Exhibit 10.2





Exhibit 10.2




Execution Copy




REAL ESTATE FUND FORMATION AGREEMENT




This Real Estate Fund Formation Agreement (this “Agreement”), dated as of
October 15, 2009, is entered into by and between Yucaipa American Alliance Fund II, LLC, a Delaware
limited liability company (“Yucaipa”), and Morgans Hotel Group Co., a Delaware corporation
(“MHG”). In consideration of the promises and representations, warranties, covenants and
agreements contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:



1. The Fund. Yucaipa and MHG shall use good faith efforts to endeavor to raise a
private investment fund (the “Fund”) in accordance
with subparagraphs (a) through
(g) of this Section 1:




(a) The purpose of the Fund will be to, subject to reasonable exceptions to be mutually
agreed by Yucaipa and MHG, invest in (i) hotel real estate projects located in North
America (including, without limitation, (x) the acquisition, development or
redevelopment of hotel real estate projects and (y) investments in, or acquisitions,
development or redevelopment of, condominiums, bars, restaurants, retail establishments,
entertainment venues and other business ventures located within or reasonably related to any
hotel real estate project described in the foregoing clause (y)) directly or
indirectly undertaken by MHG or any of its subsidiaries where there is the opportunity to
own at least a 20% equity interest in such project and to make an equity investment of at
least $10,000,000 (each such project, a “Qualified Morgans Project”) (each
underlying hotel of a Qualified Morgans Project in which the Fund invests, a “Fund
Morgans Hotel”) and (ii) such other hotel real estate projects that are related
to first class full-service hotels as determined by the General Partner; provided
that no hotel real estate project located in North America that had been undertaken by a
person without the participation of MHG or any of its subsidiaries shall be deemed to be a
Qualified Morgans Project if (A) such project is subsequently acquired by MHG or any
of its subsidiaries in connection with the acquisition by MHG or such subsidiary of such
project together with (I) assets other than hotel real estate projects or
(II) hotel real estate projects that are located outside of North America and
(B) a majority of the value of the assets being acquired in such acquisition (as
measured based on allocable purchase price at the time of such acquisition) arises from the
portion of such assets that are either (I) assets other than hotel real estate
projects or (II) hotel real estate projects that are located outside of North
America.




(b) The Fund will have the first right to fund up to the entire equity investment (but
excluding any portion reserved for co-investment by MHG pursuant to the last sentence of
this Section 1(b)) in (i) each Qualified Morgans Project and (ii) other
hotel real estate projects to be mutually agreed by Yucaipa and MHG (such right, the
“Investment Rights”). MHG will not, and will cause its subsidiaries and the
Non-Yucaipa Key Professionals (as defined below) to not, invest in, or cause to be offered
to any person, the opportunity to invest or otherwise participate in any project (including,
without limitation, any Qualified Morgans Project) that is subject to the Investment


 


 









 






Rights, in each case, except to the extent the Fund has been offered in accordance with this
Agreement, and the Fund has declined, such opportunity. The Fund will be deemed to have
declined an opportunity if the Fund does not accept such opportunity within 30 calendar days
after being offered such opportunity in accordance with this Agreement. The General Partner
shall use its reasonable best efforts to complete, and MHG shall use its reasonable best
efforts to provide promptly to the General Partner such information as the General Partner
may reasonably request in order to facilitate the completion of, the General Partner’s due
diligence review of such opportunity within such 30-calendar-day period. If the Fund has
been offered such opportunity in accordance with this Agreement, and the Fund has declined
any portion of such opportunity, then MHG, its affiliates and the Non-Yucaipa Key
Professionals may invest or otherwise participate in such portion on its own or with one or
more third parties; provided that such investment or participation must be on terms
and conditions no more favorable, taken as a whole, to any such participating party in any
material respect than the terms and conditions that were offered to, and declined by, the
Fund, unless (x) such more favorable terms and conditions are offered to the Fund in
accordance with this Agreement and (y) the Fund does not elect, within seven
calendar days after such offer, to invest in such opportunity upon such more favorable terms
and conditions. If the Fund invests in any Qualified Morgans Project, MHG may, in MHG’s
sole discretion, elect to co-invest with the Fund, on a pari passu basis with the Fund and
upon terms and conditions no more favorable to MHG than the terms and conditions applicable
to the Fund’s investment in such Qualified Morgans Project, in such amount as MHG shall
determine up to 20% of the aggregate equity investment of the Fund and MHG in such Qualified
Morgans Project.




(c) The Investment Rights will commence as of the closing of the Fund at which
aggregate capital commitments to the Fund equal or exceed $100,000,000 and will terminate
upon the earliest to occur of (i) the expiration of the Fund’s commitment period,
(ii) the date on which the Fund has invested or committed to invest at least 85% of
the aggregate capital commitments to the Fund, and (iii) the fifth anniversary of
the date hereof.




(d) The aggregate capital commitments of the General Partner (as defined below) and its
affiliates to the Fund (the “GP Commitment”) will be equal to 5% of the aggregate
capital commitments to the Fund; provided that in no event will the GP Commitment be
required to exceed $25,000,000.




(e) The targeted size of the Fund will be between $250,000,000 and $500,000,000 in
aggregate capital commitments to the Fund.




