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Exhibit 10.21
CANYON-JOHNSON URBAN FUND II, L.P.
9665 Wilshire Boulevard, Suite 200
Beverly Hills, California 90212
 
 
May 4, 2007
 
Via Facsimile and
Overnight Courier
 
Stratus Properties, Inc., a Delaware corporation
Mr. William H. Armstrong, III
98 San Jacinto Boulevard, Suite 220
Austin, Texas 78701
 
 
Re:
Block 21 – Austin, Texas – Agreement to Form Company

 
Dear Beau:
 
Reference is made to that certain Term Sheet (the “Term Sheet”) executed as of
February 22, 2007 by Canyon-Johnson Urban Fund II, L.P., a Delaware limited
partnership (“Urban”) and your affiliate, Stratus Properties Operating Co.,
L.P., a Delaware limited partnership.  Capitalized terms not otherwise defined
herein shall have the meanings assigned to them in the Operating Agreement
described below.
 
We are pleased to inform you that subject to the terms and conditions of this
Agreement to Form Company (“Agreement”), Urban hereby agrees (i) to enter into
an Operating Agreement with your affiliate STRATUS BLOCK 21 INVESTMENTS, L.P.
(“Stratus Member” or “Stratus”) substantially in the form attached hereto as
Exhibit A (“Operating Agreement”) (subject to such changes made necessary by
changes to the Initial Budget attached to the Operating Agreement as may arise
in the interim period prior to Closing and as approved by Urban, and the
completion of exhibits and schedules, which the parties agree to act in good
faith to complete as expeditiously as possible) in order that Urban and Stratus
Member may become members of CJUF II Stratus Block 21 LLC, a Delaware limited
liability company (“Company”), (ii) contribute the Urban Contribution at such
time as described in the Operating Agreement, and (iii) immediately thereafter
cause the Company to execute a development agreement with a qualified developer
(“Developer”) wholly owned by Stratus Properties, Inc. (“SPI”) substantially in
the form of Exhibit B hereto (subject, however to the completion of exhibits and
schedules reasonably satisfactory in substance to Urban) (“Development
Agreement”).  All terms not defined herein shall have the meanings assigned
thereto in the Operating Agreement or Development Agreement, as
applicable.   The date on
 

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which Urban shall execute the Operating Agreement, and fund its initial
contribution at such times contemplated therein, Stratus shall contribute the
Stratus Contribution, and the Company executes the Development Agreement, shall
be referred to herein as the Closing Date (the “Closing Date”).  Urban’s
obligation to close on the Closing Date shall be subject to and conditioned upon
the satisfaction of the following conditions (the “Closing Conditions”):  (i)
Stratus shall contemporaneously execute the Operating Agreement and contribute
the Stratus Contribution as contemplated in the Operating Agreement; (ii) from
and after the date of this Agreement, Urban shall not discover or otherwise
become aware of any information not heretofore disclosed to Urban in writing
that is inconsistent in a material and adverse manner with the information
provided to Urban prior to the date hereof, of the business, assets, operations,
condition (financial or otherwise), projections or prospects of the Project
and/or Stratus or Developer or any of their respective affiliates (collectively,
the “Stratus Parties” and each individually, a “Stratus Party”); (iii) since the
date of this Agreement, no event, change or condition shall have occurred that
has had, or could reasonably be expected to have, a material adverse effect on
the business, assets, operations, condition (financial or otherwise),
projections or prospects of any of the Stratus Parties; (iv) there shall be no
moratorium or restriction or prohibition on development or construction
limiting, precluding or delaying the Developer’s ability to develop and
construct the Project in any material respect; (v) as of their execution, the
representations and warranties of Stratus and Developer contained in the
Operating Agreement and Development Agreement shall be true, accurate and
complete; (vi) all of the conditions set forth on Exhibit C attached hereto and
incorporated herein by this reference shall be satisfied; and (vii) all of the
conditions identified in clauses (i) through (vi) shall be satisfied on or prior
to the “Outside Date” (Urban may waive or extend the time for performance of any
of the above conditions in its sole discretion).
 
During the interim period following the parties’ execution of this Agreement and
the Closing Date, Urban and Stratus, together with the Developer, shall use all
reasonable commercial efforts to work together in good faith to satisfy each of
the conditions identified above.  Stratus and Developer shall provide Urban with
any updates with respect to the Project and/or to the due diligence materials
and other information heretofore provided to Urban.  Urban will provide Stratus
and Developer any updates known to Urban and information received by Urban with
respect to the Project and/or to the due diligence materials.
 
