Exhibit 10.3

DISCOUNTED PAYOFF AGREEMENT

THIS DISCOUNTED PAYOFF AGREEMENT (this “Agreement”) is entered into as of
September 21, 2010, by and among ZHONE TECHNOLOGIES CAMPUS, LLC, a California
limited liability company (“Borrower”), ZHONE TECHNOLOGIES, INC., a Delaware
corporation (“Guarantor”), and LBA RIV-COMPANY ZNP, LLC, a Delaware limited
liability company (“Lender”).

RECITALS

A. Borrower obtained a loan in the original principal amount of $35,000,000 (the
“Loan”) from Fremont Investment & Loan, a California industrial loan association
(“Fremont”) pursuant to that certain Loan and Security Agreement dated as of
March 30, 2001 (as the same has been amended, the “Loan Agreement”). Capitalized
terms used herein without being defined shall have the respective meanings set
forth in the Loan Agreement.

B. Guarantor guaranteed certain of Borrower’s obligations with respect to the
Loan pursuant to (i) that certain Completion and Performance Guaranty dated as
of March 30, 2001, and (ii) that certain Environmental Indemnity dated as of
March 30, 2001.

C. The Loan and all of Fremont’s right, title and interest in, to and under the
Loan Documents was acquired by iStar FM Loans LLC, a Delaware limited liability
company (“iStar”) on or about June 29, 2007.

D. Lender has entered into an agreement to acquire all of iStar’s right, title
and interest in, to and under the Loan Documents, and the closing of such
acquisition is scheduled to occur on or about September 30, 2010.

E. Lender has agreed to accept a cash payment from Borrower in full and complete
satisfaction of all obligations of Borrower and Guarantor under the Loan
Documents on and subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the foregoing, and the various agreements
set forth herein below, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledge, the parties hereto
agree as follows:

1. Discounted Payoff Amount; Satisfaction of Debt. Subject to satisfaction of
the conditions set forth in Section 2, Lender agrees to accept the Payoff Amount
(as defined below) in full and complete satisfaction of all obligations of
Borrower and Guarantor to Lender under the Loan Documents; provided, however,
receipt of such payment shall not release Borrower or Guarantor from (a) any
obligation under this Agreement or from any claim or liability of such party to
Lender arising out of a breach of, or misrepresentation made in, this Agreement,
or (b) any indemnity obligations of Borrower or Guarantor contained in the Loan
Documents relating to third-party claims against Lender by entities unaffiliated
to Lender which by the express terms of the Loan Documents survive the repayment
of the Loan (the obligations in clauses (a) and (b) are referred to herein as
the “Continuing Obligations”).

2. Conditions Precedent. Sections 1 and 4 of this Agreement shall not be
effective unless and until each of the following conditions precedent (the
“Conditions Precedent”) have been satisfied no later than 5:00 p.m. Los Angeles
time on September 30, 2010 (provided, however, this Agreement shall be effective
with respect to all other terms and conditions immediately upon the satisfaction
of the condition precedent in Section 2(a) below):

 

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(a) Lender shall have acquired the Loan and the Loan Documents from iStar;

(b) Borrower, Guarantor, and Lender shall have duly executed and delivered this
Agreement;

(c) Lender shall have received immediately available funds in an amount equal to
Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00), plus (i) fifty
percent (50%) of the principal/interest payment that is due under the Loan for
September 1, 2010 to the date Lender acquires the Loan from iStar (the “Loan
Acquisition Date”); (ii) an amount equal to fifty percent (50%) of the interest
having accrued on the Loan pursuant to the Loan Documents between the Loan
Acquisition Date and the date on which Lender receives the Payoff Amount; plus
(iii) an amount equal to fifty percent (50%) of the closing costs and legal fees
incurred by Lender in acquiring the Loan from iStar (the “Payoff Amount”);

(d) LBA RIV-COMPANY V, LLC, a Delaware limited liability company (“Buyer”) shall
have acquired fee title to the Property from Borrower pursuant to that certain
Real Estate Purchase Agreement dated as of September 21, 2010, in accordance
with all of the terms and conditions contained in said agreement.

Upon the satisfaction of the foregoing conditions precedent, Lender agrees to
execute and deliver such documents as may be required by the title company
insuring fee title to the Property acquired by Buyer in order to release and
reconvey the lien of the Deed of Trust.

For the avoidance of doubt, Lender shall have no obligation or liability under
this Agreement whatsoever in the event Lender fails to acquire the Loan from
iStar for any reason whatsoever.

3. Representations and Warranties by Borrower and Guarantor.

(a) Borrower represents and warrants that (i) Borrower is duly organized,
validly existing, and in good standing under the laws of the State of
California, (ii) Borrower has full power and authority to enter into this
Agreement and perform its obligations hereunder, and (iii) Borrower’s execution
and delivery of this Agreement have been duly authorized by all necessary
company action. By executing this Agreement, Borrower acknowledges that it has
read, consulted with its attorneys regarding, and understands this Agreement and
the other Loan Documents executed in connection herewith.

