allow the Repair to be completed after the Completion Period, subject to Force Majeure); and

 

(5)         subject to the terms of Section 6.03(a) provide for professional management of the Mortgaged Property by a residential rental property manager satisfactory to Lender under a contract approved by Lender in writing;

 

(6)         give written notice to Lender of, and, unless otherwise directed in writing by Lender, appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Lender’s security for the Mortgage Loan, or Lender’s rights under this Loan Agreement; and

 

(7)         upon Lender’s written request, submit to Lender any contracts or work orders described in Section 13.02(b).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 28
Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

(c)          Property Preservation.

 

Borrower shall:

 

(1)         not commit waste or abandon or (ordinary wear and tear excepted) permit impairment or deterioration of the Mortgaged Property;

 

(2)         except as otherwise permitted herein in connection with Repairs and Replacements, not remove, demolish, or alter the Mortgaged Property or any part of the Mortgaged Property (or permit any tenant or any other person to do the same) except in connection with the replacement of tangible Personalty or Fixtures (provided such Personalty and Fixtures are replaced with items of equal or better function and quality);

 

(3)         not engage in or knowingly permit, and shall take appropriate measures to prevent and abate or cease and desist, any illegal activities at the Mortgaged Property that could endanger tenants or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Land or otherwise materially impair the lien created by the Security Instrument or Lender’s interest in the Mortgaged Property;

 

(4)         not permit any condition to exist on the Mortgaged Property that would invalidate any part of any insurance coverage required by this Loan Agreement; or

 

(5)         not subject the Mortgaged Property to any voluntary, elective, or non-compulsory tax lien or assessment (or opt in to any voluntary, elective, or non-compulsory special tax district or similar regime).

 

(d)          Property Inspections.

 

Borrower shall:

 

(1)         permit Lender, its agents, representatives, and designees to enter upon and inspect the Mortgaged Property (including in connection with any Replacement or Repair, or to conduct any Environmental Inspection pursuant to the Environmental Indemnity Agreement), and shall cooperate and provide access to all areas of the Mortgaged Property (subject to the rights of tenants under the Leases):

 

(A)         during normal business hours;

 

(B)         at such other reasonable time upon reasonable notice of not less than one (1) Business Day;

 

(C)         at any time when exigent circumstances exist; or

 

(D)         at any time after an Event of Default has occurred and is continuing; and

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 29
Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

(2)         pay for reasonable costs or expenses incurred by Lender or its agents in connection with any such inspections.

 

(e)          Compliance with Laws.

 

Borrower shall:

 

(1)         comply with all laws, ordinances, statutes, rules, and regulations of any Governmental Authority and all recorded lawful covenants and agreements relating to or affecting the Mortgaged Property, including all laws, ordinances, statutes, rules and regulations, and covenants pertaining to construction of improvements on the Land, fair housing, and requirements for equal opportunity, anti-discrimination, and Leases;

 

(2)         procure and maintain all required permits, licenses, charters, registrations, and certificates necessary to comply with all zoning and land use statutes, laws, ordinances, rules and regulations, and all applicable health, fire, safety, and building codes and for the lawful use and operation of the Mortgaged Property, including certificates of occupancy, apartment licenses, or the equivalent;

 

(3)         comply with all applicable laws that pertain to the maintenance and disposition of tenant security deposits;

 

(4)         at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 6.02(e); and

 

(5)         promptly after receipt or notification thereof, provide Lender copies of any building code or zoning violation from any Governmental Authority with respect to the Mortgaged Property.

 

Section 6.03               Mortgage Loan Administration Matters Regarding the Property.

 

(a)          Property Management.

 

From and after the Effective Date, each property manager and each property management agreement must be approved by Lender. If, in connection with the making of the Mortgage Loan, or at any later date, Lender waives in writing the requirement that Borrower enter into a written contract for management of the Mortgaged Property, and Borrower later elects to enter into a written contract or change the management of the Mortgaged Property, such new property manager or the property management agreement must be approved by Lender. As a condition to any approval by Lender, Lender may require that Borrower and such new property manager enter into a collateral assignment of the property management agreement on a form approved by Lender. As of the Effective Date, Lender approves ASPEN 2016 LLC as property manager.

  

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 30
Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Subordination of Fees to Affiliated Property Managers.

 

Any property manager that is a Borrower Affiliate to whom fees are payable for the management of the Mortgaged Property must enter into an assignment of management agreement or other agreement with Lender, in a form approved by Lender, providing for subordination of those fees and such other provisions as Lender may require.

 

(c)          Property Condition Assessment.

 

If, in connection with any inspection of the Mortgaged Property, Lender determines that the condition of the Mortgaged Property has deteriorated (ordinary wear and tear excepted) since the Effective Date, Lender may obtain, at Borrower’s expense, a property condition assessment of the Mortgaged Property. Lender’s right to obtain a property condition assessment pursuant to this Section 6.03(c) shall be in addition to any other rights available to Lender under this Loan Agreement in connection with any such deterioration. Any such inspection or property condition assessment may result in Lender requiring Additional Lender Repairs or Additional Lender Replacements as further described in Section 13.02(a)(9)(B).

 

Article 7 - LEASES AND RENTS

 

Section 7.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 7.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Prior Assignment of Rents.

 

Borrower has not executed any:

 

(1)         prior assignment of Rents (other than an assignment of Rents securing prior indebtedness that has been paid off and discharged or will be paid off and discharged with the proceeds of the Mortgage Loan); or

 

(2)         instrument which would prevent Lender from exercising its rights under this Loan Agreement or the Security Instrument.

 

(b)          Prepaid Rents.

 

Borrower has not accepted, and does not expect to receive prepayment of, any Rents for more than two (2) months prior to the due dates of such Rents.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 31
Article 6 01-16 © 2016 Fannie Mae

 

 

 

 

Section 7.02               Covenants.

 

(a)          Leases.

 

Borrower shall:

 

(1)         comply with and observe Borrower’s obligations under all Leases, including Borrower’s obligations pertaining to the maintenance and disposition of tenant security deposits;

 

(2)         surrender possession of the Mortgaged Property, including all Leases and all security deposits and prepaid Rents, immediately upon appointment of a receiver or Lender’s entry upon and taking of possession and control of the Mortgaged Property, as applicable;

 

(3)         require that all Residential Leases have initial lease terms of not less than six (6) months and not more than twenty-four (24) months (however, if customary in the applicable market for properties comparable to the Mortgaged Property, Residential Leases with terms of less than six (6) months (but in no case less than one (1) month) may be permitted with Lender’s prior written consent); and

 

(4)         promptly provide Lender a copy of any non-Residential Lease at the time such Lease is executed (subject to Lender’s consent rights for Material Commercial Leases in Section 7.02(b)) and, upon Lender’s written request, promptly provide Lender a copy of any Residential Lease then in effect.

 

(b)          Commercial Leases.

 

(1)         With respect to Material Commercial Leases, Borrower shall not:

 

(A)         enter into any Material Commercial Lease except with the prior written consent of Lender; or

 

(B)         modify the terms of, extend, or terminate any Material Commercial Lease (including any Material Commercial Lease in existence on the Effective Date) without the prior written consent of Lender.

 

In the event that Lender’s consent with respect to any Material Commercial Lease or modification or amendment thereto pursuant to the terms of subsection (1) above is required, Borrower shall provide Lender with a written request seeking Lender’s consent together with a copy of the proposed Material Commercial Lease or amendment or modification to the Material Commercial Lease (as applicable) together with all information reasonably necessary in order for Lender to make a determination with respect to such request. Upon receipt of such request and all information requested by Lender in order to make its determination, Lender (1) shall not unreasonably withhold its consent with respect to such request, and (2) shall provide its approval or denial of such request within thirty (30) days of the date upon which all information that has been requested by Lender in order to make its determination has been received.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 32
Article 7 01-16 © 2016 Fannie Mae

 

 

 

 

(2)         With respect to any non-Material Commercial Lease, Borrower shall not:

 

(A)         enter into any non-Material Commercial Lease that materially alters the use and type of operation of the premises subject to the Lease in effect as of the Effective Date or reduces the number or size of residential units at the Mortgaged Property; or

 

(B)         modify the terms of any non-Material Commercial Lease (including any non-Material Commercial Lease in existence on the Effective Date) in any way that materially alters the use and type of operation of the premises subject to such non-Material Commercial Lease in effect as of the Effective Date, reduces the number or size of residential units at the Mortgaged Property, or results in such non-Material Commercial Lease being deemed a Material Commercial Lease.

 

(3)         With respect to any Material Commercial Lease or non-Material Commercial Lease, Borrower shall cause the applicable tenant to provide within ten (10) days after a request by Borrower, a certificate of estoppel, or if not provided by tenant within such ten (10) day period, Borrower shall provide such certificate of estoppel, certifying:

 

(A)         that such Material Commercial Lease or non-Material Commercial Lease is unmodified and in full force and effect (or if there have been modifications, that such Material Commercial Lease or non-Material Commercial Lease is in full force and effect as modified and stating the modifications);

 

(B)         the term of the Lease including any extensions thereto;

 

(C)         the dates to which the Rent and any other charges hereunder have been paid by tenant;

 

(D)         the amount of any security deposit delivered to Borrower as landlord;

 

(E)         whether or not Borrower is in default (or whether any event or condition exists which, with the passage of time, would constitute an event of default) under such Lease;

 

(F)         the address to which notices to tenant should be sent; and

 

(G)         any other information as may be reasonably required by Lender.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 33
Article 7 01-16 © 2016 Fannie Mae

 

 

 

 

(c)          Payment of Rents.

 

Borrower shall:

 

(1)         pay to Lender upon demand all Rents after an Event of Default has occurred and is continuing;

 

(2)         cooperate with Lender’s efforts in connection with the assignment of Rents set forth in the Security Instrument; and

 

(3)         not accept Rent under any Lease (whether a Residential Lease or a non-Residential Lease) for more than two (2) months in advance.

 

(d)          Assignment of Rents.

 

Borrower shall not:

 

(1)         perform any acts nor execute any instrument that would prevent Lender from exercising its rights under the assignment of Rents granted in the Security Instrument or in any other Loan Document; nor

 

(2)         interfere with Lender’s collection of such Rents.

 

(e)          Further Assignments of Leases and Rents.

 

Borrower shall execute and deliver any further assignments of Leases and Rents as Lender may reasonably require.

 

(f)          Options to Purchase by Tenants.

 

No Lease (whether a Residential Lease or a non-Residential Lease) shall contain an option to purchase, right of first refusal to purchase or right of first offer to purchase, except as required by applicable law.

 

Section 7.03               Mortgage Loan Administration Regarding Leases and Rents.

 

(a)          Material Commercial Lease Requirements.

 

Each Material Commercial Lease, including any renewal or extension of any Material Commercial Lease in existence as of the Effective Date, shall provide, directly or pursuant to a subordination, non-disturbance and attornment agreement approved by Lender, that:

 

(1)         the tenant shall, upon written notice from Lender after the occurrence of an Event of Default, pay all Rents payable under such Lease to Lender;

 

(2)         such Lease and all rights of the tenant thereunder are expressly subordinate to the lien of the Security Instrument;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 34
Article 7 01-16 © 2016 Fannie Mae

 

 

 

 

(3)         the tenant shall attorn to Lender and any purchaser at a Foreclosure Event (such attornment to be self-executing and effective upon acquisition of title to the Mortgaged Property by any purchaser at a Foreclosure Event or by Lender in any manner);

 

(4)         the tenant agrees to execute such further evidences of attornment as Lender or any purchaser at a Foreclosure Event may from time to time request; and

 

(5)         such Lease shall not terminate as a result of a Foreclosure Event unless Lender or any other purchaser at such Foreclosure Event affirmatively elects to terminate such Lease pursuant to the terms of the subordination, non-disturbance and attornment agreement.

 

(b)          Residential Lease Form.

 

All Residential Leases entered into from and after the Effective Date shall be on forms approved by Lender.

 

Article 8 - BOOKS AND RECORDS; FINANCIAL REPORTING

 

Section 8.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 8.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Financial Information.

 

All financial statements and data, including statements of cash flow and income and operating expenses, that have been delivered to Lender in respect of the Mortgaged Property:

 

(1)         are true, complete, and correct in all material respects; and

 

(2)          accurately represent the financial condition of the Mortgaged Property as of such date.

 

(b)          No Change in Facts or Circumstances.

 

All information in the Loan Application and in all financial statements, rent rolls, reports, certificates, and other documents submitted in connection with the Loan Application are complete and accurate in all material respects. There has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 35
Article 7 01-16 © 2016 Fannie Mae

 

 

 

 

Section 8.02               Covenants.

 

(a)          Obligation to Maintain Accurate Books and Records.

 

Borrower shall keep and maintain at all times at the Mortgaged Property or the property management agent’s offices or Borrower’s General Business Address and, upon Lender’s written request, shall make available at the Land:

 

(1)         complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the operation of the Mortgaged Property; and

 

(2)         copies of all written contracts, Leases, and other instruments that affect Borrower or the Mortgaged Property.

 

(b)          Items to Furnish to Lender.

 

Borrower shall furnish to Lender the following, certified as true, complete, and accurate, in all material respects, by an individual having authority to bind Borrower (or Guarantor, as applicable), in such form and with such detail as Lender reasonably requires:

 

(1)         within forty-five (45) days after the end of each first, second, and third calendar quarter, a statement of income and expenses for Borrower on a year-to-date basis as of the end of each calendar quarter;

 

(2)         within one hundred twenty (120) days after the end of each calendar year:

 

(A)         for any Borrower and any Guarantor that is an entity, a statement of income and expenses and a statement of cash flows for such calendar year;

 

(B)         for any Borrower and any Guarantor that is an individual, or a trust established for estate-planning purposes, a personal financial statement for such calendar year;

 

(C)         when requested in writing by Lender, balance sheet(s) showing all assets and liabilities of Borrower and Guarantor and a statement of all contingent liabilities as of the end of such calendar year;

 

(D)         if an energy consumption metric for the Mortgaged Property is required to be reported to any Governmental Authority, the Fannie Mae Energy Performance Metrics report, as generated by ENERGY STAR ® Portfolio Manager, for the Mortgaged Property for such calendar year, which report must include the ENERGY STAR score, the Source Energy Use Intensity (EUI), the month and year ending period for such ENERGY STAR score and such Source Energy Use Intensity, and the ENERGY STAR Portfolio Manager Property Identification Number; provided that, if the Governmental Authority does not require the use of ENERGY STAR Portfolio Manager for the reporting of the energy consumption metric and Borrower does not use ENERGY STAR Portfolio Manager, then Borrower shall furnish to Lender the Source Energy Use Intensity for the Mortgaged Property for such calendar year;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 36
Article 8 01-16 © 2016 Fannie Mae

 

 

 

 

(E)         a written certification ratifying and affirming that:

 

(i)          Borrower has taken no action in violation of Section 4.02(d) regarding its single asset status;

 

(ii)         Borrower has received no notice of any building code violation, or if Borrower has received such notice, evidence of remediation;

 

(iii)        Borrower has made no application for rezoning nor received any notice that the Mortgaged Property has been or is being rezoned; and

 

(iv)        Borrower has taken no action and has no knowledge of any action that would violate the provisions of Section 11.02(b)(1)(F) regarding liens encumbering the Mortgaged Property;

 

(F)         an accounting of all security deposits held pursuant to all Leases, including the name of the institution (if any) and the names and identification numbers of the accounts (if any) in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for Lender to access information regarding such accounts; and

 

(G)         written confirmation of:

 

(i)          any changes occurring since the Effective Date (or that no such changes have occurred since the Effective Date) in (1) the direct owners of Borrower, (2) the indirect owners (and any non-member managers) of Borrower that Control Borrower (excluding any Publicly-Held Corporations or Publicly-Held Trusts), or (3) the indirect owners of Borrower that hold twenty-five percent (25%) or more of the ownership interests in Borrower (excluding any Publicly-Held Corporations or Publicly-Held Trusts), and their respective interests;

 

(ii)         the names of all officers and directors of (1) any Borrower which is a corporation, (2) any corporation which is a general partner of any Borrower which is a partnership, or (3) any corporation which is the managing member or non-member manager of any Borrower which is a limited liability company; and

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 37
Article 8 01-16 © 2016 Fannie Mae

  

 

 

 

(iii)        the names of all managers who are not members of (1) any Borrower which is a limited liability company, (2) any limited liability company which is a general partner of any Borrower which is a partnership, or (3) any limited liability company which is the managing member or non-member manager of any Borrower which is a limited liability company; and

 

(H)         if not already provided pursuant to Section 8.02(b)(2)(A) above, a statement of income and expenses for Borrower’s operation of the Mortgaged Property on a year-to-date basis as of the end of each calendar year;

 

(3)         within forty-five (45) days after the end of each first, second, and third calendar quarter and within one hundred twenty (120) days after the end of each calendar year, and at any other time upon Lender’s written request, a rent schedule for the Mortgaged Property showing the name of each tenant and for each tenant, the space occupied, the lease expiration date, the rent payable for the current month, the date through which rent has been paid, and any related information requested by Lender; and

 

(4)         upon Lender’s written request (but, absent an Event of Default, no more frequently than once in any six (6) month period):

 

(A)         any item described in Section 8.02(b)(1) or Section 8.02(b)(2) for Borrower, certified as true, complete, and accurate by an individual having authority to bind Borrower;

 

(B)         a property management or leasing report for the Mortgaged Property, showing the number of rental applications received from tenants or prospective tenants and deposits received from tenants or prospective tenants, and any other information requested by Lender;

 

(C)         a statement of income and expenses for Borrower’s operation of the Mortgaged Property on a year-to-date basis as of the end of each month for such period as requested by Lender, which statement shall be delivered within thirty (30) days after the end of such month requested by Lender;

 

(D)         a statement of real estate owned directly or indirectly by Borrower and Guarantor for such period as requested by Lender, which statement(s) shall be delivered within thirty (30) days after the end of such month requested by Lender; and

 

(E)         a statement that identifies:

 

(i)          the direct owners of Borrower and their respective interests;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 38
Article 8 01-16 © 2016 Fannie Mae

 

 

 

 

(ii)         the indirect owners (and any non-member managers) of Borrower that Control Borrower (excluding any Publicly-Held Corporations or Publicly-Held Trusts) and their respective interests; and

 

(iii)        the indirect owners of Borrower that hold twenty-five percent (25%) or more of the ownership interests in Borrower (excluding any Publicly-Held Corporations or Publicly-Held Trusts) and their respective interests.

 

(c)          Audited Financials.

 

In the event Borrower or Guarantor receives or obtains any audited financial statements and such financial statements are required to be delivered to Lender under Section 8.02(b), Borrower shall deliver or cause to be delivered to Lender the audited versions of such financial statements.

 

(d)          Delivery of Books and Records.

 

If an Event of Default has occurred and is continuing, Borrower shall deliver to Lender, upon written demand, all books and records relating to the Mortgaged Property or its operation.

 

Section 8.03               Mortgage Loan Administration Matters Regarding Books and Records and Financial Reporting.

 

(a)          Lender’s Right to Obtain Audited Books and Records.

 

Lender may require that Borrower’s or Guarantor’s books and records be audited, at Borrower’s expense, by an independent certified public accountant selected by Lender in order to produce or audit any statements, schedules, and reports of Borrower, Guarantor, or the Mortgaged Property required by Section 8.02, if:

 

(1)         Borrower or Guarantor fails to provide in a timely manner the statements, schedules, and reports required by Section 8.02 and, thereafter, Borrower or Guarantor fails to provide such statements, schedules, and reports within the cure period provided in Section 14.01(c);

 

(2)         the statements, schedules, and reports submitted to Lender pursuant to Section 8.02 are not full, complete, and accurate in all material respects as determined by Lender and, thereafter, Borrower or Guarantor fails to provide such statements, schedules, and reports within the cure period provided in Section 14.01(c); or

 

(3)         an Event of Default has occurred and is continuing.

 

Notwithstanding the foregoing, the ability of Lender to require the delivery of audited financial statements shall be limited to not more than once per Borrower’s fiscal year so long as no Event of Default has occurred during such fiscal year (or any event which, with the giving of written notice or the passage of time, or both, would constitute an Event of Default has occurred and is continuing). Borrower shall cooperate with Lender in order to satisfy the provisions of this Section 8.03(a). All related costs and expenses of Lender shall become immediately due and payable by Borrower within ten (10) Business Days after demand therefor.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 39
Article 8 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Credit Reports; Credit Score.

 

No more often than once in any twelve (12) month period, Lender is authorized to obtain a credit report (if applicable) on Borrower or Guarantor, the cost of which report shall be paid by Borrower. Lender is authorized to obtain a Credit Score (if applicable) for Borrower or Guarantor at any time at Lender’s expense.

 

Article 9 - INSURANCE

 

Section 9.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 9.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Compliance with Insurance Requirements.

 

Borrower is in compliance with Lender’s insurance requirements (or has obtained a written waiver from Lender for any non-compliant coverage) and has timely paid all premiums on all required insurance policies.

 

(b)          Property Condition.

 

(1)         The Mortgaged Property has not been damaged by fire, water, wind, or other cause of loss; or

 

(2)         if previously damaged, any previous damage to the Mortgaged Property has been repaired and the Mortgaged Property has been fully restored.

 

Section 9.02               Covenants.

 

(a)          Insurance Requirements.

 

(1)         As required by Lender and applicable law, and as may be modified from time to time, Borrower shall:

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 40
Article 8 01-16 © 2016 Fannie Mae

 

 

 

 

(A)         keep the Improvements insured at all times against any hazards, which insurance shall include coverage against loss by fire and all other perils insured by the “special causes of loss” coverage form, general boiler and machinery coverage, business income coverage, and flood (if any of the Improvements are located in an area identified by the Federal Emergency Management Agency (or any successor) as an area having special flood hazards and to the extent flood insurance is available in that area), and may include sinkhole insurance, mine subsidence insurance, earthquake insurance, terrorism insurance, windstorm insurance and, if the Mortgaged Property does not conform to applicable building, zoning, or land use laws, ordinance and law coverage;

 

(B)         maintain at all times commercial general liability insurance, workmen’s compensation insurance, and such other liability, errors and omissions, and fidelity insurance coverage; and

 

(C)         maintain builder’s risk and public liability insurance, and other insurance in connection with completing the Repairs or Replacements, as applicable.