Stratus acknowledges that notwithstanding anything herein or in any other
document to the contrary, the general partner of Urban must provide not less
than ten (10) business days’ advance written notice to each limited partner of
any capital call.  Accordingly, Stratus shall advise Urban in writing of the
anticipated day of Closing Date not less than eleven (11) business days prior to
such anticipated Closing Date and at that time shall also request that Urban
call capital in order to fund the initial Urban Contribution.  Upon timely
receipt of such request, Urban will call for capital from its limited partners
and in such capital call will require that such contributions be made on or
prior to the business day prior to the anticipated Closing Date.  The capital
contributions of Urban’s partners shall commence to earn a Preferred Return as
contemplated in the Operating Agreement.
 
The Stratus Parties acknowledge and represent that they are working solely with,
and will continue to work solely with, Urban until the Outside Date in an effort
to consummate the transactions contemplated herein and in so doing, the Stratus
Parties acknowledge that Urban
 
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has spent significant time and money investigating the proposed transactions in
order to be able to issue this Agreement and will continue to spend a
significant amount of time and money in preparation of a Closing (as such term
is defined in the Operating Agreement).  If the Closing Date has not occurred by
the Outside Date, then this Agreement will terminate and neither Urban nor any
Stratus Party will have any further liabilities or obligations to each
other.  The Outside Date is March 15, 2008 unless Stratus has not used its
reasonable commercial efforts to cause the Closing Conditions to be met on or
before March 15, 2008, in which case Urban shall have the right to request that
the Outside Date shall be extended for such period as Stratus shall have failed
to use its reasonable commercial efforts to cause the Outside Date to occur on
or prior to March 15, 2008.
 
If there is a Stratus Change in Control (defined below) prior to the time
Stratus contributes the Property to the Company and the Company begins
operations, or if either of Kenneth Jones or William H. Armstrong are no longer
general counsel and president, respectively, of the Stratus Parties and actively
supervising the Property and the Project, and replacements satisfactory to Urban
in its sole discretion have not been appointed within 30 days of such occurrence
(a "Key Person Event"), then, at Urban's election exercised within 45 days of a
Stratus Change of Control, or within 15 days of the Key Person Event, Urban may
elect either of the following;
 
(i)           The Stratus Parties and SPI, jointly and severally, shall
immediately pay to Urban 100% of the third party costs and expenses incurred by
it plus 11% per annum on such expenses from and as made (the “Walk
Reimbursement”), and neither Urban nor the Stratus Parties shall have any
further obligation to each other (if any shall exist at that time) to consummate
the transactions contemplated herein, or
 
(ii)           Urban shall purchase all of the right, title and interest of the
Stratus Parties and SPI and their affiliates in the Property and Project, and
all related development rights, contract rights and other associated assets,
free and clear of all monetary encumbrances (other than liens for ad valorem
real estate taxes not yet due and payable) an "Urban Purchase Event") and pay to
the Stratus Parties $1.5 million plus the amount of Stratus’ Costs and Expenses
paid by the Stratus Parties prior to the date of the closing of the Urban
Purchase Event (the “Urban Purchase Event Closing”) plus all ad valorem real
estate taxes allocated through the date of the Urban Purchase Event Closing,
plus all costs and expenses accrued by the Stratus Parties through the Urban
Purchase Event Closing that have not been paid as of such date but would
properly be included in Stratus Costs and Expenses when paid.  (In the event
that an Urban Purchase Event occurs, the Stratus Parties and their affiliates
shall cooperate in securing to Urban the benefit of the assets purchased
thereunder, including the transfer of City permits and rights, loan agreements
and commitments to Urban.)
 
Provided, however, that the Stratus Parties shall not be required to pay a Walk
Reimbursement or sell pursuant to an Urban Purchase Event if such Stratus Change
in Control or Key Person Event occurs at a time after (i) Urban shall have
defaulted under the terms of this Agreement or (ii) if Urban shall not be
obligated to proceed with the transactions contemplated hereby due to a failure
of condition that Urban has not agreed to waive or extend or (iii) if the
appropriate consents from Starwood Hotels & Resorts
 
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Worldwide, Inc. have not been received on or before the Outside Date (and
Stratus covenants to use commercially reasonable efforts to secure the same
within 30 day of this Agreement).  (For the avoidance of doubt, Urban need not
make either election, and if no election is made the parties shall continue to
proceed as set forth herein.)
 