(b) Guarantor represents and warrants that (i) Guarantor is duly organized,
validly existing, and in good standing under the laws of the State of Delaware,
(ii) Guarantor has full power and authority to enter into this Agreement and
perform its obligations hereunder, and (iii) Guarantor’s execution and delivery
of this Agreement have been duly authorized by all necessary company action. By
executing this Agreement, Guarantor acknowledges that it has read, consulted
with its attorneys regarding, and understands this Agreement and the other Loan
Documents executed in connection herewith.

(c) No proceedings are (i) pending against Borrower or Guarantor or (ii) to the
best of such party’s knowledge, threatened against it before any governmental
authority or in any court (including, without limitation, any bankruptcy court).
There is no action, order, writ, injunction, judgment or decree, or any claim,
suit, litigation, proceeding, labor dispute, arbitration, or governmental audit
or investigation pending or, to the best of Borrower’s and Guarantor’s
knowledge, threatened against Borrower or Guarantor that would affect Borrower’s
or Guarantor’s ability to perform its obligations under this Agreement or
otherwise affect the transactions contemplated by this Agreement.

 

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(d) No agent, broker, person or firm acting on behalf of, or under the authority
of, Borrower or Guarantor is or will be entitled, directly or indirectly, to any
commission, broker’s or finder’s fees or other remuneration from Borrower or
Guarantor, or to Borrower’s and Guarantor’s knowledge, from any other party, in
connection with any of the transactions contemplated by this Agreement.

4. Waiver and Release of Claims. Each party hereto, and anyone claiming by,
through or under such party (each, a “Releasing Party”) hereby waives its right
to recover from and fully, finally, absolutely, and irrevocably releases each
other party hereto and such other parties’ officers, directors, employees,
representatives, agents, affiliates, and each such parties’ direct and indirect
constituent owners, and each of the foregoing parties’ successors and assigns
(collectively, the “Released Parties”) from any and all claims of any and every
character that a Releasing Party may now have against any of the Released
Parties for any cost, loss, liability, damage, expense, demand, fine, penalty,
action or cause of action arising from or related to the Loan, the Loan
Documents, or any matters related thereto (collectively, “Released Claims”),
excluding any obligation of a Released Party arising under this Agreement;
provided, however, (y) in no event shall Borrower or Guarantor be released from,
nor shall the foregoing waiver and release provisions apply to, any of the
Continuing Obligations, and (z) in the event that any Releasing Party brings any
action against a Released Party seeking payment on, or any other relief with
respect to, any Released Claim, the foregoing waiver and release of such
Releasing Party by such Released Party shall be of no force or effect. The
foregoing waiver and release includes claims of which the Releasing Party is
presently unaware or which the Releasing Party does not presently suspect to
exist which, if known by the Releasing Party, would materially affect the
Releasing Party’s release of the Released Parties, and including any and all
claims that are direct and/or indirect, contingent or matured, of whatever kind
or nature, for or because of any matter or things done, omitted or permitted to
be done by any of the Released Parties, at law or in equity. Each Releasing
Party understands, acknowledges and agrees that (a) the waiver and release set
forth above may be pleaded as a full and complete defense and may be used as a
basis for an injunction against any action, suit or other proceeding which may
be instituted, prosecuted or attempted in breach of the provisions of such
release, (b) no fact, event, circumstance, evidence, or transaction which could
now be asserted or which may hereafter be discovered shall affect in any manner
the final, absolute and unconditional nature of the waiver and release set forth
above, (c) it realizes and acknowledges that factual matters now unknown to it
may have given or may hereafter give rise to causes of action, claims, demands,
debts, controversies, damages, costs, losses and expenses which are presently
unknown, unanticipated and unsuspected, and it further agrees, represents and
warrants that this release has been negotiated and agreed upon in light of that
realization and that it nevertheless hereby intends to release, discharge and
acquit the Released Parties from any and all such unknown causes of action,
claims, demands, debts, controversies, damages, costs, losses and expenses which
in any way arise out of, are connected with, or relate to, the Loan, (d) it
understands and acknowledges the significance and consequences of the foregoing
release and waiver and each has been advised by independent legal counsel
concerning the same. In furtherance of this intention, each Releasing Party
expressly waive any and all rights conferred upon it by the provisions of
California Civil Code Section 1542, and expressly consents that this Release
shall be given full force and effect according to each and all of its express
terms and provisions. Section 1542 provides:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH
THE DEBTOR.”

Each Releasing Party hereby understands and acknowledges the significance and
consequences of such release and specific waiver of Section 1542 and has been
advised by independent legal counsel concerning the same.

 

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By:  

 

     By:  

 

     By:  

 

  Borrower’s Initials        Guarantor’s Initials        Lender’s Initials

Each Releasing Party hereby represents and warrants that (i) it owns all of the
purported claims, rights, demands and causes of action that it is releasing by
the foregoing release and that no other person or entity has any interest in
said claims, rights, demands or causes of action by reason of any contract or
dealing with such Releasing Party, and (ii) it has not assigned to any other
person or entity all or any part of such claims, rights, demands or causes of
action.