 

(b)          Delivery of Policies, Renewals, Notices, and Proceeds.

 

Borrower shall:

 

(1)         cause all insurance policies (including any policies not otherwise required by Lender) which can be endorsed with standard non-contributing, non-reporting mortgagee clauses making loss payable to Lender (or Lender’s assigns) to be so endorsed;

 

(2)         promptly deliver to Lender a copy of all renewal and other notices received by Borrower with respect to the policies and all receipts for paid premiums;

 

(3)         deliver evidence, in form and content acceptable to Lender, that each required insurance policy under this Article 9 has been renewed not less than fifteen (15) days prior to the applicable expiration date, and (if such evidence is other than an original or duplicate original of a renewal policy) deliver the original or duplicate original of each renewal policy (or such other evidence of insurance as may be required by or acceptable to Lender) in form and content acceptable to Lender within ninety (90) days after the applicable expiration date of the original insurance policy;

 

(4)         provide immediate written notice to the insurance company and to Lender of any event of loss;

 

(5)         execute such further evidence of assignment of any insurance proceeds as Lender may require; and

 

(6)         provide immediate written notice to Lender of Borrower’s receipt of any insurance proceeds under any insurance policy required by Section 9.02(a)(1) above and, if requested by Lender, deliver to Lender all of such proceeds received by Borrower to be applied by Lender in accordance with this Article 9.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 41
Article 9 01-16 © 2016 Fannie Mae

 

 

 

 

Section 9.03               Mortgage Loan Administration Matters Regarding Insurance

 

(a)          Lender’s Ongoing Insurance Requirements.

 

Borrower acknowledges that Lender’s insurance requirements may change from time to time. All insurance policies and renewals of insurance policies required by this Loan Agreement shall be:

 

(1)         in the form and with the terms required by Lender;

 

(2)         in such amounts, with such maximum deductibles and for such periods required by Lender; and

 

(3)         issued by insurance companies satisfactory to Lender.

 

Borrower acknowledges that any failure OF BORROWER to comply with THE REQUIREMENTS SET FORTH IN Section 9.02 (a) or Section 9.02 (b) (3) above shall permit lender to purchase the applicable insurance at Borrower’s cost. Such insurance may, but need not, protect Borrower’s interests. The coverage that Lender purchases may not pay any claim that Borrower makes or any claim that is made against Borrower in connection with the Mortgaged Property. If Lender purchases insurance for the Mortgaged Property as permitted hereunder, Borrower will be responsible for the costs of that insurance, including interest at the Default Rate and any other charges Lender may impose in connection with the placement of the insurance until the effective date of the cancellation or the expiration of the insurance. The costs of the insurance shall be added to Borrower’s total outstanding balance or obligation and shall constitute additional Indebtedness. The costs of the insurance may be more than the cost of insurance Borrower may be able to obtain on its own. Borrower may later cancel any insurance purchased by Lender, but only after providing evidence that Borrower has obtained insurance as required by this Loan Agreement and the other Loan Documents.

 

(b)          Application of Proceeds on Event of Loss.

 

(1)         Upon an event of loss, Lender may, at Lender’s option:

 

(A)         hold such proceeds to be applied to reimburse Borrower for the cost of Restoration (in accordance with Lender’s then-current policies relating to the restoration of casualty damage on similar multifamily residential properties); or

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 42
Article 9 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         apply such proceeds to the payment of the Indebtedness, whether or not then due; provided , however , Lender shall not apply insurance proceeds to the payment of the Indebtedness and shall permit Restoration pursuant to Section 9.03(b)(1)(A) if all of the following conditions are met:

 

(i)          no Event of Default has occurred and is continuing (or any event which, with the giving of written notice or the passage of time, or both, would constitute an Event of Default has occurred and is continuing);

 

(ii)         Lender determines that the combination of insurance proceeds and amounts provided by Borrower will be sufficient funds to complete the Restoration;

 

(iii)        Lender determines that the net operating income generated by the Mortgaged Property after completion of the Restoration will be sufficient to support a debt service coverage ratio not less than the debt service coverage ratio immediately prior to the event of loss, but in no event less than 1.0x (the debt service coverage ratio shall be calculated on a thirty (30) year amortizing basis (if applicable, on a proforma basis approved by Lender) in all events and shall include all operating costs and other expenses, Imposition Deposits, deposits to Collateral Accounts, and Mortgage Loan repayment obligations);

 

(iv)        Lender determines that the Restoration will be completed before the earlier of (1) one year before the stated Maturity Date, or (2) one year after the date of the loss or casualty; and

 

(v)         Borrower provides Lender, upon written request, evidence of the availability during and after the Restoration of the insurance required to be maintained by Borrower pursuant to this Loan Agreement.

 

After the completion of Restoration in accordance with the above requirements, as determined by Lender, the balance, if any, of such proceeds shall be returned to Borrower.

 

(2)         Notwithstanding the foregoing, if any loss is estimated to be in an amount equal to or less than $50,000, Lender shall not exercise its rights and remedies as power-of-attorney herein and shall allow Borrower to make proof of loss, to adjust and compromise any claims under policies of property damage insurance, to appear in and prosecute any action arising from such policies of property damage insurance, and to collect and receive the proceeds of property damage insurance; provided that each of the following conditions shall be satisfied:

 

(A)         Borrower shall immediately notify Lender of the casualty giving rise to the claim;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 43
Article 9 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         no Event of Default has occurred and is continuing (or any event which, with the giving of written notice or the passage of time, or both, would constitute an Event of Default has occurred and is continuing);

 

(C)         the Restoration will be completed before the earlier of (i) one year before the stated Maturity Date, or (ii) one year after the date of the loss or casualty;

 

(D)         Lender determines that the combination of insurance proceeds and amounts provided by Borrower will be sufficient funds to complete the Restoration;

 

(E)         all proceeds of property damage insurance shall be issued in the form of joint checks to Borrower and Lender;

 

(F)         all proceeds of property damage insurance shall be applied to the Restoration;

 

(G)         Borrower shall deliver to Lender evidence satisfactory to Lender of completion of the Restoration and obtainment of all lien releases;

 

(H)         Borrower shall have complied to Lender’s satisfaction with the foregoing requirements on any prior claims subject to this provision, if any; and

 

(I)         Lender shall have the right to inspect the Mortgaged Property (subject to the rights of tenants under the Leases).

 

(3)         If Lender elects to apply insurance proceeds to the Indebtedness in accordance with the terms of this Loan Agreement, Borrower shall not be obligated to restore or repair the Mortgaged Property. Rather, Borrower shall restrict access to the damaged portion of the Mortgaged Property and, at its expense and regardless of whether such costs are covered by insurance, clean up any debris resulting from the casualty event, and, if required or otherwise permitted by Lender, demolish or raze any remaining part of the damaged Mortgaged Property to the extent necessary to keep and maintain the Mortgaged Property in a safe, habitable, and marketable condition. Nothing in this Section 9.03(b) shall affect any of Lender’s remedial rights against Borrower in connection with a breach by Borrower of any of its obligations under this Loan Agreement or under any Loan Document, including any failure to timely pay Monthly Debt Service Payments or maintain the insurance coverage(s) required by this Loan Agreement.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 44
Article 9 01-16 © 2016 Fannie Mae

 

 

 

 

(c)          Payment Obligations Unaffected.

 

The application of any insurance proceeds to the Indebtedness shall not extend or postpone the Maturity Date, or the due date or the full payment of any Monthly Debt Service Payment, Monthly Replacement Reserve Deposit, or any other installments referred to in this Loan Agreement or in any other Loan Document. Notwithstanding the foregoing, if Lender applies insurance proceeds to the Indebtedness in connection with a casualty of less than the entire Mortgaged Property, and after such application of proceeds the debt service coverage ratio (as determined by Lender) is less than 1.25x based on the then-applicable Monthly Debt Service Payment and the anticipated on-going net operating income of the Mortgaged Property after such casualty event, then Lender may, at its discretion, permit an adjustment to the Monthly Debt Service Payments that become due and owing thereafter, based on Lender’s then-current underwriting requirements. In no event shall the preceding sentence obligate Lender to make any adjustment to the Monthly Debt Service Payments.

 

(d)          Foreclosure Sale.

 

If the Mortgaged Property is transferred pursuant to a Foreclosure Event or Lender otherwise acquires title to the Mortgaged Property, Borrower acknowledges that Lender shall automatically succeed to all rights of Borrower in and to any insurance policies and unearned insurance premiums applicable to the Mortgaged Property and in and to the proceeds resulting from any damage to the Mortgaged Property prior to such Foreclosure Event or such acquisition.

 

(e)          Appointment of Lender as Attorney-In-Fact.

 

Borrower hereby authorizes and appoints Lender as attorney-in-fact pursuant to Section 14.03(c).

 

Article 10 - CONDEMNATION

 

Section 10.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 10.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Prior Condemnation Action.

 

No part of the Mortgaged Property has been taken in connection with a Condemnation Action.

 

(b)          Pending Condemnation Actions.

 

No Condemnation Action is pending nor, to Borrower’s knowledge, is threatened for the partial or total condemnation or taking of the Mortgaged Property.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 45
Article 9 01-16 © 2016 Fannie Mae

 

 

 

 

Section 10.02               Covenants.

 

(a)          Notice of Condemnation.

 

Borrower shall:

 

(1)         promptly notify Lender of any Condemnation Action of which Borrower has knowledge;

 

(2)         appear in and prosecute or defend, at its own cost and expense, any action or proceeding relating to any Condemnation Action, including any defense of Lender’s interest in the Mortgaged Property tendered to Borrower by Lender, unless otherwise directed by Lender in writing; and

 

(3)         execute such further evidence of assignment of any condemnation award in connection with a Condemnation Action as Lender may require.

 

(b)          Condemnation Proceeds.

 

Borrower shall pay to Lender all awards or proceeds of a Condemnation Action promptly upon receipt.

 

Section 10.03               Mortgage Loan Administration Matters Regarding Condemnation.

 

(a)          Application of Condemnation Awards.

 

Lender may apply any awards or proceeds of a Condemnation Action, after the deduction of Lender’s expenses incurred in the collection of such amounts, to:

 

(1)         the restoration or repair of the Mortgaged Property, if applicable;

 

(2)         the payment of the Indebtedness, with the balance, if any, paid to Borrower; or

 

(3)         Borrower.

 

(b)          Payment Obl i gations Unaffected.

 

The application of any awards or proceeds of a Condemnation Action to the Indebtedness shall not extend or postpone the Maturity Date, or the due date or the full payment of any Monthly Debt Service Payment, Monthly Replacement Reserve Deposit, or any other installments referred to in this Loan Agreement or in any other Loan Document.

 

(c)          Appointment of Lender as Attorney-In-Fact.

 

Borrower hereby authorizes and appoints Lender as attorney-in-fact pursuant to Section 14.03(c).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 46
Article 10 01-16 © 2016 Fannie Mae

 

 

 

 

(d)           Preservation of Mortgaged Property.

 

If a Condemnation Action results in or from damage to the Mortgaged Property and Lender elects to apply the proceeds or awards from such Condemnation Action to the Indebtedness in accordance with the terms of this Loan Agreement, Borrower shall not be obligated to restore or repair the Mortgaged Property. Rather, Borrower shall restrict access to any portion of the Mortgaged Property which has been damaged or destroyed in connection with such Condemnation Action and, at Borrower’s expense and regardless of whether such costs are covered by insurance, clean up any debris resulting in or from the Condemnation Action, and, if required by any Governmental Authority or otherwise permitted by Lender, demolish or raze any remaining part of the damaged Mortgaged Property to the extent necessary to keep and maintain the Mortgaged Property in a safe, habitable, and marketable condition. Nothing in this Section 10.03(d) shall affect any of Lender’s remedial rights against Borrower in connection with a breach by Borrower of any of its obligations under this Loan Agreement or under any Loan Document, including any failure to timely pay Monthly Debt Service Payments or maintain the insurance coverage(s) required by this Loan Agreement.

 

Article 11 - LIENS, TRANSFERS, AND ASSUMPTIONS

 

Section 11.01               Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 11.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          No Labor or Materialmen’s Claims.

 

All parties furnishing labor and materials on behalf of Borrower have been paid in full. There are no mechanics’ or materialmen’s liens (whether filed or unfiled) outstanding for work, labor, or materials (and no claims or work outstanding that under applicable law could give rise to any such mechanics’ or materialmen’s liens) affecting the Mortgaged Property, whether prior to, equal with, or subordinate to the lien of the Security Instrument.

 

(b)          No Other Interests.

 

No Person:

 

(1)         other than Borrower has any possessory ownership or interest in the Mortgaged Property or right to occupy the same except under and pursuant to the provisions of existing Leases, the material terms of all such Leases having been previously disclosed in writing to Lender; nor

 

(2)         has an option, right of first refusal, or right of first offer (except as required by applicable law) to purchase the Mortgaged Property, or any interest in the Mortgaged Property.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 47
Article 10 01-16 © 2016 Fannie Mae

 

 

 

 

Section 11.02               Covenants.

 

(a)          Liens; Encumbrances.

 

Borrower shall not permit the grant, creation, or existence of any Lien, whether voluntary, involuntary, or by operation of law, on all or any portion of the Mortgaged Property (including any voluntary, elective, or non-compulsory tax lien or assessment pursuant to a voluntary, elective, or non-compulsory special tax district or similar regime) other than:

 

(1)         Permitted Encumbrances;

 

(2)         the creation of:

 

(A)         any tax lien, municipal lien, utility lien, mechanics’ lien, materialmen’s lien, or judgment lien against the Mortgaged Property if bonded off, released of record, or otherwise remedied to Lender’s satisfaction within sixty (60) days after the earlier of the date Borrower has actual notice or constructive notice of the existence of such lien; or

 

(B)         any mechanics’ or materialmen’s liens which attach automatically under the laws of any Governmental Authority upon the commencement of any work upon, or delivery of any materials to, the Mortgaged Property and for which Borrower is not delinquent in the payment for any such work or materials; and

 

(3)         the lien created by the Loan Documents.

 

(b)          Transfers.

 

(1)          Mortgaged Property.

 

Borrower shall not Transfer, or cause or permit a Transfer of, all or any part of the Mortgaged Property (including any interest in the Mortgaged Property) other than:

 

(A)         a Transfer to which Lender has consented in writing;

 

(B)         Leases permitted pursuant to the Loan Documents;

 

(C)         [reserved];

 

(D)         a Transfer of obsolete or worn out Personalty or Fixtures that are contemporaneously replaced by items of equal or better function and quality which are free of Liens (other than those created by the Loan Documents);

 

(E)         the grant of an easement, servitude, or restrictive covenant to which Lender has consented, and Borrower has paid to Lender, upon demand, all costs and expenses incurred by Lender in connection with reviewing Borrower’s request;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 48
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(F)         a lien permitted pursuant to Section 11.02(a) of this Loan Agreement; or

 

(G)         the conveyance of the Mortgaged Property following a Foreclosure Event.

 

(2)          Interests in Borrower, Key Principal, or Guarantor.

 

Other than a Transfer to which Lender has consented in writing, Borrower shall not Transfer, or cause or permit to be Transferred:

 

(A)         any direct or indirect ownership interest in Borrower, Key Principal, or Guarantor (if applicable) if such Transfer would cause a change in Control;

 

(B)         a direct or indirect Restricted Ownership Interest in Borrower, Key Principal, or Guarantor (if applicable);

 

(C)         fifty percent (50%) or more of Key Principal’s or Guarantor’s direct or indirect ownership interests in Borrower that existed on the Effective Date (individually or on an aggregate basis);

 

(D)         the economic benefits or rights to cash flows attributable to any ownership interests in Borrower, Key Principal, or Guarantor (if applicable) separate from the Transfer of the underlying ownership interests if the Transfer of the underlying ownership interest is prohibited by this Loan Agreement; or

 

(E)         a Transfer to a new key principal or new guarantor (if such new key principal or guarantor is an entity), which entity has an organizational existence termination date that ends before the Maturity Date.

 

Notwithstanding the foregoing, if a Publicly-Held Corporation or a Publicly-Held Trust Controls Borrower, Key Principal, or Guarantor, or owns a direct or indirect Restricted Ownership Interest in Borrower, Key Principal, or Guarantor, a Transfer of any ownership interests in such Publicly-Held Corporation or Publicly-Held Trust shall not be prohibited under this Loan Agreement as long as (i) such Transfer does not result in a conversion of such Publicly-Held Corporation or Publicly-Held Trust to a privately held entity, and (ii) Borrower provides written notice to Lender not later than thirty (30) days thereafter of any such Transfer that results in any Person owning ten percent (10%) or more of the ownership interests in such Publicly-Held Corporation or Publicly-Held Trust.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 49
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(3)          Name Change or Entity Conversion.

 

Lender shall consent to Borrower changing its name, changing its jurisdiction of organization, or converting from one type of legal entity into another type of legal entity for any lawful purpose, provided that:

 

(A)         Lender receives written notice at least thirty (30) days prior to such change or conversion, which notice shall include organizational charts that reflect the structure of Borrower both prior to and subsequent to such name change or entity conversion;

 

(B)         such Transfer is not otherwise prohibited under the provisions of Section 11.02(b)(2);

 

(C)         Borrower executes an amendment to this Loan Agreement and any other Loan Documents required by Lender documenting the name change or entity conversion;

 

(D)         Borrower agrees and acknowledges, at Borrower’s expense, that (i) Borrower will execute and record in the land records any instrument required by the Property Jurisdiction to be recorded to evidence such name change or entity conversion (or provide Lender with written confirmation from the title company (via electronic mail or letter) that no such instrument is required), (ii) Borrower will execute any additional documents required by Lender, including the amendment to this Loan Agreement, and allow such documents to be recorded or filed in the land records of the Property Jurisdiction, (iii) Lender will obtain a “date down” endorsement to the Lender’s Title Policy (or obtain a new Title Policy if a “date down” endorsement is not available in the Property Jurisdiction), evidencing title to the Mortgaged Property being in the name of the successor entity and the Lien of the Security Instrument against the Mortgaged Property, and (iv) Lender will file any required UCC-3 financing statement and make any other filing deemed necessary to maintain the priority of its Liens on the Mortgaged Property; and

 

(E)         no later than ten (10) days subsequent to such name change or entity conversion, Borrower shall provide Lender (i) the documentation filed with the appropriate office in Borrower’s state of formation evidencing such name change or entity conversion, (ii) copies of the organizational documents of Borrower, including any amendments, filed with the appropriate office in Borrower’s state of formation reflecting the post-conversion Borrower name, form of organization, and structure, and (iii) if available, new certificates of good standing or valid formation for Borrower.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 50
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(4)          No Delaware Statutory Trust or Series LLC Conversion.

 

Notwithstanding any provisions herein to the contrary, no Borrower, Guarantor, or Key Principal shall convert to a Delaware Statutory Trust or a series limited liability company.

 

(c)          No Other Indebtedness.

 

Other than the Mortgage Loan, Borrower shall not incur or be obligated at any time with respect to any loan or other indebtedness (except trade payables as otherwise permitted in this Loan Agreement), including any indebtedness secured by a Lien on, or the cash flows from, the Mortgaged Property.

 

(d)          No Mezzanine Financing or Preferred Equity.

 

Neither Borrower nor any direct or indirect owner of Borrower shall: (1) incur any Mezzanine Debt other than Permitted Mezzanine Debt; (2) issue any Preferred Equity other than Permitted Preferred Equity; or (3) incur any similar indebtedness or issue any similar equity.

 

Section 11.03               Mortgage Loan Administration Matters Regarding Liens, Transfers, and Assumptions.

 

(a)          Assumption of Mortgage Loan.

 

Lender shall consent to a Transfer of the Mortgaged Property to and an assumption of the Mortgage Loan by a new borrower if each of the following conditions is satisfied prior to the Transfer:

 

(1)         Borrower has submitted to Lender all information required by Lender to make the determination required by this Section 11.03(a);

 

(2)         no Event of Default has occurred and is continuing, and no event which, with the giving of written notice or the passage of time, or both, would constitute an Event of Default has occurred and is continuing;

 

(3)         Lender determines that:

 

(A)         the proposed new borrower, new key principal, and any other new guarantor fully satisfy all of Lender’s then-applicable borrower, key principal, or guarantor eligibility, credit, management, and other loan underwriting standards, which shall include an analysis of (i) the previous relationships between Lender and the proposed new borrower, new key principal, new guarantor, and any Person in Control of them, and the organization of the new borrower, new key principal, and new guarantor (if applicable), and (ii) the operating and financial performance of the Mortgaged Property, including physical condition and occupancy;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 51
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         none of the proposed new borrower, new key principal, and any new guarantor, or any owners of the proposed new borrower, new key principal, and any new guarantor, are a Prohibited Person; and

 

(C)         none of the proposed new borrower, new key principal, and any new guarantor (if any of such are entities) shall have an organizational existence termination date that ends before the Maturity Date;

 

(4)         [reserved];

 

(5)         the proposed new borrower has:

 

(A)         executed an assumption agreement acceptable to Lender that, among other things, requires the proposed new borrower to assume and perform all obligations of Borrower (or any other transferor), and that may require that the new borrower comply with any provisions of any Loan Document that previously may have been waived by Lender for Borrower, subject to the terms of Section 11.03(g);

 

(B)         if required by Lender, delivered to the Title Company for filing and/or recording in all applicable jurisdictions, all applicable Loan Documents including the assumption agreement to correctly evidence the assumption and the confirmation, continuation, perfection, and priority of the Liens created hereunder and under the other Loan Documents; and

 

(C)         delivered to Lender a “date-down” endorsement to the Title Policy acceptable to Lender (or a new title insurance policy if a “date-down” endorsement is not available);

 

(6)         one or more individuals or entities acceptable to Lender as new guarantors have executed and delivered to Lender:

 

(A)         an assumption agreement acceptable to Lender that requires the new guarantor to assume and perform all obligations of Guarantor under any Guaranty given in connection with the Mortgage Loan; or

 

(B)         a substitute Non-Recourse Guaranty and other substitute guaranty in a form acceptable to Lender;

 

(7)         Lender has reviewed and approved the Transfer documents; and

 

(8)         Lender has received the fees described in Section 11.03(g).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 52
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Transfers to Key Principal-Owned Affiliates or Guarantor-Owned Affiliates.

