exhibit10_21.htm


    
      

    

    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 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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
      

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    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 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    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.

     


    
      
             

        
        

      

      
        4

        
          

        

      

      
        
        

      

    


    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________________________                                                                                  

     


    
      
              

        
        

      

      
        5

        
          

        

      

      
        
        

      

    


    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__________________________                                                                                    

    



    
      
             

        
        

      

      
        6

        
          

        

      

      
        
        

      

    


    EXHIBIT
      A

     

    Form
      of Operating Agreement

     

    [See
      Attached]

     


    
      
        Exhibit
          A                    

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    EXHIBIT
      B

     

    Form
      of Development Agreement

     

    [See
      Attached]

     


    
      
         Exhibit
          B                    

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    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 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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      

        

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


    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      

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    
      	
               

            	
              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