           A “Stratus Change of Control” means the occurrence of any of the
following:
 
(i)           the direct or indirect sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a series
of related transactions, of more than 50% of the properties or assets of SPI to
any “person” (as that term is used in Section 13(d) of the Securities Exchange
Act of 1934);
 
(ii)           the adoption of a plan relating to the liquidation or dissolution
of SPI;
 
(iii)           the consummation of any transaction (including, without
limitation, sale of stock, or any merger or consolidation), the result of which
is that any “person” (as defined above) becomes the beneficial owner, directly
or indirectly, of more than fifty percent (50%) of the voting stock of SPI,
measured by voting power rather than number of shares; or
 
(iv)           the consummation of any transaction (including, without
limitation, any sale, merger or consolidation), the result of which is that
Stratus, in whole or in part, is no longer wholly-owned by SPI.
 
Each party and its affiliates and representatives agree to treat (i) all
information provided by the other party or its affiliates or representatives
regarding the Property or themselves or their affiliates, and (ii) the
information contained in this Agreement (collectively, all “Transaction
Information”), as confidential information provided to them by the other party
or its affiliates or representatives (as the case may be). Urban may disclose
this Agreement to its limited partners as long as such limited partners are
informed of Urban’s confidentiality obligations herein.   Further, the parties
and their respective affiliates and representatives shall not disclose such
Transaction Information other than for the purpose of underwriting or
negotiating this transaction, or as otherwise may be required by law.  Except as
otherwise expressly provided in this Agreement to the contrary, this Agreement
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements, or conditions, express or implied, oral or
written, including, without limitation, that certain Block 21 Term Sheet dated
February 22, 2007.  All exhibits hereto are by this reference incorporated
herein and are intended to be terms of this Agreement.
 

     

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This Agreement and the terms hereof constitute the binding obligations of Urban,
Stratus, and SPI.
 
 
Very truly yours,
 
CANYON-JOHNSON URBAN FUND II, L.P.,
 
a Delaware limited partnership
 
 
By:
Canyon-Johnson Realty Advisors II, LLC,

 
a Delaware limited liability company,

 
General Partner

 
 
By: /s/ K. Robert Turner

 
K. Robert Turner

 
Authorized Signatory

 
 
By: /s/ Neville Rhone

 
Neville Rhone

 
Director

 
By signing in the spaces provided below, Stratus and Stratus Properties Inc.,
hereby acknowledge for themselves and their affiliates receipt of this Agreement
as contemplated under the Term Sheet and agrees for themselves and their
affiliates to be bound by the terms hereof.
 
STRATUS PROPERTIES OPERATING CO., L.P.,
a Delaware Limited Partnership
By:           STRS L.L.C., a Delaware limited liability company,
General Partner
By:           Stratus Properties Inc., a Delaware corporation,
Sole Member
 
               By:____/s/ William H. Armstrong
III____________                                                               
               Name:__William H. Armstrong
III_____________                                                                                  
              
Title:___President_________________________                                                                                     

 
STRATUS PROPERTIES INC., a Delaware corporation
 
By:___/s/ William H. Armstrong
III____________                                                                           
Name: ___William H. Armstrong
III____________                                                                                 
              
Title:_____President________________________                                                                                  
 

      

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STRATUS BLOCK 21 INVESTMENTS, L.P.
a Texas Limited Partnership
By:           STRATUS BLOCK 21 INVESTMENTS GP, L.L.C.,
a Texas limited liability company, General Partner

By: ____/s/ William H. Armstrong
III_______________                                                                   
Name: _____William H. Armstrong
III_______________                                                                                  
Title: ______President__________________________                                                                                    

     

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EXHIBIT A
 
Form of Operating Agreement
 
[See Attached]
 

Exhibit A                    

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EXHIBIT B
 
Form of Development Agreement
 
[See Attached]
 

 Exhibit B                    

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EXHIBIT C
 
Additional Conditions to be approved by Urban before the Closing Date (the
approval of Urban shall be given reasonably unless otherwise stated)
 
1.  Urban shall have received litigation, judgment and lien reports for Stratus,
SPI, and Stratus Properties Operating Co., L.P., and such reports shall be
satisfactory to Urban.
 
2.  Stratus shall have caused B21I to transfer title to the Property to the
Company, free and clear of any monetary liens or encumbrances except for those
(i) liens and encumbrances set forth on that certain title insurance policy
#175-1020212 dated February 5, 2007 issued by Commonwealth Land Title Insurance
Company; (ii) in favor of a Construction Lender; (iii) required to effect the
Business Plan and to be recorded after February 5, 2007; and (iv) liens for ad
valorem real estate taxes not yet due and payable.
 