 

(1)         Except as otherwise covered in Section 11.03(b)(2) below, Transfers of direct or indirect ownership interests in Borrower to Key Principal or Guarantor, or to a transferee through which Key Principal or Guarantor (as applicable) Controls Borrower with the same rights and abilities as Key Principal or Guarantor (as applicable) Controls Borrower immediately prior to the date of such Transfer, shall be consented to by Lender if:

 

(A)         such Transfer satisfies the applicable requirements of Section 11.03(a), other than Section 11.03(a)(5); and

 

(B)         after giving effect to any such Transfer, each Key Principal or Guarantor (as applicable) continues to own not less than fifty percent (50%) of such Key Principal’s or Guarantor’s (as applicable) direct or indirect ownership interests in Borrower that existed on the Effective Date.

 

(2)         Transfers of direct or indirect interests in Borrower held by a Key Principal or Guarantor to other Key Principals or Guarantors, as applicable, shall be consented to by Lender if such Transfer satisfies the following conditions:

 

(A)         the Transfer does not cause a change in the Control of Borrower; and

 

(B)         the transferor Key Principal or Guarantor maintains the same right and ability to Control Borrower as existed prior to the Transfer.

 

If the conditions set forth in this Section 11.03(b) are satisfied, the Transfer Fee shall be waived provided Borrower shall pay the Review Fee and out-of-pocket costs set forth in Section 11.03(g).

 

(c)          Estate Planning.

 

Notwithstanding the provisions of Section 11.02(b)(2), so long as (1) the Transfer does not cause a change in the Control of Borrower, and (2) Key Principal and Guarantor, as applicable, maintain the same right and ability to Control Borrower as existed prior to the Transfer, Lender shall consent to Transfers of direct or indirect ownership interests in Borrower and Transfers of direct or indirect ownership interests in an entity Key Principal or entity Guarantor to:

 

(A)         Immediate Family Members of such transferor, each of whom must have obtained the legal age of majority;

 

(B)         United States domiciled trusts established for the benefit of the transferor or Immediate Family Members of the transferor; or

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 53
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(C)         partnerships or limited liability companies of which the partners or members, respectively, are comprised entirely of (i) such transferor and Immediate Family Members (each of whom must have obtained the legal age of majority) of such transferor, (ii) Immediate Family Members (each of whom must have obtained the legal age of majority) of such transferor, or (iii) United States domiciled trusts established for the benefit of the transferor or Immediate Family Members of the transferor.

 

If the conditions set forth in this Section 11.03(c) are satisfied, the Transfer Fee shall be waived provided Borrower shall pay the Review Fee and out-of-pocket costs set forth in Section 11.03(g).

 

(d)          Termination or Revocation of Trust.

 

If any of Borrower, Guarantor, or Key Principal is a trust, or if Control of Borrower, Guarantor, or Key Principal is Transferred or if a Restricted Ownership Interest in Borrower, Guarantor, or Key Principal would be Transferred due to the termination or revocation of a trust, the termination or revocation of such trust is an unpermitted Transfer; provided that the termination or revocation of the trust due to the death of an individual trustor shall not be considered an unpermitted Transfer so long as:

 

(1)         Lender is notified within thirty (30) days of the death; and

 

(2)         such Borrower, Guarantor, Key Principal, or other Person, as applicable, is replaced with an individual or entity acceptable to Lender, in accordance with the provisions of Section 11.03(a) within ninety (90) days of the date of the death causing the termination or revocation.

 

If the conditions set forth in this Section 11.03(d) are satisfied, the Transfer Fee shall be waived; provided Borrower shall pay the Review Fee and out-of-pocket costs set forth in Section 11.03(g).

 

(e)          Death of Key Principal or Guarantor; Transfer Due to Death.

 

(1)         If a Key Principal or Guarantor that is a natural person dies, or if Control of Borrower, Guarantor, or Key Principal is Transferred, or if a Restricted Ownership Interest in Borrower, Guarantor, or Key Principal would be Transferred as a result of the death of a Person (except in the case of trusts which is addressed in Section 11.03(d)), Borrower must notify Lender in writing within ninety (90) days in the event of such death. Unless waived in writing by Lender, the deceased shall be replaced by an individual or entity within one hundred eighty (180) days, subject to Borrower’s satisfaction of the following conditions:

 

(A)         Borrower has submitted to Lender all information required by Lender to make the determination required by this Section 11.03(e);

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 54
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         Lender determines that, if applicable:

 

(i)          any proposed new key principal and any other new guarantor (or Person Controlling such new key principal or new guarantor) fully satisfies all of Lender’s then-applicable key principal or guarantor eligibility, credit, management, and other loan underwriting standards (including any standards with respect to previous relationships between Lender and the proposed new key principal and new guarantor (or Person Controlling such new key principal or new guarantor) and the organization of the new key principal and new guarantor);

 

(ii)         none of any proposed new key principal or any new guarantor, or any owners of the proposed new key principal or any new guarantor, is a Prohibited Person; and

 

(iii)        none of any proposed new key principal or any new guarantor (if any of such are entities) shall have an organizational existence termination date that ends before the Maturity Date; and

 

(C)         if applicable, one or more individuals or entities acceptable to Lender as new guarantors have executed and delivered to Lender:

 

(i)          an assumption agreement acceptable to Lender that requires the new guarantor to assume and perform all obligations of Guarantor under any Guaranty given in connection with the Mortgage Loan; or

 

(ii)         a substitute Non-Recourse Guaranty and other substitute guaranty in a form acceptable to Lender.

 

(2)         In the event a replacement Key Principal, Guarantor, or other Person is required by Lender due to the death described in this Section 11.03(e), and such replacement has not occurred within such period, the period for replacement may be extended by Lender to a date not more than one year from the date of such death; however, Lender may require as a condition to any such extension that:

 

(A)         the then-current property manager be replaced with a property manager reasonably acceptable to Lender (or if a property manager has not been previously engaged, a property manager reasonably acceptable to Lender be engaged); or

 

(B)         a lockbox agreement or similar cash management arrangement (with the property manager) reasonably acceptable to Lender during such extended replacement period be instituted.

 

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 55
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

If the conditions set forth in this Section 11.03(e) are satisfied, the Transfer Fee shall be waived, provided Borrower shall pay the Review Fee and out-of-pocket costs set forth in Section 11.03(g).

 

(f)          Bankruptcy of Guarantor.

 

(1)         Upon the occurrence of any Guarantor Bankruptcy Event, unless waived in writing by Lender, the applicable Guarantor shall be replaced by an individual or entity within ninety (90) days of such Guarantor Bankruptcy Event, subject to Borrower’s satisfaction of the following conditions:

 

(A)         Borrower has submitted to Lender all information required by Lender to make the determination required by this Section 11.03(f);

 

(B)         Lender determines that:

 

(i)          the proposed new guarantor fully satisfies all of Lender’s then-applicable guarantor eligibility, credit, management, and other loan underwriting standards (including any standards with respect to previous relationships between Lender and the proposed new guarantor and the organization of the new guarantor (if applicable));

 

(ii)         no new guarantor is a Prohibited Person; and

 

(iii)        no new guarantor (if any of such are entities) shall have an organizational existence termination date that ends before the Maturity Date; and

 

(C)         one or more individuals or entities acceptable to Lender as new guarantors have executed and delivered to Lender:

 

(i)          an assumption agreement acceptable to Lender that requires the new guarantor to assume and perform all obligations of Guarantor under any Guaranty given in connection with the Mortgage Loan; or

 

(ii)         a substitute Non-Recourse Guaranty and other substitute guaranty in a form acceptable to Lender.

 

(2)         In the event a replacement Guarantor is required by Lender due to the Guarantor Bankruptcy Event described in this Section 11.03(f), and such replacement has not occurred within such period, the period for replacement may be extended by Lender in its discretion; however, Lender may require as a condition to any such extension that:

 

(A)         the then-current property manager be replaced with a property manager reasonably acceptable to Lender (or if a property manager has not been previously engaged, a property manager reasonably acceptable to Lender be engaged); or

  

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 56
Article 11 01-16 © 2016 Fannie Mae

 

 

 

  

(B)         a lockbox agreement or similar cash management arrangement (with the property manager) reasonably acceptable to Lender during such extended replacement period be instituted.

 

If the conditions set forth in this Section 11.03(f) are satisfied, the Transfer Fee shall be waived, provided Borrower shall pay the Review Fee and out-of-pocket costs set forth in Section 11.03(g).

 

(g)          Further Conditions to Transfers and Assumption.

 

(1)         In connection with any Transfer of the Mortgaged Property, or an ownership interest in Borrower, Key Principal, or Guarantor for which Lender’s approval is required under this Loan Agreement (including Section 11.03(a)), Lender may, as a condition to any such approval, require:

 

(A)         additional collateral, guaranties, or other credit support to mitigate any risks concerning the proposed transferee or the performance or condition of the Mortgaged Property;

 

(B)         amendment of the Loan Documents to delete or modify any specially negotiated terms or provisions previously granted for the exclusive benefit of original Borrower, Key Principal, or Guarantor and to restore the original provisions of the standard Fannie Mae form multifamily loan documents, to the extent such provisions were previously modified; or

 

(C)         a modification to the amounts required to be deposited into the Reserve/Escrow Account pursuant to the terms of Section 13.02(a)(3)(B).

 

(2)         In connection with any request by Borrower for consent to a Transfer, Borrower shall pay to Lender upon demand:

 

(A)         the Transfer Fee (to the extent charged by Lender);

 

(B)         the Review Fee (regardless of whether Lender approves or denies such request); and

 

(C)         all of Lender’s out-of-pocket costs (including reasonable attorneys’ fees) incurred in reviewing the Transfer request, regardless of whether Lender approves or denies such request.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 57
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(h)          Further Transfers Affecting Clipper Realty L.P.

 

The following Transfers to the extent otherwise prohibited by the terms and provisions of this Article 11, including, without limitation, Section 11.02(b)(2), shall be permitted (without payment of the Transfer Fee) provided the conditions set forth herein are satisfied:

 

(1)          A Transfer that results in the cumulative Transfer of more than 50% of the limited partnership interests (“ Investor Interests ”) in Clipper Realty L.P. (“ Clipper ”) to other limited partners or to other third party transferees (“ Investor Interest Transfer ”), provided that each of the following conditions is satisfied:

 

(A)         Borrower provides Lender with at least 30 days prior Notice of the proposed Investor Interest Transfer.

 

(B)         At the time of the proposed Investor Interest Transfer, no Event of Default has occurred and is continuing and no event or condition has occurred and is continuing that, with the giving of Notice or the passage of time, or both, would become an Event of Default.

 

(C)         Following the Investor Interest Transfer, Control and management of the day-to-day operations of Borrower continue to be held by Clipper Realty Inc. (“ Clipper Realty ”).

 

(D)         At any time that one Person (or a group of affiliated Persons) acquire as a result of the Investor Interest Transfer 25% or more of the aggregate of direct or indirect interests in Borrower the following additional requirements shall be satisfied:

 

(1)         Borrower pays to Lender the Review Fee (regardless of whether Lender approves or denies such request);

 

(2)         Borrower pays to Lender all of Lender’s out-of-pocket costs (including reasonable attorneys’ fees) incurred in reviewing the Transfer request, regardless of whether Lender approves or denies such request; and

 

(3)         Lender shall receive customary credit, background and associated searches that are acceptable to Lender.

 

(E)         Lender receives organizational charts reflecting the structure of Borrower prior to and after the Investor Interest Transfer and copies of the then-current organizational documents of Clipper, including any amendments.

 

(F)          None of any proposed transferee is a Prohibited Person;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 58
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(G)         With respect to such Investor Interest Transfer, the terms and provisions of the Bond Regulatory Agreement have been complied with and Borrower delivers a certification to Lender confirming same together with copies of any required approvals (if any).

 

(2)         The sale or Transfer of limited partnership interests in Clipper to Clipper Realty and, in connection with such sale or transfer, such limited partnership interests shall be converted to general partnership interests (the “ GP Interest Transfer ”) shall be permitted without Lender’s consent provided that each of the following conditions is satisfied:

 

(A)         Borrower provides Lender with Notice of the GP Interest Transfer within thirty (30) days after the GP Interest Transfer is complete and identifies the limited partner that made such GP Interest Transfer.

 

(B)         At the time of the GP Interest Transfer, no Event of Default has occurred and is continuing and no event or condition has occurred and is continuing that, with the giving of Notice or the passage of time, or both, would become an Event of Default.

 

(C)         The transferee of the GP Interest Transfer is Clipper Realty.

 

(D)         Following the GP Interest Transfer, Control and management of the day-to-day operations of Borrower continue to be held by Clipper Realty.

 

(E)         Lender receives organizational charts reflecting the structure of Borrower prior to and after the GP Interest Transfer and copies of the then-current organizational documents of Clipper, including any amendments.

 

(F)         with respect to such GP Interest Transfer, the terms and provisions of the Bond Regulatory Agreement have been complied with and Borrower delivers a certification to Lender confirming same together with copies of any required approvals (if any).

 

(3)         The sale or Transfer of general partnership interests in Clipper owned by Clipper Realty to an existing limited partner or to additional third party transferees and, in connection with such sale or transfer, such general partnership interests shall be converted to limited partnership interests (the “ LP Interest Transfer ”) provided that each of the following conditions is satisfied:

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 59
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

(A) No such LP Interest Transfer shall exceed in any case in the aggregate more than twenty percent (20%) of the general partnership interests in Clipper such that at no time shall Clipper Realty ever own less than 76.79% general partnership interest in Clipper.

 

(B) Borrower provides Lender with at least 30 days prior Notice of the proposed LP Interest Transfer if the proposed LP Interest Transfer.

 

(C) At the time of the LP Interest Transfer, no Event of Default has occurred and is continuing and no event or condition has occurred and is continuing that, with the giving of Notice or the passage of time, or both, would become an Event of Default.

 

(D) Following the LP Interest Transfer, Control and management of the day-to-day operations of Borrower continue to be held by Clipper Realty.

 

(E) At any time that one Person (or a group of affiliated Persons) acquire as a result of the LP Interest Transfer 25% or more of the aggregate direct or indirect interests in Borrower, the following shall be satisfied:

 

(1) Borrower pays to Lender the Review Fee (regardless of whether Lender approves or denies such request);

 

(2) Borrower pays to Lender all of Lender’s out-of-pocket costs (including reasonable attorneys’ fees) incurred in reviewing the Transfer request, regardless of whether Lender approves or denies such request; and

 

(3) Lender shall receive customary credit, background and associated searches that are acceptable to Lender.

 

(F) Lender receives organizational charts reflecting the structure of Borrower prior to and after the Investor Interest Transfer and copies of the then-current organizational documents of Clipper Realty, including any amendments.

 

(G) none of any proposed transferee is a Prohibited Person.

 

(H) with respect to such Investor Interest Transfer, the terms and provisions of the Bond Regulatory Agreement have been complied with and Borrower delivers a certification to Lender confirming same together with copies of any required approvals (if any).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 60
Article 11 01-16 © 2016 Fannie Mae

 

 

 

 

Article 12 - IMPOSITIONS

 

Section 12.01              Representations and Warranties.

 

The representations and warranties made by Borrower to Lender in this Section 12.01 are made as of the Effective Date and are true and correct except as disclosed on the Exceptions to Representations and Warranties Schedule.

 

(a)          Payment of Taxes, Assessments, and Other Charges.

 

Borrower has:

 

(1)         paid (or with the approval of Lender, established an escrow fund sufficient to pay when due and payable) all amounts and charges relating to the Mortgaged Property that have become due and payable before any fine, penalty interest, lien, or costs may be added thereto, including Impositions, leasehold payments, and ground rents;

 

(2)         paid all Taxes for the Mortgaged Property that have become due before any fine, penalty interest, lien, or costs may be added thereto pursuant to any notice of assessment received by Borrower and any and all taxes that have become due against Borrower before any fine, penalty interest, lien, or costs may be added thereto;

 

(3)         no knowledge of any basis for any additional assessments;

 

(4)         no knowledge of any presently pending special assessments against all or any part of the Mortgaged Property, or any presently pending special assessments against Borrower; and

 

(5)         not received any written notice of any contemplated special assessment against the Mortgaged Property, or any contemplated special assessment against Borrower.

 

Section 12.02                Covenants.

 

(a)          Imposition Deposits, Taxes, and Other Charges.

 

Borrower shall:

 

(1)         deposit the Imposition Deposits with Lender on each Payment Date (or on another day designated in writing by Lender) in amount sufficient, in Lender’s discretion, to enable Lender to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added, plus an amount equal to no more than one-sixth (1/6) (or the amount permitted by applicable law) of the Impositions for the trailing twelve (12) months (calculated based on the aggregate annual Imposition costs divided by twelve (12) and multiplied by two (2));

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 61
Article 12 01-16 © 2016 Fannie Mae

 

 

 

 

(2)         deposit with Lender, within ten (10) days after written notice from Lender (subject to applicable law), such additional amounts estimated by Lender to be reasonably necessary to cure any deficiency in the amount of the Imposition Deposits held for payment of a specific Imposition;

 

(3)         except as set forth in Section 12.03(c) below, pay all Impositions, leasehold payments, ground rents, and Taxes when due and before any fine, penalty, interest, lien, or costs may be added thereto;

 

(4)         promptly deliver to Lender a copy of all notices of, and invoices for, Impositions, and, if Borrower pays any Imposition directly, Borrower shall promptly furnish to Lender receipts evidencing such payments; and

 

(5)         promptly deliver to Lender a copy of all notices of any special assessments and contemplated special assessments against the Mortgaged Property or Borrower.

 

Section 12.03               Mortgage Loan Administration Matters Regarding Impositions.

 

(a)          Maintenance of Records by Lender.

 

Lender shall maintain records of the monthly and aggregate Imposition Deposits held by Lender for the purpose of paying Taxes, insurance premiums, and each other obligation of Borrower for which Imposition Deposits are required.

 

(b)          Imposition Accounts.

 

All Imposition Deposits shall be held in an institution (which may be Lender, if Lender is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency and which accounts meet the standards for custodial accounts as required by Lender from time to time. Lender shall not be obligated to open additional accounts, or deposit Imposition Deposits in additional institutions, when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. No interest, earnings, or profits on the Imposition Deposits shall be paid to Borrower unless applicable law so requires. Imposition Deposits shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Lender for that purpose in accordance with this Loan Agreement. For the purposes of 9-104(a)(3) of the UCC, Lender is the owner of the Imposition Deposits and shall be deemed a “customer” with sole control of the account holding the Imposition Deposits.

 

(c)          Payment of Impositions; Sufficiency of Imposition Deposits.

 

Lender may pay an Imposition according to any bill, statement, or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement, or estimate or into the validity of the Imposition. Imposition Deposits shall be required to be used by Lender to pay Taxes, insurance premiums and any other individual Imposition only if:

 

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 62
Article 12 01-16 © 2016 Fannie Mae

 

 

 

 

(1)         no Event of Default exists;

 

(2)         Borrower has timely delivered to Lender all applicable bills or premium notices that it has received; and

 

(3)         sufficient Imposition Deposits are held by Lender for each Imposition at the time such Imposition becomes due and payable.

 

Lender shall have no liability to Borrower or any other Person for failing to pay any Imposition if any of the conditions are not satisfied. If at any time the amount of the Imposition Deposits held for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Lender to be held in connection with such Imposition, the excess may be credited against future installments of Imposition Deposits for such Imposition.

 

(d)          Imposition Deposits Upon Event of Default.

 

If an Event of Default has occurred and is continuing, Lender may apply any Imposition Deposits, in such amount and in such order as Lender determines, to pay any Impositions or as a credit against the Indebtedness.

 

(e)          Contesting Impositions.

 

Other than insurance premiums, Borrower may contest, at its expense, by appropriate legal proceedings, the amount or validity of any Imposition if:

 

(1)         Borrower notifies Lender of the commencement or expected commencement of such proceedings;

 

(2)         Lender determines that the Mortgaged Property is not in danger of being sold or forfeited;

 

(3)         Borrower deposits with Lender (or the applicable Governmental Authority if required by applicable law) reserves sufficient to pay the contested Imposition, if required by Lender (or the applicable Governmental Authority);

 

(4)         Borrower furnishes whatever additional security is required in the proceedings or is reasonably requested in writing by Lender; and

 

(5)         Borrower commences, and at all times thereafter diligently prosecutes, such contest in good faith until a final determination is made by the applicable Governmental Authority.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 63
Article 12 01-16 © 2016 Fannie Mae

 

 

 

 

(f)          Release to Borrower.

 

Upon payment in full of all sums secured by the Security Instrument and this Loan Agreement and release by Lender of the lien of the Security Instrument, Lender shall disburse to Borrower the balance of any Imposition Deposits then on deposit with Lender.

 

Article 13 - REPLACEMENT RESERVE AND REPAIRS

 

Section 13.01               Covenants.

 

(a)          Initial Deposits to Replacement Reserve Account and Repairs Escrow Account.

 

On the Effective Date, Borrower shall pay to Lender:

 

(1)         the Initial Replacement Reserve Deposit for deposit into the Replacement Reserve Account; and

 

(2)         the Repairs Escrow Deposit for deposit into the Repairs Escrow Account.

 

(b)          Monthly Replacement Reserve Deposits.

 

Borrower shall deposit the applicable Monthly Replacement Reserve Deposit into the Replacement Reserve Account on each Payment Date.

 

(c)          Payment for Replacements and Repairs.