5. Taxes. Borrower and Guarantor agree to pay any and all taxes payable to any
applicable governmental authority by Borrower or Guarantor with respect to any
portion of the Loan forgiven by Lender in connection herewith (“Forgiven Debt”)
and Borrower and Guarantor hereby agree, on a joint and several basis, to
indemnify, defend, and hold Lender and all other Released Parties harmless from
and against any and all federal, state, or local taxes payable on or with
respect to any such Forgiven Debt. Borrower and Guarantor acknowledge and agree
that neither Lender nor its representatives have provided any advice or
consultation as to whether any portion of the Forgiven Debt is taxable by any
applicable governmental authority, and that Borrower and Guarantor have sought
and received the advice of independent and competent legal counsel and/or
accounting consultants with respect thereto.

6. Reinstatement of Obligations. Notwithstanding anything to the contrary
contained in this Agreement, all obligations of Borrower and Guarantor to Lender
discharged, waived, or released pursuant to this Agreement (including, without
limitation, any portion of the principal of or interest on the Loan waived or
reduced pursuant to this Agreement) will be reinstated in full if for any reason
Lender is required to return any portion of any payment received by Lender to
Borrower or pay the same over to any other person or entity for any reason
whatsoever.

7. Entire Agreement. This Agreement embodies the entire agreement between the
parties with respect to the subject matter hereof and there are no agreements,
representations or warranties, oral or written, between or among the parties
other than those set forth in this Agreement.

8. Amendments. This Agreement may not be modified or changed, in whole or in
part, except by a supplemental agreement signed by all of parties.

9. Successors and Assigns Bound. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns.

10. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.

11. Counterparts. This Agreement may be executed by manual or facsimile
signature or email signature sent in .pdf or .tif format in any number of
counterparts, each of which shall be an original, but which together constitute
one and the same instrument.

12. Rights and Remedies Cumulative. The rights and remedies provided by this
Agreement are cumulative, and the use of any one right or remedy by any party
shall not preclude or waive the right to use any or all other remedies. Such
rights and remedies are given in addition to any other rights, the parties may
have by law, statute, ordinance or otherwise.

13. Severability. If any provision of this Agreement or the application thereof
to any person or circumstance shall be invalid, illegal or unenforceable to any
extent, the remainder of this Agreement

 

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and the application thereof shall not be affected and shall be enforceable to
the fullest extent permitted by law.

14. Third Party Beneficiaries. No person other than a party hereto shall be
entitled or be deemed to be entitled to any benefits or rights hereunder, nor be
authorized or entitled to enforce any rights or remedies hereunder or by reason
hereof.

15. Drafting. The parties hereto shall be deemed the mutual drafters of this
Agreement.

16. Attorneys’ Fees. If any party hereto becomes involved in litigation
(including bankruptcy proceedings), arbitration or other proceedings arising out
of or relating to this Agreement, the court in litigation (including bankruptcy
proceedings) or arbitrator in the arbitration shall award legal expenses
(including, but not limited to attorneys’ fees, court costs and other legal
expenses, and including reasonable fees charged by in-house counsel) to the
prevailing party. The award for legal expenses shall not be computed in
accordance with any court schedule, but shall be as necessary to fully reimburse
all attorneys’ fees and other legal expenses paid or incurred in good faith. The
terms “attorneys’ fees” or “attorneys’ fees and costs” shall include all
reasonable fees and expenses incurred with respect to appeals, arbitrations and
bankruptcy proceedings, and whether or not any action or proceeding is brought
with respect to the matter for which said fees and expenses were incurred.

17. Confidentiality. Each party hereto agrees to keep this Agreement and the
terms and conditions contained herein confidential and not to disclose the same
to any persons other than their legal counsel and other advisors (except as may
be required by law or applicable legal process).

[Signatures on next page]

 

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.

 

LENDER:    LBA RIV-COMPANY ZNP, LLC,    a Delaware limited liability company   
By:     

LBA REIT IV, LLC, a Delaware limited liability company,

its Sole Member and Manager

        By:      LBA Realty Fund IV, L.P., a Delaware limited partnership,   
          its Sole Manager              By:      LBA Management Company IV, LLC,
a Delaware limited liability company, its General Partner                   By:
     LBA Realty LLC, a Delaware limited liability company, its Manager        
               By:      LBA Inc., a California corporation                  
          its Managing Member                             By:  

 

                            Name:  

 

                            Title:  

 

 

BORROWER:     ZHONE TECHNOLOGIES CAMPUS, LLC,     a California limited liability
company     By:  

 

    Name:  

 

    Title:  

 

GUARANTOR:     ZHONE TECHNOLOGIES, INC.,     a Delaware corporation     By:  

 

    Name:  

 

    Title:  

 

 

  S-1   Discounted Payoff Agreement