3.  The Property Agreements shall have been assigned to the Company free and
clear of liens, charges and encumbrances.
 
4.  The Company shall have entered into the Core/Shell GMP, in form and
substance reasonably acceptable Urban, with Austin Commercial, Inc., providing a
guaranteed maximum price for those components of the Project as set forth on
Exhibit C to the Operating Agreement.
 
5.  Stratus or its Affiliates shall have received thirty-five percent (35%)
pre-sales on the residential condominiums, which presales shall include 5%
deposits at contract signing and 5% deposits upon 50% completion of construction
and such pre-sales shall equate to at least $61 million of gross Company revenue
for the 35% presold (i.e., $174 million of total revenue projected).
 
6.  The City of Austin shall have issued a site development permit and a
building permit for the initial phase of the Project, as described in Exhibit
C-1.
 
7.  Construction loan financing on terms equal or better than the terms set
forth on Exhibit C-2 with a Construction Lender acceptable to Urban shall have
been obtained.
 
8.  The Initial Budget and related business plans (which will include
development budgets including finishing costs not covered by the guaranteed
maximum price construction contract) attached to the Operating Agreement
attached hereto shall at the Closing shall continue to represent and be the
Stratus Parties’ good faith estimate of the costs and expenses required to
implement the Company’s Business as contemplated in the Operating
Agreement.  The Initial Budget shall include all project costs (inclusive of
land, hard costs, soft costs (including insurance) and other project related
costs).
 
9.  The Members shall have unanimously approved a contractor bonding strategy
for the Project.
 
10.  Urban shall have received an estimate of the costs, if any, of remediating,
abating or otherwise responding to, any environmental conditions affecting the
Property and the cost of
 

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environmental insurance and approved such costs and the general environmental
remediation program.
 
11.  Urban shall have received and approved an unconditional irrevocable
commitment to issue an extended coverage owner’s title policy on the standard
Texas State Board of Insurance promulgated form and endorsements subject only to
title exceptions, approved by Urban, with such endorsements as Urban shall
reasonably request.
 
12.  Evidence that the Property is properly zoned to permit development of the
Project shall have been provided to Urban for its approval.
 
13.  Architectural services agreements shall have been executed and delivered
for the architect of record and for the design architect, in each case on terms,
and with an architect, acceptable to Urban, and an architect’s certification
acceptable to Urban shall have been delivered.
 
14.  Consents and estoppels shall have been executed, in form and substance
reasonably satisfactory to Urban for each of the following:  (i) R.S. Ellis,
Inc. with respect to the Agreement Regarding Construction Staging, (ii) Austin
Children’s Museum, (iii) the City of Austin, and (iv) Starwood Hotels & Resorts
Worldwide, Inc.
 
15.  Urban shall have approved the general liability, builder’s risk, continuing
operations and other applicable insurance policies for the Project, all of which
shall have been obtained and in force effective at the Closing Date.
 
16.  Organizational documents for the Stratus Parties and any relevant affiliate
and certificates for such parties evidencing such parties valid existence and
authority to transact business shall have been delivered to Urban for its
approval promptly after the date hereof and such approval shall have been
obtained.
 

        Exhibit C      

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EXHIBIT C-1 TO ADDITIONAL CONDITIONS

Site Development Permit and Initial Phase Building Permit

 
Site Development Permit
 
The Site Development Permit shall comprise:
 
 
1.
An Unconsolidated Site Development Permit issued by the City of Austin for the
garage and foundation excavation component of the Project based on the
unconsolidated site plan application prepared and sealed by Bury + Partners,
Engineers, dated April 17, 2007, and submitted to and approved by the City of
Austin pursuant to its Land Development Code; and

 
 
2.
A Consolidated Site Development Permit issued by the City of Austin for the
Project based on the consolidated site plan application prepared and sealed by
Bury + Partners, Engineers, and submitted to and approved by the City of Austin
pursuant to its Land Development Code.

 
Initial Phase Building Permit
 
A building permit issued by the City of Austin for construction of the
foundation and parking garage components of the Project based on plans and
specifications prepared and sealed by BOKA Powell and Associates.
 

 

Exhibit C-1      

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EXHIBIT C-2 TO ADDITIONAL CONDITIONS

 
Construction Loan Financing Terms with a Construction Lender Acceptable to Urban

 
LTV:  A minimum loan-to-value of seventy percent (70%).

 
 
Interest Rate:  A maximum annual interest rate of seven and one-half percent
(7.5%).

 
 
Loan Term:  A minimum loan term of thirty-six (36) months.

 

        Exhibit C-2      

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