 

Borrower shall:

 

(1)         pay all invoices for the Replacements and Repairs, regardless of whether funds on deposit in the Replacement Reserve Account or the Repairs Escrow Account, as applicable, are sufficient, prior to any request for disbursement from the Replacement Reserve Account or the Repairs Escrow Account, as applicable (unless Lender has agreed to issue joint checks in connection with a particular Replacement or Repair);

 

(2)         pay all applicable fees and charges of any Governmental Authority on account of the Replacements and Repairs, as applicable; and

 

(3)         provide evidence satisfactory to Lender of completion of the Replacements and any Required Repairs (within the Completion Period or within such other period or by such other date set forth in the Required Repair Schedule and any Borrower Requested Repairs and Additional Lender Repairs (by the date specified by Lender for any such Borrower Requested Repairs or Additional Lender Repairs)).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 64
Article 12 01-16 © 2016 Fannie Mae

 

 

 

 

(d)          Assignment of Contracts for Replacements and Repairs.

 

Borrower shall collaterally assign to Lender as additional security any contract or subcontract for Replacements or Repairs, upon Lender’s written request, on a form of assignment approved by Lender.

 

(e)          Indemnification.

 

If Lender elects to exercise its rights under Section 14.03 due to Borrower’s failure to timely commence or complete any Replacements or Repairs, Borrower shall indemnify and hold Lender harmless for, from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations, and costs or expenses, including litigation costs and reasonable attorneys’ fees, arising from or in any way connected with the performance by Lender of the Replacements or Repairs or investment of the Reserve/Escrow Account Funds; provided that Borrower shall have no indemnity obligation if such actions, suits, claims, demands, liabilities, losses, damages, obligations, and costs or expenses, including litigation costs and reasonable attorneys’ fees, arise as a result of the willful misconduct or gross negligence of Lender, Lender’s agents, employees, or representatives as determined by a court of competent jurisdiction pursuant to a final non-appealable court order.

 

(f)          Amendments to Loan Documents.

 

Subject to Section 5.02, Borrower shall execute and deliver to Lender, upon written request, an amendment to this Loan Agreement, the Security Instrument, and any other Loan Document deemed necessary or desirable to perfect Lender’s lien upon any portion of the Mortgaged Property for which Reserve/Escrow Account Funds were expended.

 

(g)          Administrative Fees and Expenses.

 

Borrower shall pay to Lender:

 

(1)         by the date specified in the applicable invoice, the Repairs Escrow Account Administrative Fee and the Replacement Reserve Account Administration Fee for Lender’s services in administering the Repairs Escrow Account and Replacement Reserve Account and investing the funds on deposit in the Repairs Escrow Account and the Replacement Reserve Account, respectively;

 

(2)         upon demand, a reasonable inspection fee, not exceeding the Maximum Inspection Fee, for each inspection of the Mortgaged Property by Lender in connection with a Repair or Replacement, plus all other reasonable costs and out-of-pocket expenses relating to such inspections; and

 

(3)         upon demand, all reasonable fees charged by any engineer, architect, inspector or other person inspecting the Mortgaged Property on behalf of Lender for each inspection of the Mortgaged Property in connection with a Repair or Replacement, plus all other reasonable costs and out-of-pocket expenses relating to such inspections.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 65
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

Section 13.02               Mortgage Loan Administration Matters Regarding Reserves.

 

(a)          Accounts, Deposits, and Disbursements.

 

(1)          Custodial Accounts.

 

(A)         The Replacement Reserve Account shall be an interest-bearing account that meets the standards for custodial accounts as required by Lender from time to time. Lender shall not be responsible for any losses resulting from the investment of the Replacement Reserve Deposits or for obtaining any specific level or percentage of earnings on such investment. All interest, if any, earned on the Replacement Reserve Deposits shall be added to and become part of the Replacement Reserve Account; provided , however , if applicable law requires, and so long as no Event of Default has occurred and is continuing under any of the Loan Documents, Lender shall pay to Borrower the interest earned on the Replacement Reserve Account not less frequently than the Replacement Reserve Account Interest Disbursement Frequency. In no event shall Lender be obligated to disburse funds from the Reserve/Escrow Account if an Event of Default has occurred and is continuing.

 

(B)         Lender shall not be obligated to deposit the Repairs Escrow Deposits into an interest-bearing account.

 

(2)          Disbursements by Lender Only.

 

Only Lender or a designated representative of Lender may make disbursements from the Replacement Reserve Account and the Repairs Escrow Account. Except as provided in Section 13.02(a)(8), disbursements shall only be made upon Borrower request and after satisfaction of all conditions for disbursement.

 

(3)          Adjustment to Deposits.

 

(A)         Mortgage Loan Terms Exceeding Ten (10) Years.

 

If the Loan Term exceeds ten (10) years (or five (5) years in the case of any Mortgaged Property that is an “affordable housing property” as indicated on the Summary of Loan Terms), a property condition assessment shall be ordered by Lender for the Mortgaged Property at the expense of Borrower (which expense may be paid out of the Replacement Reserve Account if excess funds are available). The property condition assessment shall be performed no earlier than the sixth (6th) month and no later than the ninth (9th) month of the tenth (10th) Loan Year and every tenth (10th) Loan Year thereafter if the Loan Term exceeds twenty (20) years (or the fifth (5th) Loan Year in the case of any Mortgaged Property that is an “affordable housing property” as indicated on the Summary of Loan Terms and every fifth (5th) Loan Year thereafter if the Loan Term exceeds ten (10) years). After review of the property condition assessment, the amount of the Monthly Replacement Reserve Deposit may be adjusted by Lender for the remaining Loan Term by written notice to Borrower so that the Monthly Replacement Reserve Deposits are sufficient to fund the Replacements as and when required and/or the amount to be held in the Repairs Escrow Account may be adjusted by Lender so that the Repairs Escrow Deposit is sufficient to fund the Repairs as and when required.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 66
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         Transfers.

 

In connection with any Transfer of the Mortgaged Property, or any Transfer of an ownership interest in Borrower, Guarantor, or Key Principal that requires Lender’s consent, Lender may review the amounts on deposit, if any, in the Replacement Reserve Account or the Repairs Escrow Account, the amount of the Monthly Replacement Reserve Deposit and the likely repairs and replacements required by the Mortgaged Property, and the related contingencies which may arise during the remaining Loan Term. Based upon that review, Lender may require an additional deposit to the Replacement Reserve Account or the Repairs Escrow Account, or an increase in the amount of the Monthly Replacement Reserve Deposit as a condition to Lender’s consent to such Transfer.

 

(4)          Insufficient Funds.

 

Lender may, upon thirty (30) days’ prior written notice to Borrower, require an additional deposit(s) to the Replacement Reserve Account or Repairs Escrow Account, or an increase in the amount of the Monthly Replacement Reserve Deposit, if Lender determines that the amounts on deposit in either the Replacement Reserve Account or the Repairs Escrow Account are not sufficient to cover the costs for Required Repairs or Required Replacements or, pursuant to the terms of Section 13.02(a)(9), not sufficient to cover the costs for Borrower Requested Repairs, Additional Lender Repairs, Borrower Requested Replacements, or Additional Lender Replacements. Borrower’s agreement to complete the Replacements or Repairs as required by this Loan Agreement shall not be affected by the insufficiency of any balance in the Replacement Reserve Account or the Repairs Escrow Account, as applicable.

 

(5)          Disbursements for Replacements and Repairs.

 

(A)         Disbursement requests may only be made after completion of the applicable Replacements and only to reimburse Borrower for the actual approved costs of the Replacements. Lender shall not disburse from the Replacement Reserve Account the costs of routine maintenance to the Mortgaged Property or for costs which are to be reimbursed from the Repairs Escrow Account or any similar account. Disbursement from the Replacement Reserve Account shall not be made more frequently than the Maximum Replacement Reserve Disbursement Interval. Other than in connection with a final request for disbursement, disbursements from the Replacement Reserve Account shall not be less than the Minimum Replacement Reserve Disbursement Amount.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 67
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(B)         Disbursement requests may only be made after completion of the applicable Repairs and only to reimburse Borrower for the actual cost of the Repairs, up to the Maximum Repair Cost. Lender shall not disburse any amounts which would cause the funds remaining in the Repairs Escrow Account after any disbursement (other than with respect to the final disbursement) to be less than the Maximum Repair Cost of the then-current estimated cost of completing all remaining Repairs. Lender shall not disburse from the Repairs Escrow Account the costs of routine maintenance to the Mortgaged Property or for costs which are to be reimbursed from the Replacement Reserve Account or any similar account. Disbursement from the Repairs Escrow Account shall not be made more frequently than the Maximum Repair Disbursement Interval. Other than in connection with a final request for disbursement, disbursements from the Repairs Escrow Account shall not be less than the Minimum Repairs Disbursement Amount.

 

(6)          Disbursement Requests.

 

Each request by Borrower for disbursement from the Replacement Reserve Account or the Repairs Escrow Account must be in writing, must specify the Replacement or Repair for which reimbursement is requested (provided that for any Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements, and Additional Lender Repairs, Lender shall have approved the use of the Reserve/Escrow Account Funds for such replacements or repairs pursuant to the terms of Section 13.02(a)(9)), and must:

 

(A)         if applicable, specify the quantity and price of the items or materials purchased, grouped by type or category;

 

(B)         if applicable, specify the cost of all contracted labor or other services involved in the Replacement or Repair for which such request for disbursement is made;

 

(C)         if applicable, include copies of invoices for all items or materials purchased and all contracted labor or services provided;

 

(D)         include evidence of payment of such Replacement or Repair satisfactory to Lender (unless Lender has agreed to issue joint checks in connection with a particular Repair or Replacement as provided in this Loan Agreement); and

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 68
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(E)         contain a certification by Borrower that the Repair or Replacement has been completed lien free and in a good and workmanlike manner, in accordance with any plans and specifications previously approved by Lender (if applicable) and in compliance with all applicable laws, ordinances, rules, and regulations of any Governmental Authority having jurisdiction over the Mortgaged Property, and otherwise in accordance with the provisions of this Loan Agreement.

 

(7)          Conditions to Disbursement.

 

Lender may require any or all of the following at the expense of Borrower as a condition to disbursement of funds from the Replacement Reserve Account or the Repairs Escrow Account (provided that for any Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements, and Additional Lender Repairs, Lender shall have approved the use of the Reserve/Escrow Account Funds for such replacements or repairs pursuant to the terms of Section 13.02(a)(9)):

 

(A)         an inspection by Lender of the Mortgaged Property and the applicable Replacement or Repair;

 

(B)         an inspection or certificate of completion by an appropriate independent qualified professional (such as an architect, engineer or property inspector, depending on the nature of the Repair or Replacement) selected by Lender;

 

(C)         either:

 

(i)          a search of title to the Mortgaged Property effective to the date of disbursement; or

 

(ii)         a “date-down” endorsement to Lender’s Title Policy (or a new Lender’s Title Policy if a “date-down” is not available) extending the effective date of such policy to the date of disbursement (provided that Lender agrees it shall not require a “date down” endorsement for disbursements of less than $250,000 in the aggregate), and showing no Liens other than (1) Permitted Encumbrances, (2) liens which Borrower is diligently contesting in good faith that have been bonded off to the satisfaction of Lender, or (3) mechanics’ or materialmen’s liens which attach automatically under the laws of any Governmental Authority upon the commencement of any work upon, or delivery of any materials to, the Mortgaged Property and for which Borrower is not delinquent in the payment for any such work or materials; and

 

(D)         an acknowledgement of payment, waiver of claims, and release of lien for work performed and materials supplied from each contractor, subcontractor or materialman in accordance with the requirements of applicable law and covering all work performed and materials supplied (including equipment and fixtures) for the Mortgaged Property by that contractor, subcontractor, or materialman through the date covered by the disbursement request (or, in the event that payment to such contractor, subcontractor, or materialman is to be made by a joint check, the release of lien shall be effective through the date covered by the previous disbursement).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 69
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(8)          Joint Checks for Periodic Disbursements.

 

Lender may, upon Borrower’s written request, issue joint checks, payable to Borrower and the applicable supplier, materialman, mechanic, contractor, subcontractor, or other similar party, if:

 

(A)         the cost of the Replacement or Repair exceeds the Replacement Threshold or the Repair Threshold, as applicable, and the contractor performing such Replacement or Repair requires periodic payments pursuant to the terms of the applicable written contract;

 

(B)         the contract for such Repair or Replacement requires payment upon completion of the applicable portion of the work;

 

(C)         Borrower makes the disbursement request after completion of the applicable portion of the work required to be completed under such contract;

 

(D)         the materials for which the request for disbursement has been made are on site at the Mortgaged Property and are properly secured or installed;

 

(E)         Lender determines that the remaining funds in the Replacement Reserve Account designated for such Replacement, or in the Repairs Escrow Account designated for such Repair, as applicable, are sufficient to pay such costs and the then-current estimated cost of completing all remaining Required Replacements or Required Repairs (at the Maximum Repair Cost), as applicable, and any other Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements, or Additional Lender Repairs that have been previously approved by Lender;

 

(F)         each supplier, materialman, mechanic, contractor, subcontractor, or other similar party receiving payments shall have provided, if requested in writing by Lender, a waiver of liens with respect to amounts which have been previously paid to them; and

 

(G)         all other conditions for disbursement have been satisfied.

 

(9)          Replacements and Repairs Other than Required Replacements or Required Repairs.

 

(A)         Borrower Requested Replacements and Borrower Requested Repairs.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 70
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

Borrower may submit a disbursement request from the Replacement Reserve Account or the Repairs Escrow Account to reimburse Borrower for any Borrower Requested Replacement or Borrower Requested Repair. The disbursement request must be in writing and include an explanation for such request. Lender shall make disbursements for Borrower Requested Replacements or Borrower Requested Repairs if:

 

(i)          they are of the type intended to be covered by the Replacement Reserve Account or the Repairs Escrow Account, as applicable;

 

(ii)         the costs are commercially reasonable;

 

(iii)        the amount of funds in the Replacement Reserve Account or Repairs Escrow Account, as applicable, is sufficient to pay such costs and the then-current estimated cost of completing all remaining Required Replacements or Required Repairs (at the Maximum Repair Cost), as applicable, and any other Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements or Additional Lender Repairs that have been previously approved by Lender; and

 

(iv)        all conditions for disbursement from the Replacement Reserve Account or Repairs Escrow Account, as applicable, have been satisfied.

 

Nothing in this Loan Agreement shall limit Lender’s right to require an additional deposit to the Replacement Reserve Account or an increase to the Monthly Replacement Reserve Deposit in connection with any such Borrower Requested Replacements, or an additional deposit to the Repairs Escrow Account for any such Borrower Requested Repairs.

 

(B)         Additional Lender Replacements and Additional Lender Repairs.

 

Lender may require, as set forth in Section 6.02(b), Section 6.03(c), or otherwise from time to time, upon written notice to Borrower, that Borrower make Additional Lender Replacements or Additional Lender Repairs. Lender shall make disbursements from the Replacement Reserve Account for Additional Lender Replacements or from the Repairs Escrow Account for Additional Lender Repairs, as applicable, if:

 

(i)          the costs are commercially reasonable;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 71
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(ii)         the amount of funds in the Replacement Reserve Account or the Repairs Escrow Account, as applicable, is sufficient to pay such costs and the then-current estimated cost of completing all remaining Required Replacements or Required Repairs (at the Maximum Repair Cost), as applicable, and any other Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements, or Additional Lender Repairs that have been previously approved by Lender; and

 

(iii)        all conditions for disbursement from the Replacement Reserve Account or Repairs Escrow Account, as applicable, have been satisfied.

 

Nothing in this Loan Agreement shall limit Lender’s right to require an additional deposit to the Replacement Reserve Account or an increase to the Monthly Replacement Reserve Deposit for any such Additional Lender Replacements or an additional deposit to the Repairs Escrow Account for any such Additional Lender Repair.

 

(10)         Excess Costs.

 

In the event any Replacement or Repair exceeds the approved cost set forth on the Required Replacement Schedule for Replacements, or the Maximum Repair Cost for Repairs, Borrower may submit a disbursement request to reimburse Borrower for such excess cost. The disbursement request must be in writing and include an explanation for such request. Lender shall make disbursements from the Replacement Reserve Account or the Repairs Escrow Account, as applicable, if:

 

(A)         the excess cost is commercially reasonable;

 

(B)         the amount of funds in the Replacement Reserve Account or the Repairs Escrow Account, as applicable, is sufficient to pay such costs and the then-current estimated cost of completing all remaining Required Replacements or Required Repairs (at the Maximum Repair Cost), as applicable, and any other Borrower Requested Replacements, Borrower Requested Repairs, Additional Lender Replacements, or Additional Lender Repairs that have been previously approved by Lender; and

 

(C)         all conditions for disbursement from the Replacement Reserve Account or the Repairs Escrow Account have been satisfied.

 

(11)         Final Disbursements.

 

Upon completion of all Repairs in accordance with this Loan Agreement and so long as no Event of Default has occurred and is continuing, Lender shall disburse to Borrower any amounts then remaining in the Repairs Escrow Account. Upon payment in full of the Indebtedness and release by Lender of the lien of the Security Instrument, Lender shall disburse to Borrower any and all amounts then remaining in the Replacement Reserve Account and the Repairs Escrow Account (if not previously released).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 72
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Approvals of Contracts; Assignment of Claims.

 

Lender retains the right to approve all contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors, or other parties providing labor or materials in connection with the Replacements or Repairs if such contract or work order exceeds $250,000. Notwithstanding Borrower’s assignment (in the Security Instrument) of its rights and claims against all Persons supplying labor or materials in connection with the Replacement or Repairs, Lender will not pursue any such right or claim unless an Event of Default has occurred and is continuing or as otherwise provided in Section 14.03(c).

 

(c)          Delays and Workmanship.

 

If any work for any Replacement or Repair has not timely commenced, has not been timely performed in a workmanlike manner, or has not been timely completed in a workmanlike manner, Lender may, without notice to Borrower:

 

(1)         withhold disbursements from the Replacement Reserve Account or Repairs Escrow Account for such unsatisfactory Replacement or Repair, as applicable;

 

(2)         proceed under existing contracts or contract with third parties to make or complete such Replacement or Repair;

 

(3)         apply the funds in the Replacement Reserve Account or Repairs Escrow Account toward the labor and materials necessary to make or complete such Replacement or Repair, as applicable; or

 

(4)         exercise any and all other remedies available to Lender under this Loan Agreement or any other Loan Document, including any remedies otherwise available upon an Event of Default pursuant to the terms of Section 14.02.

 

To facilitate Lender’s completion or making of such Replacements or Repairs, Lender shall have the right to enter onto the Mortgaged Property and perform any and all work and labor necessary to make or complete the Replacements or Repairs and employ watchmen to protect the Mortgaged Property from damage. All funds so expended by Lender shall be deemed to have been advanced to Borrower, shall be part of the Indebtedness and shall be secured by the Security Instrument and this Loan Agreement.

 

(d)          Appointment of Lender as Attorney-In-Fact.

 

Borrower hereby authorizes and appoints Lender as attorney-in-fact pursuant to Section 14.03(c).

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 73
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(e)          No Lender Obligation.

 

Nothing in this Loan Agreement shall:

 

(1)         make Lender responsible for making or completing the Replacements or Repairs;

 

(2)         require Lender to expend funds, whether from the Replacement Reserve Account, the Repairs Escrow Account, or otherwise, to make or complete any Replacement or Repair;

 

(3)         obligate Lender to proceed with the Replacements or Repairs; or

 

(4)         obligate Lender to demand from Borrower additional sums to make or complete any Replacement or Repair.

 

(f)          No Lender Warranty.

 

Lender’s approval of any plans for any Replacement or Repair, release of funds from the Replacement Reserve Account or Repairs Escrow Account, inspection of the Mortgaged Property by Lender or its agents, representatives, or designees, or other acknowledgment of completion of any Replacement or Repair in a manner satisfactory to Lender shall not be deemed an acknowledgment or warranty to any Person that the Replacement or Repair has been completed in accordance with applicable building, zoning, or other codes, ordinances, statutes, laws, regulations, or requirements of any Governmental Authority, such responsibility being at all times exclusively that of Borrower.

 

Article 14 - DEFAULTS/REMEDIES

 

Section 14.01               Events of Default.

 

The occurrence of any one or more of the following in this Section 14.01 shall constitute an Event of Default under this Loan Agreement.

 

(a)          Automatic Events of Default.

 

Any of the following shall constitute an automatic Event of Default:

 

(1)         any failure by Borrower to pay or deposit when due any amount required by the Note, this Loan Agreement or any other Loan Document;

 

(2)         any failure by Borrower to maintain the insurance coverage required by any Loan Document;

 

(3)         any failure by Borrower to comply with the provisions of Section 4.02(d) relating to its single asset status;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 7 4
Article 13 01-16 © 2016 Fannie Mae

 

 

 

 

(4)         if any warranty, representation, certification, or statement of Borrower, Guarantor, or Key Principal in this Loan Agreement or any of the other Loan Documents is false, inaccurate, or misleading in any material respect when made;

 

(5)         fraud, gross negligence, willful misconduct, or material misrepresentation or material omission by or on behalf of Borrower, Guarantor, or Key Principal or any of their officers, directors, trustees, partners, members, or managers in connection with:

 

(A)         the application for, or creation of, the Indebtedness;

 

(B)         any financial statement, rent roll, or other report or information provided to Lender during the term of the Mortgage Loan; or

 

(C)         any request for Lender’s consent to any proposed action, including a request for disbursement of Reserve/Escrow Account Funds or Collateral Account Funds;

 

(6)         the occurrence of any Transfer not permitted by the Loan Documents;

 

(7)         the occurrence of a Bankruptcy Event;

 

(8)         the commencement of a forfeiture action or other similar proceeding, whether civil or criminal, which, in Lender’s reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Loan Agreement or the Security Instrument or Lender’s interest in the Mortgaged Property;

 

(9)         if Borrower, Guarantor, or Key Principal is a trust, or if Control of Borrower, Guarantor, or Key Principal is Transferred or if a Restricted Ownership Interest in Borrower, Guarantor, or Key Principal would be Transferred due to the termination or revocation of a trust, the termination or revocation of such trust, except as set forth in Section 11.03(d);

 

(10)        any failure by Borrower to complete any Repair related to fire, life, or safety issues in accordance with the terms of this Loan Agreement within the Completion Period (or such other date set forth on the Required Repair Schedule or otherwise required by Lender in writing for such Repair); or

 

(11)        any exercise by the holder of any other debt instrument secured by a mortgage, deed of trust, or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable.

 

(b)          Events of Default Subject to a Specified Cure Period.

 

Any of the following shall constitute an Event of Default subject to the cure period set forth in the Loan Documents:

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 75
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(1)         if Key Principal or Guarantor is a natural person, the death of such individual, unless all requirements of Section 11.03(e) are met;

 

(2)         the occurrence of a Guarantor Bankruptcy Event, unless requirements of Section 11.03(f) are met;

 

(3)         any failure by Borrower, Key Principal, or Guarantor to comply with the provisions of Section 5.02(b) and Section 5.02(c); or

 

(4)         any failure by Borrower to perform any obligation under this Loan Agreement or any Loan Document that is subject to a specified written notice and cure period, which failure continues beyond such specified written notice and cure period as set forth herein or in the applicable Loan Document.

 

(c)          Events of Default Subject to Extended Cure Period.

 

The following shall constitute an Event of Default if the existence of such condition or event, or such failure to perform or default in performance continues for a period of thirty (30) days after written notice by Lender to Borrower of the existence of such condition or event, or of such failure to perform or default in performance, provided, however, such period may be extended for up to an additional thirty (30) days if Borrower, in the discretion of Lender, is diligently pursuing a cure of such; provided, further, however, no such written notice, grace period, or extension shall apply if, in Lender’s discretion, immediate exercise by Lender of a right or remedy under this Loan Agreement or any Loan Document is required to avoid harm to Lender or impairment of the Mortgage Loan (including the Loan Documents), the Mortgaged Property or any other security given for the Mortgage Loan:

 

(1)         any failure by Borrower to perform any of its obligations under this Loan Agreement or any Loan Document (other than those specified in Section 14.01(a) or Section 14.01(b) above) as and when required.

 

Section 14.02              Remedies.

 

(a)          Acceleration; Foreclosure.

 

If an Event of Default has occurred and is continuing, the entire unpaid principal balance of the Mortgage Loan, any Accrued Interest, interest accruing at the Default Rate, the Prepayment Premium (if applicable), and all other Indebtedness, at the option of Lender, shall immediately become due and payable, without any prior written notice to Borrower, unless applicable law requires otherwise (and in such case, after any required written notice has been given). Lender may exercise this option to accelerate regardless of any prior forbearance. In addition, Lender shall have all rights and remedies afforded to Lender hereunder and under the other Loan Documents, including, foreclosure on and/or the power of sale of the Mortgaged Property, as provided in the Security Instrument, and any rights and remedies available to Lender at law or in equity (subject to Borrower’s statutory rights of reinstatement, if any). Any proceeds of a Foreclosure Event may be held and applied by Lender as additional collateral for the Indebtedness pursuant to this Loan Agreement. Notwithstanding the foregoing, the occurrence of any Bankruptcy Event shall automatically accelerate the Mortgage Loan and all obligations and Indebtedness shall be immediately due and payable without written notice or further action by Lender.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 76
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Loss of Right to Disbursements from Collateral Accounts.

 

If an Event of Default has occurred and is continuing, Borrower shall immediately lose all of its rights to receive disbursements from the Reserve/Escrow Accounts and any Collateral Accounts. During the continuance of any such Event of Default, Lender may use the Reserve/Escrow Account Funds and any Collateral Account Funds (or any portion thereof) for any purpose, including:

 

(1)         repayment of the Indebtedness, including principal prepayments and the Prepayment Premium applicable to such full or partial prepayment, as applicable (however, such application of funds shall not cure or be deemed to cure any Event of Default);

 

(2)         reimbursement of Lender for all losses and expenses (including reasonable legal fees) suffered or incurred by Lender as a result of such Event of Default;

 

(3)         completion of the Replacement or Repair or for any other replacement or repair to the Mortgaged Property; and

 

(4)         payment of any amount expended in exercising (and the exercise of) all rights and remedies available to Lender at law or in equity or under this Loan Agreement or under any of the other Loan Documents.

 

Nothing in this Loan Agreement shall obligate Lender to apply all or any portion of the Reserve/Escrow Account Funds or Collateral Account Funds on account of any Event of Default by Borrower or to repayment of the Indebtedness or in any specific order of priority.

 

(c)          Remedies Cumulative.

 

Each right and remedy provided in this Loan Agreement is distinct from all other rights or remedies under this Loan Agreement or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of additional default by Borrower in order to exercise any of its remedies with respect to an Event of Default.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 77
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

Section 14.03               Additional Lender Rights; Forbearance.

 

(a)          No Effect Upon Obligations.

 

Lender may, but shall not be obligated to, agree with Borrower, from time to time, and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of, Guarantor, Key Principal, or other third party obligor, to take any of the following actions:

 

(1)         the time for payment of the principal of or interest on the Indebtedness may be extended, or the Indebtedness may be renewed in whole or in part;

 

(2)         the rate of interest on or period of amortization of the Mortgage Loan or the amount of the Monthly Debt Service Payments payable under the Loan Documents may be modified;

 

(3)         the time for Borrower’s performance of or compliance with any covenant or agreement contained in any Loan Document, whether presently existing or hereinafter entered into, may be extended or such performance or compliance may be waived;

 

(4)         any or all payments due under this Loan Agreement or any other Loan Document may be reduced;

 

(5)         any Loan Document may be modified or amended by Lender and Borrower in any respect, including an increase in the principal amount of the Mortgage Loan;

 

(6)         any amounts under this Loan Agreement or any other Loan Document may be released;

 

(7)         any security for the Indebtedness may be modified, exchanged, released, surrendered, or otherwise dealt with, or additional security may be pledged or mortgaged for the Indebtedness;

 

(8)         the payment of the Indebtedness or any security for the Indebtedness, or both, may be subordinated to the right to payment or the security, or both, of any other present or future creditor of Borrower; or

 

(9)         any other terms of the Loan Documents may be modified.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 78
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          No Waiver of Rights or Remedies.

 

Any waiver of an Event of Default or forbearance by Lender in exercising any right or remedy under this Loan Agreement or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of any other Event of Default or preclude the exercise or failure to exercise of any other right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Lender’s right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any remedies for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise or failure to exercise of any other right available to Lender. Lender’s receipt of any insurance proceeds or amounts in connection with a Condemnation Action shall not operate to cure or waive any Event of Default.

 

(c)          Appointment of Lender as Attorney-In-Fact.

 

Borrower hereby irrevocably makes, constitutes, and appoints Lender (and any officer of Lender or any Person designated by Lender for that purpose) as Borrower’s true and lawful proxy and attorney-in-fact (and agent-in-fact) in Borrower’s name, place, and stead, with full power of substitution, to:

 

(1)         use any of the funds in the Replacement Reserve Account or Repairs Escrow Account for the purpose of making or completing the Replacements or Repairs;

 

(2)         make such additions, changes, and corrections to the Replacements or Repairs as shall be necessary or desirable to complete the Replacements or Repairs;

 

(3)         employ such contractors, subcontractors, agents, architects, and inspectors as shall be required for such purposes;

 

(4)         pay, settle, or compromise all bills and claims for materials and work performed in connection with the Replacements or Repairs, or as may be necessary or desirable for the completion of the Replacements or Repairs, or for clearance of title;

 

(5)         adjust and compromise any claims under any and all policies of insurance required pursuant to this Loan Agreement and any other Loan Document, subject only to Borrower’s rights under this Loan Agreement;

 

(6)         appear in and prosecute any action arising from any insurance policies;

 

(7)         collect and receive the proceeds of insurance, and to deduct from such proceeds Lender’s expenses incurred in the collection of such proceeds;

 

(8)         commence, appear in, and prosecute, in Lender’s or Borrower’s name, any Condemnation Action;

 

(9)         settle or compromise any claim in connection with any Condemnation Action;

 

(10)        execute all applications and certificates in the name of Borrower which may be required by any of the contract documents;

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 79
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(11)        prosecute and defend all actions or proceedings in connection with the Mortgaged Property or the rehabilitation and repair of the Mortgaged Property;

 

(12)        take such actions as are permitted in this Loan Agreement and any other Loan Documents;

 

(13)        execute such financing statements and other documents and to do such other acts as Lender may require to perfect and preserve Lender’s security interest in, and to enforce such interests in, the collateral; and

 

(14)        carry out any remedy provided for in this Loan Agreement and any other Loan Documents, including endorsing Borrower’s name to checks, drafts, instruments and other items of payment and proceeds of the collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of Borrower, changing the address of Borrower to that of Lender, opening all envelopes addressed to Borrower, and applying any payments contained therein to the Indebtedness.

 

Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable and shall not be affected by the disability or incompetence of Borrower. Borrower specifically acknowledges and agrees that this power of attorney granted to Lender may be assigned by Lender to Lender’s successors or assigns as holder of the Note (and the other Loan Documents). The foregoing powers conferred on Lender under this Section 14.03(c) shall not impose any duty upon Lender to exercise any such powers and shall not require Lender to incur any expense or take any action. Borrower hereby ratifies and confirms all that such attorney-in-fact may do or cause to be done by virtue of any provision of this Loan Agreement and any other Loan Documents.

 

Notwithstanding the foregoing provisions, Lender shall not exercise its rights as set forth in this Section 14.03(c) unless: (A) an Event of Default has occurred and is continuing, or (B) Lender determines, in its discretion, that exigent circumstances exist or that such exercise is necessary or prudent in order to protect and preserve the Mortgaged Property, or Lender’s lien priority and security interest in the Mortgaged Property.

 

(d)          Borrower Waivers.

 

If more than one Person signs this Loan Agreement as Borrower, each Borrower, with respect to any other Borrower, hereby agrees that Lender, in its discretion, may:

 

(1)         bring suit against Borrower, or any one or more of Borrower, jointly and severally, or against any one or more of them;

 

(2)         compromise or settle with any one or more of the persons constituting Borrower, for such consideration as Lender may deem proper;

 

(3)         release one or more of the persons constituting Borrower, from liability; or

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 80
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(4)         otherwise deal with Borrower, or any one or more of them, in any manner, and no such action shall impair the rights of Lender to collect from any Borrower the full amount of the Indebtedness.

 

Section 14.04               Waiver of Marshaling.

 

Notwithstanding the existence of any other security interests in the Mortgaged Property held by Lender or by any other party, Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Loan Agreement, any other Loan Document or applicable law. Lender shall have the right to determine the order in which all or any part of the Indebtedness is satisfied from the proceeds realized upon the exercise of such remedies. Borrower and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Loan Agreement waives any and all right to require the marshaling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Loan Agreement or any other Loan Documents.

 

Lender shall account for any moneys received by Lender in respect of any foreclosure on or disposition of collateral hereunder and under the other Loan Documents provided that Lender shall not have any duty as to any collateral, and Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers. NONE OF LENDER OR ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR REPRESENTATIVES SHALL BE RESPONSIBLE TO BORROWER (a) FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED PURSUANT TO A FINAL, NON-APPEALABLE COURT ORDER BY A COURT OF COMPETENT JURISDICTION, NOR (b) FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

 

Article 15 - MISCELLANEOUS

 

Section 15.01               Governing Law; Consent to Jurisdiction and Venue.

 

(a)          Governing L aw.

 

This Loan Agreement and any other Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the Property Jurisdiction without regard to the application of choice of law principles.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 81
Article 14 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          Venue.

 

Any controversy arising under or in relation to this Loan Agreement or any other Loan Document shall be litigated exclusively in the Property Jurisdiction without regard to conflicts of laws principles. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Loan Agreement or any other Loan Document. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence, or otherwise.

 

Section 15.02               Notice.

 

(a)          Process of Serving Notice.

 

Except as otherwise set forth herein or in any other Loan Document, all notices under this Loan Agreement and any other Loan Document shall be:

 

(1)         in writing and shall be:

 

(A)         delivered, in person;

 

(B)         mailed, postage prepaid, either by registered or certified delivery, return receipt requested;

 

(C)         sent by overnight courier; or

 

(D)         sent by electronic mail with originals to follow by overnight courier;

 

(2)         addressed to the intended recipient at Borrower’s Notice Address and Lender’s Notice Address, as applicable; and

 

(3)         deemed given on the earlier to occur of:

 

(A)         the date when the notice is received by the addressee; or

 

(B)         if the recipient refuses or rejects delivery, the date on which the notice is so refused or rejected, as conclusively established by the records of the United States Postal Service or such express courier service.

 

(b)          Change of Address.

 

Any party to this Loan Agreement may change the address to which notices intended for it are to be directed by means of notice given to the other parties identified on the Summary of Loan Terms in accordance with this Section 15.02.

 

(c)          Default Method of Notice.

 

Any required notice under this Loan Agreement or any other Loan Document which does not specify how notices are to be given shall be given in accordance with this Section 15.02.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 82
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

(d)          Receipt o f Notices.

 

Neither Borrower nor Lender shall refuse or reject delivery of any notice given in accordance with this Loan Agreement. Each party is required to acknowledge, in writing, the receipt of any notice upon request by the other party.

 

Section 15.03               Successors and Assigns Bound; Sale of Mortgage Loan.

 

(a)          Binding Agreement.

 

This Loan Agreement shall bind, and the rights granted by this Loan Agreement shall inure to, the successors and assigns of Lender and the permitted successors and assigns of Borrower. However, a Transfer not permitted by this Loan Agreement shall be an Event of Default and shall be void ab initio.

 

(b)          Sale of Mortgage Loan; Change of Servicer.

 

Nothing in this Loan Agreement shall limit Lender’s (including its successors and assigns) right to sell or transfer the Mortgage Loan or any interest in the Mortgage Loan. The Mortgage Loan or a partial interest in the Mortgage Loan (together with this Loan Agreement and the other Loan Documents) may be sold one or more times without prior written notice to Borrower. A sale may result in a change of the Loan Servicer.

 

Section 15.04               Counterparts.

 

This Loan Agreement may be executed in any number of counterparts with the same effect as if the parties hereto had signed the same document and all such counterparts shall be construed together and shall constitute one instrument.

 

Section 15.05              Joint and Several (or Solidary) Liability.

 

If more than one Person signs this Loan Agreement as Borrower, the obligations of such Persons shall be joint and several (solidary instead for purposes of Louisiana law).

 

Section 15.06              Relationship of Parties; No Third Party Beneficiary.

 

(a)          Solely Creditor and Debtor.

 

The relationship between Lender and Borrower shall be solely that of creditor and debtor, respectively, and nothing contained in this Loan Agreement shall create any other relationship between Lender and Borrower. Nothing contained in this Loan Agreement shall constitute Lender as a joint venturer, partner, or agent of Borrower, or render Lender liable for any debts, obligations, acts, omissions, representations, or contracts of Borrower.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 83
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

(b)          No Third Party Beneficiaries.

 

No creditor of any party to this Loan Agreement and no other Person shall be a third party beneficiary of this Loan Agreement or any other Loan Document or any account created or contemplated under this Loan Agreement or any other Loan Document. Nothing contained in this Loan Agreement shall be deemed or construed to create an obligation on the part of Lender to any third party nor shall any third party have a right to enforce against Lender any right that Borrower may have under this Loan Agreement. Without limiting the foregoing:

 

(1)         any Servicing Arrangement between Lender and any Loan Servicer shall constitute a contractual obligation of such Loan Servicer that is independent of the obligation of Borrower for the payment of the Indebtedness;

 

(2)         Borrower shall not be a third party beneficiary of any Servicing Arrangement; and

 

(3)         no payment by the Loan Servicer under any Servicing Arrangement will reduce the amount of the Indebtedness.

 

Section 15.07               Severability; Entire Agreement; Amendments.

 

The invalidity or unenforceability of any provision of this Loan Agreement or any other Loan Document shall not affect the validity or enforceability of any other provision of this Loan Agreement or of any other Loan Document, all of which shall remain in full force and effect, including the Guaranty. This Loan Agreement contains the complete and entire agreement among the parties as to the matters covered, rights granted, and the obligations assumed in this Loan Agreement. This Loan Agreement may not be amended or modified except by written agreement signed by the parties hereto.

 

Section 15.08               Construction.

 

(a)          The captions and headings of the sections of this Loan Agreement and the Loan Documents are for convenience only and shall be disregarded in construing this Loan Agreement and the Loan Documents.

 

(b)          Any reference in this Loan Agreement to an “Exhibit” or “Schedule” or a “Section” or an “Article” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit or Schedule attached to this Loan Agreement or to a Section or Article of this Loan Agreement.

 

(c)          Any reference in this Loan Agreement to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time.

 

(d)          Use of the singular in this Loan Agreement includes the plural and use of the plural includes the singular.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 84
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

(e)          As used in this Loan Agreement, the term “including” means “including, but not limited to” or “including, without limitation,” and is for example only and not a limitation.

 

(f)          Whenever Borrower’s knowledge is implicated in this Loan Agreement or the phrase “to Borrower’s knowledge” or a similar phrase is used in this Loan Agreement, Borrower’s knowledge or such phrase(s) shall be interpreted to mean to the best of Borrower’s knowledge after reasonable and diligent inquiry and investigation.

 

(g)          Unless otherwise provided in this Loan Agreement, if Lender’s approval, designation, determination, selection, estimate, action, or decision is required, permitted, or contemplated hereunder, such approval, designation, determination, selection, estimate, action, or decision shall be made in Lender’s sole and absolute discretion.

 

(h)          All references in this Loan Agreement to a separate instrument or agreement shall include such instrument or agreement as the same may be amended or supplemented from time to time pursuant to the applicable provisions thereof.

 

(i)          “Lender may” shall mean at Lender’s discretion, but shall not be an obligation.

 

(j)          If the Mortgage Loan proceeds are disbursed on a date that is later than the Effective Date, as described in Section 2.02(a)(1), the representations and warranties in the Loan Documents with respect to the ownership and operation of the Mortgaged Property shall be deemed to be made as of the disbursement date.

 

Section 15.09               Mortgage Loan Servicing.

 

All actions regarding the servicing of the Mortgage Loan, including the collection of payments, the giving and receipt of notice, inspections of the Mortgaged Property, inspections of books and records, and the granting of consents and approvals, may be taken by the Loan Servicer unless Borrower receives notice to the contrary. If Borrower receives conflicting notices regarding the identity of the Loan Servicer or any other subject, any such written notice from Lender shall govern. The Loan Servicer may change from time to time (whether related or unrelated to a sale of the Mortgage Loan). If there is a change of the Loan Servicer, Borrower will be given written notice of the change.

 

Section 15.10               Disclosure of Information.

 

Lender may furnish information regarding Borrower, Key Principal, or Guarantor, or the Mortgaged Property to third parties with an existing or prospective interest in the servicing, enforcement, evaluation, performance, purchase, or securitization of the Mortgage Loan, including trustees, master servicers, special servicers, rating agencies, and organizations maintaining databases on the underwriting and performance of multifamily mortgage loans. Borrower irrevocably waives any and all rights it may have under applicable law to prohibit such disclosure, including any right of privacy.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 85
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

Section 15.11               Waiver; Conflict.

 

No specific waiver of any of the terms of this Loan Agreement shall be considered as a general waiver. If any provision of this Loan Agreement is in conflict with any provision of any other Loan Document, the provision contained in this Loan Agreement shall control.

 

Section 15.12               No Reliance.

 

Borrower acknowledges, represents, and warrants that:

 

(a)          it understands the nature and structure of the transactions contemplated by this Loan Agreement and the other Loan Documents;

 

(b)          it is familiar with the provisions of all of the documents and instruments relating to such transactions;

 

(c)          it understands the risks inherent in such transactions, including the risk of loss of all or any part of the Mortgaged Property;

 

(d)          it has had the opportunity to consult counsel; and

 

(e)          it has not relied on Lender for any guidance or expertise in analyzing the financial or other consequences of the transactions contemplated by this Loan Agreement or any other Loan Document or otherwise relied on Lender in any manner in connection with interpreting, entering into, or otherwise in connection with this Loan Agreement, any other Loan Document, or any of the matters contemplated hereby or thereby.

 

Section 15.13                Subrogation.

 

If, and to the extent that, the proceeds of the Mortgage Loan are used to pay, satisfy, or discharge any obligation of Borrower for the payment of money that is secured by a pre-existing mortgage, deed of trust, or other lien encumbering the Mortgaged Property, such Mortgage Loan proceeds shall be deemed to have been advanced by Lender at Borrower’s request, and Lender shall automatically, and without further action on its part, be subrogated to the rights, including lien priority, of the owner or holder of the obligation secured by such prior lien, whether or not such prior lien is released.

 

Section 15.14               Counting of Days.

 

Except where otherwise specifically provided, any reference in this Loan Agreement to a period of “days” means calendar days, not Business Days. If the date on which Borrower is required to perform an obligation under this Loan Agreement is not a Business Day, Borrower shall be required to perform such obligation by the Business Day immediately preceding such date; provided , however , in respect of any Payment Date, or if the Maturity Date is other than a Business Day, Borrower shall be obligated to make such payment by the Business Day immediately following such date.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 86
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

Section 15.15               Revival and Reinstatement of Indebtedness.

 

If the payment of all or any part of the Indebtedness by Borrower, Guarantor, or any other Person, or the transfer to Lender of any collateral or other property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Insolvency Laws relating to a Voidable Transfer, and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the advice of its counsel, then the amount of such Voidable Transfer or the amount of such Voidable Transfer that Lender is required or elects to repay or restore, including all reasonable costs, expenses, and attorneys’ fees incurred by Lender in connection therewith, and the Indebtedness shall be automatically revived, reinstated, and restored by such amount and shall exist as though such Voidable Transfer had never been made.

 

Section 15.16               Time is of the Essence.

 

Borrower agrees that, with respect to each and every obligation and covenant contained in this Loan Agreement and the other Loan Documents, time is of the essence.

 

Section 15.17              Final Agreement.

 

THIS LOAN AGREEMENT ALONG WITH ALL OF THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. All prior or contemporaneous agreements, understandings, representations, and statements, oral or written, are merged into this Loan Agreement and the other Loan Documents. This Loan Agreement, the other Loan Documents, and any of their provisions may not be waived, modified, amended, discharged, or terminated except by an agreement in writing signed by the party against which the enforcement of the waiver, modification, amendment, discharge, or termination is sought, and then only to the extent set forth in that agreement.

 

Section 15.18               WAIVER OF TRIAL BY JURY.

 

TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH OF BORROWER AND LENDER (a)  COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER, THAT IS TRIABLE OF RIGHT BY A JURY, AND (b) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 87
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

[Remainder of Page Intentionally Blank]

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 88
Article 15 01-16 © 2016 Fannie Mae

 

 

 

 

IN WITNESS WHEREOF , Borrower and Lender have signed and delivered this Loan Agreement under seal (where applicable) or have caused this Loan Agreement to be signed and delivered under seal (where applicable) by their duly authorized representatives. Where applicable law so provides, Borrower and Lender intend that this Loan Agreement shall be deemed to be signed and delivered as a sealed instrument.

 

  BORROWER :
     
  ASPEN 2016 LLC , a
  Delaware limited liability company
     
  By: CLIPPER REALTY L.P. , a
    Delaware limited partnership,
    its sole member

 

  By: /s/ David Bistricer (SEAL)
  Name:   David Bistricer  
  Title:     Authorized Signatory  

 

[SIGNATURES CONTINUE ON NEXT PAGE]

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page S-1
Signature Page 01-16 © 2016 Fannie Mae

 

 

 

 

  LENDER :  
     
 

CAPITAL ONE MULTIFAMILY FINANCE, LLC , a

  Delaware limited liability company  
       
  By: /s/ Nathan D. Burlingame [SEAL]
  Name: Nathan D. Burlingame  
  Title:

Vice President 

 

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page S-2
Signature Page 01-16 © 2016 Fannie Mae

 

 

 

 

SCHEDULE 1

TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Definitions Schedule

(Interest Rate Type – Fixed Rate)

 

Capitalized terms used in the Loan Agreement have the meanings given to such terms in this Definitions Schedule.

 

Accrued Interest ” means unpaid interest, if any, on the Mortgage Loan that has not been added to the unpaid principal balance of the Mortgage Loan pursuant to Section 2.02(b) (Capitalization of Accrued But Unpaid Interest) of the Loan Agreement.

 

Additional Lender Repairs ” means repairs of the type listed on the Required Repair Schedule but not otherwise identified thereon that are determined advisable by Lender to keep the Mortgaged Property in good order and repair (ordinary wear and tear excepted) and in good marketable condition or to prevent deterioration of the Mortgaged Property.

 

Additional Lender Replacements ” means replacements of the type listed on the Required Replacement Schedule but not otherwise identified thereon that are determined advisable by Lender to keep the Mortgaged Property in good order and repair (ordinary wear and tear excepted) and in good marketable condition or to prevent deterioration of the Mortgaged Property.

 

Amortization Period ” has the meaning set forth in the Summary of Loan Terms.

 

Amortization Type ” has the meaning set forth in the Summary of Loan Terms.

 

Bank Secrecy Act ” means the Bank Secrecy Act of 1970, as amended (e.g., 31 U.S.C. Sections 5311-5330).

 

Bankruptcy Event ” means any one or more of the following:

 

(a)       the commencement, filing or continuation of a voluntary case or proceeding under one or more of the Insolvency Laws by Borrower;

 

(b)       the acknowledgment in writing by Borrower (other than to Lender in connection with a workout) that it is unable to pay its debts generally as they mature;

 

(c)       the making of a general assignment for the benefit of creditors by Borrower;

 

(d)       the commencement, filing or continuation of an involuntary case or proceeding under one or more Insolvency Laws against Borrower; or

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 1
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(e)       the appointment of a receiver (other than a receiver appointed at the direction or request of Lender under the terms of the Loan Documents), liquidator, custodian, sequestrator, trustee or other similar officer who exercises control over Borrower or any substantial part of the assets of Borrower;

 

provided, however, that any proceeding or case under (d) or (e) above shall not be a Bankruptcy Event until the ninetieth (90th) day after filing (if not earlier dismissed) so long as such proceeding or case occurred without the consent, encouragement or active participation of (1) Borrower, Guarantor, or Key Principal, (2) any Person Controlling Borrower, Guarantor, or Key Principal, or (3) any Person Controlled by or under common Control with Borrower, Guarantor, or Key Principal (in which event such case or proceeding shall be a Bankruptcy Event immediately).

 

Borrower ” means, individually (and jointly and severally (solidarily instead for purposes of Louisiana law) if more than one), the entity (or entities) identified as “Borrower” in the first paragraph of the Loan Agreement.

 

Borrower Affiliate ” means, as to Borrower, Guarantor or Key Principal:

 

(a)       any Person that owns any direct ownership interest in Borrower, Guarantor or Key Principal;

 

(b)       any Person that indirectly owns, with the power to vote, twenty percent (20%) or more of the ownership interests in Borrower, Guarantor or Key Principal;

 

(c)       any Person Controlled by, under common Control with, or which Controls, Borrower, Guarantor or Key Principal;

 

(d)       any entity in which Borrower, Guarantor or Key Principal directly or indirectly owns, with the power to vote, twenty percent (20%) or more of the ownership interests in such entity; or

 

(e)       any other individual that is related (to the third degree of consanguinity) by blood or marriage to Borrower, Guarantor or Key Principal.

 

Borrower Requested Repairs ” means repairs not listed on the Required Repair Schedule requested by Borrower to be reimbursed from the Repairs Escrow Account and determined advisable by Lender to keep the Mortgaged Property in good order and repair and in a good marketable condition or to prevent deterioration of the Mortgaged Property.

 

Borrower Requested Replacements ” means replacements not listed on the Required Replacement Schedule requested by Borrower to be reimbursed from the Replacement Reserve Account and determined advisable by Lender to keep the Mortgaged Property in good order and repair and in a good marketable condition or to prevent deterioration of the Mortgaged Property.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 2
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Borrower’s General Business Address ” has the meaning set forth in the Summary of Loan Terms.

 

Borrower’s Notice Address ” has the meaning set forth in the Summary of Loan Terms.

 

Business Day ” means any day other than (a) a Saturday, (b) a Sunday, (c) a day on which Lender is not open for business, or (d) a day on which the Federal Reserve Bank of New York is not open for business.

 

Collateral Account Funds ” means, collectively, the funds on deposit in any or all of the Collateral Accounts, including the Reserve/Escrow Account Funds.

 

Collateral Accounts ” means any account designated as such by Lender pursuant to a Collateral Agreement or as established pursuant to this Loan Agreement, including the Reserve/Escrow Account.

 

Collateral Agreement ” means any separate agreement between Borrower and Lender for the establishment of any other fund, reserve or account.

 

Completion Period ” has the meaning set forth in the Summary of Loan Terms.

 

Condemnation Action ” has the meaning set forth in the Security Instrument.

 

Control ” (including with correlative meanings, such as “Controlling,” “Controlled by” and “under common Control with”) means, as applied to any entity, the possession, directly or indirectly, of the power to direct or cause the direction of the management and operations of such entity, whether through the ownership of voting securities or other ownership interests, by contract or otherwise.

 

Credit Score ” means a numerical value or a categorization derived from a statistical tool or modeling system used to measure credit risk and predict the likelihood of certain credit behaviors, including default.

 

Debt Service Amounts ” means the Monthly Debt Service Payments and all other amounts payable under the Loan Agreement, the Note, the Security Instrument or any other Loan Document.

 

Default Rate ” means an interest rate equal to the lesser of:

 

(a)       the sum of the Interest Rate plus four (4) percentage points; or

 

(b)       the maximum interest rate which may be collected from Borrower under applicable law.

 

Definitions Schedule ” means this Schedule 1 (Definitions Schedule) to the Loan Agreement.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 3
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Economic Sanctions ” means any economic or financial sanction administered or enforced by the United States Government (including, without limitation, those administered by OFAC at http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx), the U.S. Department of Commerce, or the U.S. Department of State.

 

Effective Date ” has the meaning set forth in the Summary of Loan Terms.

 

Employee Benefit Plan ” means a plan described in Section 3(3) of ERISA, regardless of whether the plan is subject to ERISA.

 

Enforcement Costs ” has the meaning set forth in the Security Instrument.

 

Environmental Indemnity Agreement ” means that certain Environmental Indemnity Agreement dated as of the Effective Date made by Borrower to and for the benefit of Lender, as the same may be amended, restated, replaced, supplemented, or otherwise modified from time to time.

 

“Environmental Inspections ” has the meaning set forth in the Environmental Indemnity Agreement.

 

Environmental Laws ” has the meaning set forth in the Environmental Indemnity Agreement.

 

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

 

ERISA Affiliate ” shall mean, with respect to Borrower, any entity that, together with Borrower, would be treated as a single employer under Section 414(b) or (c) of the Internal Revenue Code, or Section 4001(a)(14) of ERISA, or the regulations thereunder.

 

ERISA Plan ” means any employee pension benefit plan within the meaning of Section 3(2) of ERISA (or related trust) that is subject to the requirements of Title IV of ERISA, Sections 430 or 431 of the Internal Revenue Code, or Sections 302, 303, or 304 of ERISA, which is maintained or contributed to by Borrower or its ERISA Affiliates.

 

Event of Default ” means the occurrence of any event listed in Section 14.01 (Events of Default) of the Loan Agreement.

 

Exceptions to Representations and Warranties Schedule ” means that certain Schedule 7 (Exceptions to Representations and Warranties Schedule) to the Loan Agreement.

 

First Payment Date ” has the meaning set forth in the Summary of Loan Terms.

 

First Principal and Interest Payment Date ” has the meaning set forth in the Summary of Loan Terms, if applicable.

 

Fixed Rate ” has the meaning set forth in the Summary of Loan Terms.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 4
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Fixtures ” has the meaning set forth in the Security Instrument.

 

Force Majeure ” shall mean acts of God, acts of war, civil disturbance, governmental action (including the revocation or refusal to grant licenses or permits, where such revocation or refusal is not due to the fault of Borrower), strikes, lockouts, fire, unavoidable casualties or any other causes beyond the reasonable control of Borrower (other than lack of financing), and of which Borrower shall have notified Lender in writing within ten (10) days after its occurrence.

 

Foreclosure Event ” means:

 

(a)       foreclosure under the Security Instrument;

 

(b)       any other exercise by Lender of rights and remedies (whether under the Security Instrument or under applicable law, including Insolvency Laws) as holder of the Mortgage Loan and/or the Security Instrument, as a result of which Lender (or its designee or nominee) or a third party purchaser becomes owner of the Mortgaged Property;

 

(c)       delivery by Borrower to Lender (or its designee or nominee) of a deed or other conveyance of Borrower’s interest in the Mortgaged Property in lieu of any of the foregoing; or

 

(d)       in Louisiana, any dation en paiement.

 

Goods ” has the meaning set forth in the Security Instrument.

 

Governmental Authority ” means any court, board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over Borrower or the Mortgaged Property or the use, operation or improvement of the Mortgaged Property.

 

Guarantor ” means, individually and collectively, any guarantor of the Indebtedness or any other obligation of Borrower under any Loan Document.

 

Guarantor Bankruptcy Event ” means any one or more of the following:

 

(a)       the commencement, filing or continuation of a voluntary case or proceeding under one or more of the Insolvency Laws by Guarantor;

 

(b)       the acknowledgment in writing by Guarantor (other than to Lender in connection with a workout) that it is unable to pay its debts generally as they mature;

 

(c)       the making of a general assignment for the benefit of creditors by Guarantor;

 

(d)       the commencement, filing or continuation of an involuntary case or proceeding under one or more Insolvency Laws against Guarantor; or

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 5
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(e)       the appointment of a receiver, liquidator, custodian, sequestrator, trustee or other similar officer who exercises control over Guarantor or any substantial part of the assets of Guarantor, as applicable;

 

provided, however, that any proceeding or case under (d) or (e) above shall not be a Guarantor Bankruptcy Event until the ninetieth (90th) day after filing (if not earlier dismissed) so long as such proceeding or case occurred without the consent, encouragement or active participation of (1) Borrower, Guarantor or Key Principal, (2) any Person Controlling Borrower, Guarantor or Key Principal, or (3) any Person Controlled by or under common Control with Borrower, Guarantor or Key Principal (in which event such case or proceeding shall be a Guarantor Bankruptcy Event immediately).

 

Guarantor’s General Business Address ” has the meaning set forth in the Summary of Loan Terms.

 

Guarantor’s Notice Address ” has the meaning set forth in the Summary of Loan Terms.

 

Guaranty ” means, individually and collectively, any Payment Guaranty, Non-Recourse Guaranty or other guaranty executed by Guarantor in connection with the Mortgage Loan.

 

Immediate Family Members ” means a child, stepchild, grandchild, spouse, sibling, or parent, each of whom is not a Prohibited Person.

 

Imposition Deposits ” has the meaning set forth in the Security Instrument.

 

Impositions ” has the meaning set forth in the Security Instrument.

 

Improvements ” has the meaning set forth in the Security Instrument.

 

Indebtedness ” has the meaning set forth in the Security Instrument.

 

Initial Replacement Reserve Deposit ” has the meaning set forth in the Summary of Loan Terms.

 

Insolvency Laws ” means the United States Bankruptcy Code, 11 U.S.C. Section 101, et seq., together with any other federal or state law affecting debtor and creditor rights or relating to the bankruptcy, insolvency, reorganization, arrangement, moratorium, readjustment of debt, dissolution, liquidation or similar laws, proceedings, or equitable principles affecting the enforcement of creditors’ rights, as amended from time to time.

 

Insolvent ” means:

 

(a)       that the sum total of all of a specified Person’s liabilities (whether secured or unsecured, contingent or fixed, or liquidated or unliquidated) is in excess of the value of such Person’s non-exempt assets, i.e., all of the assets of such Person that are available to satisfy claims of creditors; or

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 6
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(b)       such Person’s inability to pay its debts as they become due.

 

Intended Prepayment Date ” means the date upon which Borrower intends to make a prepayment on the Mortgage Loan, as set forth in the Prepayment Notice.

 

Interest Accrual Method ” has the meaning set forth in the Summary of Loan Terms.

 

Interest Only Term ” has the meaning set forth in the Summary of Loan Terms.

 

Interest Rate ” means the Fixed Rate.

 

Interest Rate Type ” has the meaning set forth in the Summary of Loan Terms.

 

Internal Revenue Code ” means the Internal Revenue Code of 1986, as amended.

 

Investor ” means any Person to whom Lender intends to (a) sell, transfer, deliver or assign the Mortgage Loan in the secondary mortgage market, or (b) sell an MBS backed by the Mortgage Loan.

 

Key Principal ” means, collectively:

 

(a)       the natural person(s) or entity that Controls Borrower that Lender determines is critical to the successful operation and management of Borrower and the Mortgaged Property, as identified as such in the Summary of Loan Terms; or

 

(b)       any natural person or entity who becomes a Key Principal after the date of the Loan Agreement and is identified as such in an assumption agreement, or another amendment or supplement to the Loan Agreement.

 

Key Principal’s General Business Address ” has the meaning set forth in the Summary of Loan Terms.

 

Key Principal’s Notice Address ” has the meaning set forth in the Summary of Loan Terms.

 

Land ” means the land described in Exhibit A to the Security Instrument.

 

Last Interest Only Payment Date ” has the meaning set forth in the Summary of Loan Terms, if applicable.

 

Late Charge ” means an amount equal to the delinquent amount then due under the Loan Documents multiplied by five percent (5%).

 

Leases ” has the meaning set forth in the Security Instrument.

 

Lender ” means the entity identified as “Lender” in the first paragraph of the Loan Agreement and its transferees, successors and assigns, or any subsequent holder of the Note.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 7
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Lender’s General Business Address ” has the meaning set forth in the Summary of Loan Terms.

 

Lender’s Notice Address ” has the meaning set forth in the Summary of Loan Terms.

 

Lender’s Payment Address ” has the meaning set forth in the Summary of Loan Terms.

 

Lien ” has the meaning set forth in the Security Instrument.

 

Loan Agreement ” means the Multifamily Loan and Security Agreement dated as of the Effective Date executed by and between Borrower and Lender to which this Definitions Schedule is attached, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

Loan Amount ” has the meaning set forth in the Summary of Loan Terms.

 

Loan Application ” means the application for the Mortgage Loan submitted by Borrower to Lender.

 

Loan Documents ” means the Note, the Loan Agreement, the Security Instrument, the Environmental Indemnity Agreement, the Guaranty, all guaranties, all indemnity agreements, all Collateral Agreements, all O&M Plans, and any other documents now or in the future executed by Borrower, Guarantor, Key Principal, any other guarantor or any other Person in connection with the Mortgage Loan, as such documents may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

Loan Servicer ” means the entity that from time to time is designated by Lender to collect payments and deposits and receive notices under the Note, the Loan Agreement, the Security Instrument and any other Loan Document, and otherwise to service the Mortgage Loan for the benefit of Lender. Unless Borrower receives notice to the contrary, the Loan Servicer shall be the Lender originally named on the Summary of Loan Terms.

 

Loan Term ” has the meaning set forth in the Summary of Loan Terms.

 

Loan Year ” has the meaning set forth in the Summary of Loan Terms.

 

Material Commercial Lease ” means any Lease that is not a Residential Lease, and which is:

 

(a)       a Lease comprising five percent (5%) or more of total gross income of the Mortgaged Property on an annualized basis;

 

(b)       a master Lease (which term “master Lease” shall include any master Lease to a single corporate tenant);

 

(c)       a cell tower Lease;

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 8
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(d)       a solar (power) Lease;

 

(e)       a solar power purchase agreement; or

 

(f)       a Lease of oil, gas, or mineral rights.

 

Maturity Date ” has the meaning set forth in the Summary of Loan Terms.

 

Maximum Inspection Fee ” has the meaning set forth in the Summary of Loan Terms.

 

Maximum Repair Cost ” shall be the amount(s) set forth in the Required Repair Schedule, if any.

 

Maximum Repair Disbursement Interval ” has the meaning set forth in the Summary of Loan Terms.

 

Maximum Replacement Reserve Disbursement Interval ” has the meaning set forth in the Summary of Loan Terms.

 

MBS ” means an investment security that represents an undivided beneficial interest in a pool of mortgage loans or participation interests in mortgage loans held in trust pursuant to the terms of a governing trust document.

 

Mezzanine Debt ” means a loan to a direct or indirect owner of Borrower secured by a pledge of such owner’s interest in an entity owning a direct or indirect interest in Borrower.

 

Minimum Repairs Disbursement Amount ” has the meaning set forth in the Summary of Loan Terms.

 

Minimum Replacement Reserve Disbursement Amount ” has the meaning set forth in the Summary of Loan Terms.

 

Monthly Debt Service Payment ” has the meaning set forth in the Summary of Loan Terms.

 

Monthly Replacement Reserve Deposit ” has the meaning set forth in the Summary of Loan Terms.

 

Mortgage Loan ” means the mortgage loan made by Lender to Borrower in the principal amount of the Note made pursuant to the Loan Agreement, evidenced by the Note and secured by the Loan Documents that are expressly stated to be security for the Mortgage Loan.

 

Mortgaged Property ” has the meaning set forth in the Security Instrument.

 

Multifamily Project ” has the meaning set forth in the Summary of Loan Terms.

 

Multifamily Project Address ” has the meaning set forth in the Summary of Loan Terms.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 9
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Non-Recourse Guaranty ” means, if applicable, that certain Guaranty of Non-Recourse Obligations of even date herewith executed by Guarantor to and for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

Note ” means that certain Multifamily Note of even date herewith in the original principal amount of the stated Loan Amount made by Borrower in favor of Lender, and all schedules, riders, allonges and addenda attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

O&M Plan ” has the meaning set forth in the Environmental Indemnity Agreement.

 

OFAC ” means the United States Treasury Department, Office of Foreign Assets Control, and any successor thereto.

 

Payment Date ” means the First Payment Date and the first day of each month thereafter until the Mortgage Loan is fully paid.

 

Payment Guaranty ” means, if applicable, that certain Guaranty (Payment) of even date herewith executed by Guarantor to and for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

Permitted Encumbrance ” has the meaning set forth in the Security Instrument.

 

Permitted Mezzanine Debt ” means Mezzanine Debt incurred by a direct or indirect owner or owners of Borrower where the exercise of any of the rights and remedies by the holder or holders of the Mezzanine Debt would not in any circumstance cause (a) a change in Control in Borrower, Key Principal, or Guarantor, or (b) a Transfer of a direct or indirect Restricted Ownership Interest in Borrower, Key Principal, or Guarantor.

 

Permitted Preferred Equity ” means Preferred Equity that does not (a) require mandatory dividends, distributions, payments or returns (including at maturity or in connection with a redemption), or (b) provide the Preferred Equity owner with rights or remedies on account of a failure to receive any preferred dividends, distributions, payments or returns (or, if such rights are provided, the exercise of such rights do not violate the Loan Documents or are otherwise exercised with the prior written consent of Lender in accordance with Article 11 (Liens, Transfers and Assumptions) of the Loan Agreement and the payment of all applicable fees and expenses as set forth in Section 11.03(g) (Further Conditions to Transfers and Assumption)).

 

Permitted Prepayment Date ” means the last Business Day of a calendar month.

 

Person ” means an individual, an estate, a trust, a corporation, a partnership, a limited liability company or any other organization or entity (whether governmental or private).

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 10
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Personal Property ” means the Goods, accounts, choses of action, chattel paper, documents, general intangibles (including Software), payment intangibles, instruments, investment property, letter of credit rights, supporting obligations, computer information, source codes, object codes, records and data, all telephone numbers or listings, claims (including claims for indemnity or breach of warranty), deposit accounts and other property or assets of any kind or nature related to the Land or the Improvements, including operating agreements, surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements, and all other intangible property and rights relating to the operation of, or used in connection with, the Land or the Improvements, including all governmental permits relating to any activities on the Land.

 

Personalty ” has the meaning set forth in the Security Instrument.

 

Preferred Equity ” means a direct or indirect equity ownership interest in, economic interests in, or rights with respect to, Borrower that provide an equity owner preferred dividend, distribution, payment, or return treatment relative to other equity owners.

 

Prepayment Lockout Period ” has the meaning set forth in the Summary of Loan Terms.

 

Prepayment Notice ” means the written notice that Borrower is required to provide to Lender in accordance with Section 2.03 (Lockout/Prepayment) of the Loan Agreement in order to make a prepayment on the Mortgage Loan, which shall include, at a minimum, the Intended Prepayment Date.

 

Prepayment Premium ” means the amount payable by Borrower in connection with a prepayment of the Mortgage Loan, as provided in Section 2.03 (Lockout/Prepayment) of the Loan Agreement and calculated in accordance with the Prepayment Premium Schedule.

 

Prepayment Premium Period End Date or Yield Maintenance Period End Date ” has the meaning set forth in the Summary of Loan Terms.

 

Prepayment Premium Period Term or Yield Maintenance Period Term ” has the meaning set forth in the Summary of Loan Terms.

 

Prepayment Premium Schedule ” means that certain Schedule 4 (Prepayment Premium Schedule) to the Loan Agreement.

 

Prohibited Person ” means:

 

(a)       any Person with whom Lender or Fannie Mae is prohibited from doing business pursuant to any law, rule, regulation, judicial proceeding or administrative directive; or

 

(b)       any Person identified on the United States Department of Housing and Urban Development’s “Limited Denial of Participation, HUD Funding Disqualifications and Voluntary Abstentions List,” or on the General Services Administration’s “System for Award Management (SAM)” exclusion list, each of which may be amended from time to time, and any successor or replacement thereof; or

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 11
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(c)       any Person that is determined by Fannie Mae to pose an unacceptable credit risk due to the aggregate amount of debt of such Person owned or held by Fannie Mae; or

 

(d)       any Person that has caused any unsatisfactory experience of a material nature with Fannie Mae or Lender, such as a default, fraud, intentional misrepresentation, litigation, arbitration or other similar act.

 

Property Jurisdiction ” has the meaning set forth in the Security Instrument.

 

Property Square Footage ” has the meaning set forth in the Summary of Loan Terms.

 

Publicly-Held Corporation ” means a corporation, the outstanding voting stock of which is registered under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended.

 

Publicly-Held Trust ” means a real estate investment trust, the outstanding voting shares or beneficial interests of which are registered under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended.

 

Rents ” has the meaning set forth in the Security Instrument.

 

Repair Threshold ” has the meaning set forth in the Summary of Loan Terms.

 

Repairs ” means, individually and collectively, the Required Repairs, Borrower Requested Repairs, and Additional Lender Repairs.

 

Repairs Escrow Account ” means the account established by Lender into which the Repairs Escrow Deposit is deposited to fund the Repairs.

 

Repairs Escrow Account Administrative Fee ” has the meaning set forth in the Summary of Loan Terms.

 

Repairs Escrow Deposit ” has the meaning set forth in the Summary of Loan Terms.

 

Replacement Reserve Account ” means the account established by Lender into which the Replacement Reserve Deposits are deposited to fund the Replacements.

 

Replacement Reserve Account Administration Fee ” has the meaning set forth in the Summary of Loan Terms.

 

Replacement Reserve Account Interest Disbursement Frequency ” has the meaning set forth in the Summary of Loan Terms.

 

Replacement Reserve Deposits ” means the Initial Replacement Reserve Deposit, Monthly Replacement Reserve Deposits and any other deposits to the Replacement Reserve Account required by the Loan Agreement.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 12
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Replacement Threshold ” has the meaning set forth in the Summary of Loan Terms.

 

Replacements ” means, individually and collectively, the Required Replacements, Borrower Requested Replacements and Additional Lender Replacements.

 

Required Repair Schedule ” means that certain Schedule 6 (Required Repair Schedule) to the Loan Agreement.

 

Required Repairs ” means those items listed on the Required Repair Schedule.

 

Required Replacement Schedule ” means that certain Schedule 5 (Required Replacement Schedule) to the Loan Agreement.

 

Required Replacements ” means those items listed on the Required Replacement Schedule.

 

Reserve/Escrow Account Funds ” means, collectively, the funds on deposit in the Reserve/Escrow Accounts.

 

Reserve/Escrow Accounts ” means, together, the Replacement Reserve Account and the Repairs Escrow Account.

 

Residential Lease ” means a Lease of an individual dwelling unit and shall not include any master Lease (which term “master Lease” includes any master Lease to a single corporate tenant).

 

Restoration ” means restoring and repairing the Mortgaged Property to the equivalent of its physical condition immediately prior to the casualty or to a condition approved by Lender following a casualty.

 

Restricted Ownership Interest ” means, with respect to any entity, the following:

 

(a)         if such entity is a general partnership or a joint venture, fifty percent (50%) or more of all general partnership or joint venture interests in such entity;

 

(b)         if such entity is a limited partnership:

 

(1)       the interest of any general partner; or

 

(2)       fifty percent (50%) or more of all limited partnership interests in such entity;

 

(c)         if such entity is a limited liability company or a limited liability partnership:

 

(1)       the interest of any managing member or the contractual rights of any non-member manager; or

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 13
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

(2)       fifty percent (50%) or more of all membership or other ownership interests in such entity;

 

(d)         if such entity is a corporation (other than a Publicly-Held Corporation) with only one class of voting stock, fifty percent (50%) or more of voting stock in such corporation;

 

(e)         if such entity is a corporation (other than a Publicly-Held Corporation) with more than one class of voting stock, the amount of shares of voting stock sufficient to have the power to elect the majority of directors of such corporation; or

 

(f)         if such entity is a trust (other than a land trust or a Publicly-Held Trust), the power to Control such trust vested in the trustee of such trust or the ability to remove, appoint or substitute the trustee of such trust (unless the trustee of such trust after such removal, appointment or substitution is a trustee identified in the trust agreement approved by Lender).

 

Review Fee ” means the non-refundable fee of Three Thousand Dollars ($3,000) payable to Lender.

 

Sanctioned Country ” means a country subject to a comprehensive country-wide sanctions program administered and enforced by OFAC, which list is updated from time to time.

 

Sanctioned Person ” means (a) a Person named on the list of “Specially Designated Nationals and Blocked Persons” maintained by OFAC, available at http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx, or as otherwise published from time to time; (b) (1) an agency of the government of a Sanctioned Country, (2) an organization controlled by a Sanctioned Country, or (3) a Person resident in a Sanctioned Country, to the extent any Person described in clauses (1), (2) or (3) is the subject of a sanctions program administered by OFAC; and, (c) a Person whose property and interests in property are blocked pursuant to an Executive Order or regulations administered by OFAC consistent with the guidance issued by OFAC.

 

Schedule of Interest Rate Type Provisions ” means that certain Schedule 3 (Schedule of Interest Rate Type Provisions) to the Loan Agreement.

 

Security Instrument ” means that certain multifamily mortgage, deed to secure debt or deed of trust executed and delivered by Borrower as security for the Mortgage Loan and encumbering the Mortgaged Property, including all riders or schedules attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

 

Servicing Arrangement ” means any arrangement between Lender and the Loan Servicer for loss sharing or interim advancement of funds.

 

Summary of Loan Terms ” means that certain Schedule 2 (Summary of Loan Terms) to the Loan Agreement.

 

Taxes ” has the meaning set forth in the Security Instrument.

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 14
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

Title Policy ” means the mortgagee’s loan policy of title insurance issued in connection with the Mortgage Loan and insuring the lien of the Security Instrument as set forth therein, as approved by Lender.

 

Total Parking Spaces ” has the meaning set forth in the Summary of Loan Terms.

 

Total Residential Units ” has the meaning set forth in the Summary of Loan Terms.

 

Transfer ” means:

 

(a)       a sale, assignment, transfer or other disposition (whether voluntary, involuntary, or by operation of law), other than Residential Leases, Material Commercial Leases or non-Material Commercial Leases permitted by this Loan Agreement;

 

(b)       a granting, pledging, creating or attachment of a lien, encumbrance or security interest (whether voluntary, involuntary, or by operation of law);

 

(c)       an issuance or other creation of a direct or indirect ownership interest;

 

(d)       a withdrawal, retirement, removal or involuntary resignation of any owner or manager of a legal entity; or

 

(e)       a merger, consolidation, dissolution or liquidation of a legal entity.

 

Transfer Fee ” means a fee equal to one percent (1%) of the unpaid principal balance of the Mortgage Loan payable to Lender.

 

UCC ” has the meaning set forth in the Security Instrument.

 

UCC Collateral ” has the meaning set forth in the Security Instrument.

 

Voidable Transfer ” means any fraudulent conveyance, preference or other voidable or recoverable payment of money or transfer of property.

 

Yield Maintenance Period End Date or Prepayment Premium Period End Date ” has the meaning set forth in the Summary of Loan Terms.

 

Yield Maintenance Period Term or Prepayment Premium Period Term ” has the meaning set forth in the Summary of Loan Terms.

 

[INITIALS FOLLOW ON NEXT PAGE]

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 15
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Schedule 1 to Multifamily Loan and
Security Agreement - Definitions Schedule
(Interest Rate Type - Fixed Rate)
Form 6101.FR Page 16
Fannie Mae 01-16 © 2016 Fannie Mae

 

 

 

 

SCHEDULE 2

TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Summary of Loan Terms

(Interest Rate Type - Fixed Rate)

 

I.         GENERAL PARTY AND MULTIFAMILY PROJECT INFORMATION
 
Borrower ASPEN 2016 LLC , a
Delaware limited liability company
   
Lender CAPITAL ONE MULTIFAMILY FINANCE, LLC , a Delaware limited liability company
   
Key Principal

CLIPPER REALTY INC. , a
Maryland corporation

 

CLIPPER REALTY L.P. , a
Delaware limited partnership

   
Guarantor

CLIPPER REALTY INC. , a
Maryland corporation

 

CLIPPER REALTY L.P. , a
Delaware limited partnership

   
Multifamily Project The Aspen Apartments
   
ADDRESSES
 
Borrower’s General Business Address 4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
   
Borrower’s Notice Address 4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
david@clipperequity.com
   
Multifamily Project Address 1955 First Avenue, New York, New York 10029

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 1
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

Multifamily Project County New York
   
Key Principal’s General Business Address 4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
   
Key Principal’s Notice Address 4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
david@clipperequity.com
   
Guarantor’s General Business Address

CLIPPER REALTY INC. , a
Maryland corporation
4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer

 

CLIPPER REALTY L.P. , a
Delaware limited partnership
4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer

   
Guarantor’s Notice Address

CLIPPER REALTY INC. , a
Maryland corporation
4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
david@clipperequity.com

 

CLIPPER REALTY L.P. , a
Delaware limited partnership
4611 12 th Avenue
Suite 1-L
Brooklyn, New York 11219
Attn: David Bistricer
david@clipperequity.com

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 2
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

Lender’s General Business Address 7600 Wisconsin Avenue, Suite 800
Bethesda, MD  20814
   
Lender’s Notice Address Capital One Multifamily Finance, LLC
7600 Wisconsin Avenue, Suite 800
Bethesda, MD  20814
Attn:  Asset Management
Email Address:  AssetManagement@capitalone.com
   
Lender’s Payment Address Capital One Multifamily Finance, LLC
7600 Wisconsin Avenue, Suite 800
Bethesda, MD  20814
Attn:  Loan Servicing

 

II.         MULTIFAMILY PROJECT INFORMATION
 
Property Square Footage 49,357.954
   
Total Parking Spaces 61
   
Total Residential Units 232
   
Affordable Housing Property

x       Yes

¨        No

 

III.         MORTGAGE LOAN INFORMATION
 
Amortization Period 360 months
   
Amortization Type

¨        Amortizing

¨        Full Term Interest Only

x        Partial Interest Only

   
Effective Date June 27, 2016
   
First Payment Date The first day of August, 2016.
   
First Principal and Interest Payment Date The first day of August, 2017

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 3
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

Fixed Rate 3.68%
   
Interest Accrual Method

¨        30/360 (computed on the basis of a three hundred sixty (360) day year consisting of twelve (12) thirty (30) day months).

 

or

 

x        Actual/360 (computed on the basis of a three hundred sixty (360) day year and the actual number of calendar days during the applicable month, calculated by multiplying the unpaid principal balance of the Mortgage Loan by the Interest Rate, dividing the product by three hundred sixty (360), and multiplying the quotient obtained by the actual number of days elapsed in the applicable month).

   
Interest Only Term 12 months
   
Interest Rate The Fixed Rate
   
Interest Rate Type Fixed Rate
   
Last Interest Only Payment Date The first day of July, 2017.
   
Loan Amount $70,000,000.00
   
Loan Term 144 months
   
Loan Year The period beginning on the Effective Date and ending on the last day of June, 2017, and each successive twelve (12) month period thereafter.
   
Maturity Date The first day of July, 2028, or any earlier date on which the unpaid principal balance of the Mortgage Loan becomes due and payable by acceleration or otherwise.

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 4
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

Monthly Debt Service Payment

(i)          $221,822.22 for the First Payment Date;

 

(ii)          for each Payment Date thereafter through and including the Last Interest Only Payment Date:

 

(a)       $200,355.56 if the prior month was a 28-day month;

 

(b)       $207,511.11 if the prior month was a 29-day month;

 

(c)       $214,666.67 if the prior month was a 30-day month; and

 

(d)       $221,822.22 if the prior month was a 31-day month; and

 

(iii)          $321,406.76 for the First Principal and Interest Payment Date and each Payment Date thereafter until the Mortgage Loan is fully paid.

   
Prepayment Lockout Period 0 year(s) from the Effective Date

 

IV.        YIELD MAINTENANCE/PREPAYMENT PREMIUM INFORMATION
 

Yield Maintenance Period End Date

 

or

 

Prepayment Premium Period End Date

The last day of December, 2027.
   

Yield Maintenance Period Term

 

or

 

Prepayment Premium Period Term

138 months

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 5
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

V.       RESERVE INFORMATION
 
Completion Period Within six (6) months after the Effective Date or as otherwise shown on the Required Repair Schedule.
   
Initial Replacement Reserve Deposit $36,979.00
   
Maximum Inspection Fee $1,200.00
   
Maximum Repair Disbursement Interval One (1) time per calendar quarter
   
Maximum Replacement Reserve Disbursement Interval One (1) time per calendar quarter
   
Minimum Repairs Disbursement Amount $5,000.00
   
Minimum Replacement Reserve Disbursement Amount $5,000.00
   
Monthly Replacement Reserve Deposit $5,189.84
   
Repair Threshold $25,000.00
   
Repairs Escrow Account Administrative Fee $200.00, payable one time
   
Repairs Escrow Deposit $0.00
   
Replacement Reserve Account Administration Fee $250.00 payable annually
   
Replacement Reserve Account Interest Disbursement Frequency Annually
   
Replacement Threshold $5,000.00

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 6
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Schedule 2 to Multifamily Loan and
Security Agreement - Summary of Loan
Terms (Interest Rate Type - Fixed Rate)
Form 6102.FR Page 7
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

Modifications to Multifamily Loan and Security Agreement

 

ADDENDA TO SCHEDULE 2 – SUMMARY OF LOAN TERMS

(New York Gap Note Modifications)

(Interest Rate Type - Fixed Rate)

 

1.          The following is hereby added to Section III (“Mortgage Loan Information”) of the Summary of Loan Terms at the end of the cell entitled “Monthly Debt Service Payment:”

    

Monthly GAP Debt Service Payment  

(i)          $79,644.59 for the First Payment Date;

 

(ii)         for each Payment Date thereafter through and including the Last Interest Only Payment Date:

 

(a)          $71,937.05 if the prior month was a 28-day month;

 

(b)          $74,506.23 if the prior month was a 29-day month;

 

(c)          $77,075.41 if the prior month was a 30-day month; and

 

(d)          $79,644.59 if the prior month was a 31-day month; and

 

(iii)        $115,400.12 for the First Principal and Interest Payment Date and each Payment Date thereafter until the Mortgage Loan is fully paid.

 

2.           The following new section is hereby added to the Summary of Loan Terms:

 

VI.   GAP NOTE
 
GAP Note That certain GAP Multifamily Note dated as of June 27, 2016 in the original principal amount of $25,133,287.00 made by Borrower in favor of Lender, and all schedules, riders, allonges and addenda attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.  The Note amends, restates, consolidates and supersedes the Gap Note.  

 

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Modifications to Multifamily Loan and Security Agreement - Schedule 2 Addenda - Summary of Loan Terms (New York Gap Note Modifications) (Interest Rate Type – Fixed Rate) Form 6102.19.FR Page 1
Fannie Mae 07-11 © 2011 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Modifications to Multifamily Loan and Security Agreement - Schedule 2 Addenda - Summary of Loan Terms (New York Gap Note Modifications) (Interest Rate Type – Fixed Rate) Form 6102.19.FR Page 2
Fannie Mae 07-11 © 2011 Fannie Mae

 

 

 

 

Modifications to Multifamily Loan and Security Agreement

 

ADDENDA TO SCHEDULE 2 – SUMMARY OF LOAN TERMS

(Bond Regulatory Agreement)

 

VII. Bond Regulatory Agreement
 
Agency New York City Housing Development Corporation  
     
Bond Trustee The Bank of New York  

 

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Modifications to Multifamily Loan and Security Agreement - Schedule 2 Addenda - Summary of Loan Terms (Bond Regulatory Agreement) Form 6102.22 Page 1
Fannie Mae 08-14 © 2014 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Modifications to Multifamily Loan and Security Agreement - Schedule 2 Addenda - Summary of Loan Terms (Bond Regulatory Agreement) Form 6102.22 Page 2
Fannie Mae 08-14 © 2014 Fannie Mae

 

 

 

 

SCHEDULE 3

TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Schedule of Interest Rate Type Provisions

(Fixed Rate)

 

1. Defined Terms.

 

Capitalized terms not otherwise defined in this Schedule have the meanings given to such terms in the Definitions Schedule to the Loan Agreement.

 

2. Interest Accrual.

 

Except as otherwise provided in the Loan Agreement, interest shall accrue at the Interest Rate until fully paid.

 

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Schedule 3 to Multifamily Loan and Security Agreement - Interest Rate Type Provisions (Fixed Rate) Form 6103.FR Page 1
Fannie Mae 01-11 © 2011 Fannie Mae

 

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Schedule 3 to Multifamily Loan and Security Agreement - Interest Rate Type Provisions (Fixed Rate) Form 6103.FR Page 2
Fannie Mae 01-11 © 2011 Fannie Mae

 

 

 

   

SCHEDULE 4

TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Prepayment Premium Schedule

(Standard Yield Maintenance – Fixed Rate)

 

1. Defined Terms.

 

All capitalized terms used but not defined in this Prepayment Premium Schedule shall have the meanings assigned to them in the Loan Agreement.

 

2. Prepayment Premium.

 

Any Prepayment Premium payable under Section 2.03 (Lockout/Prepayment) of the Loan Agreement shall be computed as follows:

 

(a)          If the prepayment is made at any time after the Effective Date and before the Yield Maintenance Period End Date, the Prepayment Premium shall be the greater of:

 

(1)         one percent (1%) of the amount of principal being prepaid; or

 

(2)         the product obtained by multiplying:

 

(A)         the amount of principal being prepaid,

 

by

 

(B)         the difference obtained by subtracting from the Fixed Rate on the Mortgage Loan, the Yield Rate (as defined below) on the twenty-fifth (25th) Business Day preceding (i) the Intended Prepayment Date, or (ii) the date Lender accelerates the Mortgage Loan or otherwise accepts a prepayment pursuant to Section 2.03(d) (Application of Collateral) of the Loan Agreement,

 

by

 

(C)         the present value factor calculated using the following formula:

 

  1 - (1 + r) -n/12  
  r  

 

[r =        Yield Rate

 

n =         the number of months remaining between (i) either of the following: (x) in the case of a voluntary prepayment, the last day of the month in which the prepayment is made, or (y) in any other case, the date on which Lender accelerates the unpaid principal balance of the Mortgage Loan and (ii) the Yield Maintenance Period End Date.

 

Schedule 4 to Multifamily Loan and Security Agreement (Prepayment Premium Schedule – Standard Yield Maintenance – Fixed Rate) Form 6104.01 Page 1
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

For purposes of this clause (2), the “ Yield Rate ” means the yield calculated by interpolating the yields for the immediately shorter and longer term U.S. “Treasury constant maturities” (as reported in the Federal Reserve Statistical Release H.15 Selected Interest Rates (the “ Fed Release ”) under the heading “U.S. government securities”) closest to the remaining term of the Yield Maintenance Period Term, as follows (rounded to three (3) decimal places):

 

 

a = the yield for the longer U.S. Treasury constant maturity
b = the yield for the shorter U.S. Treasury constant maturity
x = the term of the longer U.S. Treasury constant maturity
y = the term of the shorter U.S. Treasury constant maturity
z = “n” (as defined in the present value factor calculation above) divided by twelve (12).

 

Notwithstanding any provision to the contrary, if “ z ” equals a term reported under the U.S. “Treasury constant maturities” subheading in the Fed Release, the yield for such term shall be used, and interpolation shall not be necessary. If publication of the Fed Release is discontinued by the Federal Reserve Board, Lender shall determine the Yield Rate from another source selected by Lender. Any determination of the Yield Rate by Lender will be binding absent manifest error.]

 

(b)          If the prepayment is made on or after the Yield Maintenance Period End Date but before the last calendar day of the fourth (4th) month prior to the month in which the Maturity Date occurs, the Prepayment Premium shall be one percent (1%) of the amount of principal being prepaid.

 

Schedule 4 to Multifamily Loan and Security Agreement (Prepayment Premium Schedule – Standard Yield Maintenance – Fixed Rate) Form 6104.01 Page 2
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

(c)          Notwithstanding the provisions of Section 2.03 (Lockout/Prepayment) of the Loan Agreement, no Prepayment Premium shall be payable with respect to any prepayment made on or after the last calendar day of the fourth (4th) month prior to the month in which the Maturity Date occurs.

 

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Schedule 4 to Multifamily Loan and Security Agreement (Prepayment Premium Schedule – Standard Yield Maintenance – Fixed Rate) Form 6104.01 Page 3
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Schedule 4 to Multifamily Loan and Security Agreement (Prepayment Premium Schedule – Standard Yield Maintenance – Fixed Rate) Form 6104.01 Page 4
Fannie Mae 08-13 © 2013 Fannie Mae

 

 

 

  

SCHEDULE 5 TO

 

MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Required Replacement Schedule

 

· Plant materials at the terrace

 

· Wall-mounted exterior lighting

 

· Scrape and paint stairs

 

· Repaint brick masonry

 

· Roof replacement

 

· Fitness room equipment and finishes

 

· Recreation room equipment and finishes

 

· Laundry room finishes

 

· Domestic water pumps

 

· Domestic water heater storage tanks

 

· Central boiler component refurnish

 

· Through-wall AC

 

· Replace fire pump

 

· Replace alarm panel

 

· Common area hallway carpet and corridor flooring replacement

 

· Wood flooring replacement in units

 

· Refrigerator

 

· Range/Stove

 

· Microwave

 

· Dishwasher

 

[INITIALS FOLLOW ON NEXT PAGE]

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 1
Schedule 5 01-16 © 2016 Fannie Mae

 

 

 

  

  BORROWER’S INITIALS:  /S/ DB  

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 2
Schedule 5 01-16 © 2016 Fannie Mae

 

 

 

  

SCHEDULE 6 TO

 

MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Required Repair Schedule

 

Repair Description   Estimated Cost     Maximum Repair
Cost
  Completion Date
Investigate the source of the water intrusion in the seventh floor hallway and in Unit 539.  The source of the intrusion should be repaired and the impacted materials should be replaced   $ 0.00     N/A   180 days

 

[INITIALS FOLLOW ON NEXT PAGE]

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 1
Schedule 6 01-16 © 2016 Fannie Mae

 

 

 

  

  BORROWER’S INITIALS:  /S/ DB  

  

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 2
Schedule 6 01-16 © 2016 Fannie Mae

  

 

 

 

SCHEDULE 7 TO

 

MULTIFAMILY LOAN AND SECURITY AGREEMENT

 

Exceptions to Representations and Warranties Schedule

 

1. Section 4.0l(a) . Borrower is in the process of completing the required publication requirement in New York and shall complete same within thirty (30) days of the Closing Date.

 

2. Section 6.0l(a)(1) . There are the following two open sidewalk violations of record with respect to the Mortgaged Property:

 

Notice of Sidewalk Violation No. 81492 (filed on 12/17/2008)

 

Notice of Sidewalk Violation No. 18261 (filed on 09/24/1980)

 

3. Section 11.01(b)(2) : NEW YORK SMSA LIMITED PARTNERSHIP, d/b/a Verizon Wireless, maintains a right of first refusal to purchase the Mortgaged Property under Section 13 of that certain Lease Agreement, dated as of August 1, 2005, by and between 100 STREET TRI VENTURE LLC and NEW YORK SMSA LIMITED PARTNERSHIP, d/b/a Verizon Wireless (as the same may be amended, restated, modified, supplemented or assigned).

 

[INITIALS FOLLOW ON NEXT PAGE]

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 1
Schedule 7 01-16 © 2016 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Multifamily Loan and Security Agreement
(Non-Recourse)
Form 6001.NR Page 2
Schedule 7 01-16 © 2016 Fannie Mae

 

 

 

 

EXHIBIT A

 

MODIFICATIONS TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

(New York Gap Note Modifications)

 

The foregoing Loan Agreement is hereby modified as follows:

 

1.       Capitalized terms used and not specifically defined herein have the meanings given to such terms in the Loan Agreement.

 

2.       The Definitions Schedule is hereby amended by adding the following new definitions in the appropriate alphabetical order:

 

GAP Note ” has the meaning set forth in the Summary of Loan Terms.

 

GAP Security Instrument ” means that certain multifamily mortgage, deed to secure debt or deed of trust executed and delivered by Borrower as security for the Mortgage Loan and encumbering the Mortgaged Property, including all riders or schedules attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. The Security Instrument amends, restates, consolidates and supersedes the GAP Security Instrument.

 

Monthly GAP Debt Service Payment ” has the meaning set forth in the Summary of Loan Terms.

 

3.       The definitions of “Monthly Debt Service Payment,” “Note” and “Security Instrument” in the Definitions Schedule are hereby deleted and restated in their entirety to read as follows:

 

Monthly Debt Service Payment ” has the meaning set forth in the Summary of Loan Terms and which amount includes the Monthly GAP Debt Service Payment.

 

Note ” means that certain Amended and Restated Multifamily Note of even date herewith in the original principal amount of the stated Loan Amount made by Borrower in favor of Lender, and all schedules, riders, allonges and addenda attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. The Note amends, restates, consolidates and supersedes the GAP Note.

 

Security Instrument ” means that certain consolidation, extension and modification agreement, multifamily mortgage, deed to secure debt or deed of trust executed and delivered by Borrower as security for the Mortgage Loan and encumbering the Mortgaged Property, including all riders or schedules attached thereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. The Security Instrument amends, restates, consolidates and supersedes the GAP Security Instrument.

 

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Modifications to Multifamily Loan and
Security Agreement (New York Gap Note
Modifications)
Form 6234 Page 1
Fannie Mae 07-11 © 2011 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Modifications to Multifamily Loan and
Security Agreement (New York Gap Note
Modifications)
Form 6234 Page 2
Fannie Mae 07-11 © 2011 Fannie Mae

 

 

 

 

EXHIBIT B

 

MODIFICATIONS TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

(Bond Redemption and Bond Regulatory Agreement ) (HDC )

 

The foregoing Loan Agreement is hereby modified as follows:

 

1.          Capitalized terms used and not specifically defined herein have the meanings given to such terms in the Loan Agreement.

 

2.          The Definitions Schedule is hereby amended by adding the following new definitions in the appropriate alphabetical order:

 

Agency ” has the meaning set forth on the Summary of Loan Terms.

 

Bond Regulatory Agreement ” has the meaning set forth in the Security Instrument.

 

Bond Trustee ” has the meaning set forth on the Summary of Loan Terms.

 

Trust Indenture ” has the meaning set forth in the Security Instrument.

 

3.          Section 3.02(a) (Personal Liability Based on Lender’s Loss) of the Loan Agreement is hereby amended by adding the following subsection to the end thereof:

 

(18)        failure of Borrower to comply with Section 14.01( b a )(12) and Section 14.01( b a )(13) of this Loan Agreement; or

 

(19)        (A) failure of the Bonds (as defined in the Trust Indenture and issued in connection therewith) to be paid and redeemed; or (B) any losses directly or indirectly related to the Bonds or the documents executed in connection with the Bonds.

 

4.          Section 14.01( b a ) ( Automatic Events of Default Subject to a Cure Period ) of the Loan Agreement is hereby amended by adding the following provision provisions to the end thereof:

 

(12)        any default beyond the expiration of any applicable cure period under the Bond Regulatory Agreement; or

 

(13)        the institution of any adverse proceeding against the Mortgaged Property or Borrower relating to the Bonds (as defined in the Trust Indenture), including the payment and redemption of the Bonds.

 

Modifications to Multifamily Loan and
Security Agreement (Bond Redemption
and Bond Regulatory Agreement)
Form 6238 Page 1
Fannie Mae 08-14 © 2014 Fannie Mae

 

 

 

 

5.          The following article is hereby added to the Loan Agreement as Article 16 (Items Related to Bond Regulatory Agreements):

 

ARTICLE 16 – ITEMS RELATED TO BOND REGULATORY AGREEMENTS

 

Section 16.01    Notice of Default Under Bond Regulatory Agreement.

 

Within three (3) Business Days after Borrower’s receipt, Borrower shall provide Lender with a copy of any default notice, any warning letter, or any similar communication from the Agency or any other compliance monitoring designee, and shall identify the manner in which Borrower or the Mortgaged Property is alleged to be non-compliant.

 

Section 16.02    Compliance.

 

Pursuant to Section 11 of the Bond Regulatory Agreement Borrower is required to provide evidence of compliance to the Agency verifying compliance with the Bond Regulatory Agreement. Borrower covenants and agrees to comply with all requirements of the Bond Regulatory Agreement and to provide Lender with a copy of all reports, certifications, and documents within five (5) Business Days after filing the same with the applicable agency.

 

Further, Section 8.02(b)(2)(E) (Items to Furnish to Lender) of the Loan Agreement is hereby amended by adding the foll owing provision to the end thereof:

 

(v)         Borrower is in full compliance with the Bond Regulatory Agreement.

 

Section 16.03    Amendment of Bond Regulatory Agreement.

 

The Bond Regulatory Agreement may not be amended, modified, or terminated without the written consent of Lender.

 

Section 16.04    Property Management After Event of Default.

 

As of the Effective Date, Lender has approved Borrower as self-manager of the Mortgaged Property; provided, however, that after the occurrence of an Event of Default, Borrower shall promptly engage a third-party property manager for management of the Mortgaged Property, and the identity of such third-party property manager and the form of written agreement between such third-party property manager and Borrower shall be subject to Lender approval. Nothing in this section shall be construed to limit or otherwise affect Lender’s rights as otherwise provided in the Loan Documents regarding management of the Mortgaged Property, the property manager, and/or any property management agreement.

 

[INITIALS FOLLOW ON NEXT PAGE]

 

Modifications to Multifamily Loan and
Security Agreement (Bond Redemption
and Bond Regulatory Agreement)
Form 6238 Page 2
Fannie Mae 08-14 © 2014 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Modifications to Multifamily Loan and
Security Agreement (Bond Redemption
and Bond Regulatory Agreement)
Form 6238 Page 3
Fannie Mae 08-14 © 2014 Fannie Mae

 

 

 

 

EXHIBIT C

 

MODIFICATIONS TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

(HPD Regulatory Agreement)

 

The foregoing Loan Agreement is hereby modified as follows:

 

1.       Capitalized terms used and not specifically defined herein have the meanings given to such terms in the Loan Agreement.

 

2.       The Definitions Schedule is hereby amended by adding the following new definitions in the appropriate alphabetical order:

 

HPD Regulatory Agreement ” means, collectively:

 

(i) that certain Deed, dated as of November 13, 2002, by and between THE CITY OF NEW YORK, a municipal corporation formed pursuant to the laws of the State of New York, acting by and through its DEPARTMENT OF HOUSING PRESERVATION AND DEVELOPMENT (“ HPD ”), as Grantor, and 100 STREET TRI VENTURE LLC, a New York limited liability company (“ 100 Street Tri Venture ”), as Grantee, recorded in the Office of the City Register of the City of New York, Borough of Manhattan (“ Official Records ”), as CRFN 2003000142549; and

 

(ii) that certain Land Disposition Agreement, dated as of November 13, 2002, by and between HPD and 100 Tri Street Venture, recorded in the Official Records as CRFN 2003000142548.

 

3.       Section 3.02(a) (Personal Liability Based on Lender’s Loss) of the Loan Agreement is hereby amended by adding the following subsection to the end thereof:

 

(10)       failure of Borrower to comply with Section 14.01(a)(14) of this Loan Agreement.

 

4.       Section 14.01(a) (Automatic Events of Default) of the Loan Agreement is hereby amended by adding the following provision to the end thereof:

 

(14)       any default beyond the expiration of any applicable cure period under the HPD Regulatory Agreement.

 

Modifications to Multifamily Loan and
Security Agreement (HPD Regulatory
Agreement)
  Page 1
Fannie Mae   © 2014 Fannie Mae

 

 

 

 

5.       The following article is hereby added to the Loan Agreement as Article 17 (Items Related to HPD Regulatory Agreement):

 

ARTICLE 17 – ITEMS RELATED TO HPD REGULATORY AGREEMENT

 

Section 17.01  Notice of Default Under HPD Regulatory Agreement.

 

Within three (3) Business Days after Borrower’s receipt, Borrower shall provide Lender with a copy of any default notice, any warning letter, or any similar communication from the respective agency or any other compliance monitoring designee for the HPD Regulatory Agreement, and shall identify the manner in which Borrower or the Mortgaged Property is alleged to be non-compliant.

 

Section 17.02  Compliance.

 

Borrower may be required to provide evidence of compliance to the respective agency verifying compliance with the HPD Regulatory Agreement, as applicable in accordance with the HPD Regulatory Agreement. Borrower covenants and agrees to comply with all requirements of the HPD Regulatory Agreement and to provide Lender with a copy of all reports, certifications, and documents within five (5) Business Days after filing the same with the respective agency.

 

Section 17.03  Amendment of HPD Regulatory Agreement.

 

The HPD Regulatory Agreement may not be amended, modified, or terminated without the written consent of Lender.

 

Section 17.04  Property Management After Event of Default.

 

As of the Effective Date, Lender has approved Borrower as self-manager of the Mortgaged Property; provided , however , that after the occurrence of an Event of Default, Borrower shall promptly engage a third-party property manager for management of the Mortgaged Property, and the identity of such third-party property manager and the form of written agreement between such third-party property manager and Borrower shall be subject to Lender approval. Nothing in this section shall be construed to limit or otherwise affect Lender’s rights as otherwise provided in the Loan Documents regarding management of the Mortgaged Property, the property manager, and/or any property management agreement.

 

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Modifications to Multifamily Loan and
Security Agreement (HPD Regulatory
Agreement)
  Page 2
Fannie Mae   © 2014 Fannie Mae

 

 

 

 

  BORROWER’S INITIALS:  /S/ DB  

 

Modifications to Multifamily Loan and
Security Agreement (HPD Regulatory
Agreement)
  Page 3
Fannie Mae   © 2014 Fannie Mae

 

 

 

 

EXHIBIT D

 

MODIFICATIONS TO MULTIFAMILY LOAN AND SECURITY AGREEMENT

(Shuttle Service Reserve)

 

The foregoing Loan Agreement is hereby modified as follows:

 

1.       Capitalized terms used and not specifically defined herein have the meanings given to such terms in the Loan Agreement.

 

2.       The Definitions Schedule is hereby amended by adding the following new definitions in the appropriate alphabetical order:

 

Initial Shuttle Service Reserve Deposit ” means $299,620.00 .

 

Shuttle Service Reserve Account ” means a custodial account as required by Lender from time to time.

 

Shuttle Service Reserve Account Funds ” means, collectively, the Initial Shuttle Service Reserve Deposit and all other funds from time to time held in the Shuttle Service Reserve Account.

 

Statement Period ” means the twelve (12) month period shown on the most recent financial statement submitted by Borrower to Lender.

 

Modifications to Multifamily Loan and
Security Agreement (Shuttle Service
Reserve)
  Page 1
Fannie Mae    

 

 

 

 

3.       The following article is hereby added to the Loan Agreement as Article 18 (Shuttle Service Reserve):

 

ARTICLE 18 – SHUTTLE SERVICE RESERVE

 

Section 18.   Recitals Regarding Shuttle Service

 

As of the Effective Date, the Borrower provides a private shuttle service (the “ Shuttle Service ”) for residents of the Mortgaged Property to travel to the Lexington Avenue subway station located at Lexington Avenue and 96 th Street in Manhattan, New York.  The Metropolitan Transportation Authority of New York City is currently scheduled to open a new subway station in December, 2016, located at 96 th Street and 2 nd Avenue in Manhattan, New York (the “ Second Avenue Station ”), which location is less than four blocks from the Mortgaged Property. Borrower intends to continue to provide the Shuttle Service until the time the Second Avenue Station is opened for use by the public.

 

Section 18.01     Covenants.

 

(a)       Shuttle Service; Initial Deposit to Shuttle Reserve Account.

 

At its own cost and expense, without reliance on or use of the Shuttle Service Reserve Account Funds, Borrower intends to provide the Shuttle Service until the time the Second Avenue Station is opened for use by the public.

 

On the Effective Date, Borrower shall pay to Lender the Initial Shuttle Service Reserve Deposit for deposit into the Shuttle Service Reserve Account.

 

(b)       Administrative Fees and Expenses; Costs of Collection.

 

Borrower shall pay within ten (10) days of request from Lender all reasonable costs and expenses incurred by Lender in connection with collecting, holding and disbursing the Shuttle Service Reserve Account Funds pursuant to this Article 18 (Shuttle Service Reserve). In addition, Borrower agrees to pay, within ten (10) days of request from Lender, all costs and expenses incurred by Lender (including but not limited to court costs and attorneys’ fees and expenses) in exercising any of Lender’s rights or obligations pursuant to the terms of this Loan Agreement or holding the Shuttle Service Reserve Account Funds.

 

Modifications to Multifamily Loan and
Security Agreement (Shuttle Service
Reserve)
  Page 2
Fannie Mae    

 

 

 

 

Section 18.02   Mortgage Loan Administration Matters Regarding Shuttle Service Reserve Account.

 

(a)       Accounts, Deposits and Disbursements.

 

(1)       Custodial Account.

 

The Shuttle Service Reserve Account shall be deemed a Collateral Account under this Loan Agreement and any Shuttle Service Reserve Account Funds shall be deemed part of the Collateral Account Funds under this Loan Agreement. The Shuttle Service Reserve Account shall be an interest-bearing account which meets the standards for custodial accounts as required by Lender from time to time. Lender shall not be responsible for any losses resulting from the investment of the Shuttle Service Reserve Account Funds or for obtaining any specific level or percentage of earnings on such investment. All interest earned on the Shuttle Service Reserve Account Funds shall be added to and become part of such Shuttle Service Reserve Account; provided , however , if applicable law requires, and so long as no Event of Default has occurred and is continuing under any of the Loan Documents, Lender shall pay to Borrower the interest earned on the Shuttle Service Reserve Account not less than once a quarter. In no event shall Lender be obligated to disburse funds from the Shuttle Service Reserve Account if (A) an Event of Default has occurred and is continuing at the time the disbursement request is made or (B) an Event of Default has occurred at any time during the applicable Statement Period.

 

(2)       Disbursements from Shuttle Service Reserve Account.

 

Nothing in this Loan Agreement shall obligate Lender to apply all or any portion of the Shuttle Service Reserve Funds to cure any Event of Default or to reduce the Indebtedness.

 

(3)       Disbursement Request.

 

(A)       Lender shall disburse to Borrower any and all amounts in the Shuttle Service Reserve Account upon receipt of a request in writing received by Lender no later than ten (10) Business Days before the requested date of disbursement. The request shall include:

 

(i)       written evidence, sufficient to Lender in its reasonable discretion, that (A) the Second Avenue Station has been opened for use by the public, and (B) Borrower has ceased providing Shuttle Service;

 

Modifications to Multifamily Loan and
Security Agreement (Shuttle Service
Reserve)
  Page 3
Fannie Mae    

 

 

 

 

(ii)       unless already delivered to Lender, certified current financial statements from Borrower’s operation of the Mortgaged Property, for the prior month, and reconciled bank statements for the three (3) months preceding such request;

 

(iii)       a certification by Borrower that no Event of Default has occurred and is continuing under the Loan Documents; and

 

(iv)       such other information regarding the Mortgaged Property as Lender reasonably requests.

 

(C)       The disbursement shall be expressly conditioned upon no Event of Default or event or condition which, with the giving of notice or the passage of time, or both, would give rise to an Event of Default existing at either the time Borrower requests the disbursement from the Shuttle Service Reserve Account or the time of such disbursement. Borrower is and shall remain obligated and responsible for the payment of all amounts due under the Loan Documents regardless of whether disbursement from the Shuttle Service Reserve Account is made by Lender pursuant to the terms of this Loan Agreement.

 

(D)       Notwithstanding the foregoing, Lender shall disburse to Borrower any and all amounts then remaining in the Shuttle Service Reserve Account within ten (10) days following Borrower’s payment in full of the Indebtedness and release by Lender of the Lien of the Security Instrument.

 

(4)       Review of Funding Requirement.

 

In connection with any Transfer of the Mortgaged Property, or any Transfer of an ownership interest in Borrower, Guarantor or Key Principal that requires Lender’s consent, Lender may review the amounts on deposit, if any, in the Shuttle Service Reserve Account and the related contingencies which may arise during the remaining Loan Term. Based upon that review, Lender may require an additional deposit to the Shuttle Service Reserve Account as a condition to Lender’s consent to such Transfer. In all events, the transferee shall be required to assume Borrower’s duties and obligations under this Loan Agreement.

 

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(b)       Lender as Attorney-In-Fact.

 

Borrower hereby authorizes and appoints Lender as attorney-in-fact pursuant to Section 14.03(c) (Appointment of Lender as Attorney-In-Fact).

 

[INITIALS FOLLOW ON NEXT PAGE]

 

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  BORROWER’S INITIALS:  /S/ DB  

 

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Exhibit 23.3

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the use in this Registration Statement on Form S-11 of Clipper Realty Inc. of our report dated March 30, 2016 relating to the consolidated and combined financial statements of Clipper Realty Inc. and Predecessor (which report expresses an unqualified opinion on the consolidated and combined financial statements) appearing in the Prospectus, which is part of this Registration Statement.

 

We also consent to the reference to us under the heading “Experts” in the Prospectus.

 

/s/ BDO USA, LLP  
   
New York, New York  
October 6, 2016  

 

     

 

 

Exhibit 23.4

 

CONSENT OF INDEPENDENT AUDITOR

 

We consent to the use in this Registration Statement on Form S-11 of Clipper Realty Inc. of our report dated October 9, 2015 relating to the statement of revenues and certain expenses of the properties located at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of New York, New York, for the year ended December 31, 2013, appearing in the Prospectus, which is part of this Registration Statement.

 

We also consent to the reference to us under the heading “Experts” in the Prospectus.

 

/s/ BERDON LLP  
   
New York, New York  
October 7, 2016  

 

     

 

 

Exhibit 23.5

 

CONSENT OF INDEPENDENT AUDITOR

 

We consent to the use in this Registration Statement on Form S-11 of Clipper Realty Inc. of our report dated March 29, 2016 relating to the statement of revenues and certain expenses of the Aspen for the year ended December 31, 2015, appearing in the Prospectus, which is part of this Registration Statement.

 

We also consent to the reference to us under the heading “Experts” in the Prospectus.

 

/s/ LIPSKY GOODKIN & CO., P.C.  
   
New York, New York  
October 6, 2016