(f) The Fund will be subject to governance and investor rights satisfactory to Yucaipa
and MHG. The Fund will be entitled to consent rights over certain actions of MHG with
respect to Fund Morgans Hotels and each other Fund hotel owned by the Fund that is managed
by MHG or a subsidiary of MHG. The material terms and
conditions of each Fund Morgans Hotel and each other Fund hotel owned by the Fund that
is managed by MHG or a subsidiary of MHG, including, without limitation, the acquisition and
the corresponding renovation/development scope and budget, will be mutually decided by the
Fund and MHG. Furthermore, if MHG or any of its subsidiaries



 


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co-invests in a Qualified
Morgans Project, major decisions of the applicable joint venture established with respect to
the underlying Fund Morgans Hotel will be mutually decided upon by the Fund and MHG. Such
major decisions will include, without limitation, capital expenditures in excess of
applicable reserves or budgets, financings, dispositions and approvals of operating and
capital budgets.




(g) Except as contemplated by this Agreement (including, without limitation,
subparagraphs (a) through (g) of this
Section 1) or otherwise mutually
agreed by Yucaipa and MHG, the terms and conditions of the Fund, and the rights and
obligations of investors in the Fund, will be commercially reasonable, as determined by
reference to prevailing investor expectations, industry standards and market practices for
private investment funds with similar investment objectives as the Fund.



2. The General Partner. The Fund, if successfully organized, shall be controlled by a
general partner (or other equivalent control entity in the case the Fund is not organized as a
limited partnership) (the “General Partner”), which shall be organized as a joint venture
between Yucaipa, its affiliates and its related persons, on the one hand, and MHG, its subsidiaries
and its related persons, on the other hand, in accordance with
subparagraphs (a) through
(d) of this Section 2:




(a) 50% of the equity interests in the General Partner will be allocated to Yucaipa,
its affiliates and its investment professionals in such proportions as Yucaipa may
determine. The remaining 50% of the equity interests in the General Partner will be
allocated to key non-Yucaipa professionals who are (i) employed by, or serve as
directors to, MHG, (ii) actively involved with the Fund, and (iii)
reasonably satisfactory to Yucaipa (such non-Yucaipa professionals, the “Non-Yucaipa Key
Professionals”).




(b) In the event the General Partner issues equity interests to persons other than
Yucaipa, MHG, Non-Yucaipa Key Professionals or their respective subsidiaries, affiliates and
related persons, including, without limitation, in connection with the raising of additional
capital or as allocations to other management and professionals, the equityholders of the
General Partner will be subject to pro rata dilution of their equity interests in the
General Partner.




(c) Yucaipa will assist the Non-Yucaipa Key Professionals in funding their pro rata
share of the GP Commitment by making to them, or causing one of Yucaipa’s affiliates to make
to them, an interest-bearing loan on mutually agreeable terms and conditions to be
determined by Yucaipa and such Non-Yucaipa Key Professionals and secured only by a first
priority lien in favor of Yucaipa or such affiliate, as applicable, on such Non-Yucaipa Key
Professionals’ interests in the General Partner and the Fund. Such loans will be structured
such that Yucaipa or such affiliate, as applicable, will be repaid in full (including,
without limitation, all outstanding principal, accrued and unpaid interest and other amounts
owing under such loans) on a first priority basis before any
distributions are made with respect to the General Partner or the Fund to the
Non-Yucaipa Key Professionals. Such loans shall be made in compliance with the
Sarbanes-Oxley Act.



 


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(d) Except as contemplated by this Agreement (including, without limitation,
subparagraphs (a) through (d) of this Section 2), the terms and
conditions of the General Partner, and the respective rights and obligations of the members
and other owners of equity interests in the General Partner, shall be as mutually agreed by
Yucaipa and MHG in good faith.



3. Fund Hotels. If the Fund is successfully organized, then MHG, whether directly,
through its wholly owned subsidiary Morgans Hotel Group Management LLC or through one or more other
wholly owned subsidiaries of MHG, shall have the first right, except to the extent declined by MHG
and subject to a reasonable transition period in the case such hotel was managed by a third party
at the time the Fund invested in such hotel, to (x) serve as the manager of each hotel
owned by the Fund (regardless of whether such hotel is a Fund Morgans Hotel) and provide expertise
in the operation, direction and supervision of such hotel, and (y) require such hotel to
use MHG’s global technology platforms, reservations systems and global marketing programs. Such
management and use shall be pursuant to a management agreement (each, a “Management
Agreement”) between such hotel and MHG, which shall contain such terms and conditions as are
then generally offered by MHG, at the time such Management Agreement is negotiated and executed, to
unaffiliated third parties under comparable management agreements in the locality where such hotel
is situated and shall otherwise be in a form generally consistent with MHG’s then standard
management agreement with unaffiliated third parties (collectively, the “Morgans Standard
Terms”). The Morgans Standard Terms (subject to local variation) are generally as set forth in
the letter from MHG to Yucaipa, dated the date hereof and referencing
this Section 3. MHG
and the Fund shall in good faith agree to modifications to the Morgans Standard Terms from time to
time as may be reasonably necessary to reflect changes in the marketplace for the hotel management
services or practices of MHG and its affiliates.



4. Conflicts of Interest. In organizing the Fund, Yucaipa and MHG shall use their
reasonable efforts to structure the Fund to minimize the risk of any conflicts of interests. In
addition, the governing documents of the Fund and the General Partner (collectively, including,
without limitation, the limited partnership agreement or other equivalent or related governing
agreements of the Fund and the operating agreement or other equivalent or related governing
agreements of the General Partner, the “Fund Agreements”) shall contain reasonable
conflicts of interest protections, including, without limitation, a requirement that Yucaipa shall
have sole control over the Fund and the General Partner with respect to any decision or action in
which MHG or any of its affiliates has a material pecuniary interest or other conflict of interest.
If Yucaipa determines that there is a decision or action with respect to which MHG or any of its
affiliates has a material pecuniary interest or other conflict of interest sufficient for Yucaipa
to be entitled under the Fund Agreements to exercise sole control over the Fund and the General
Partner with respect to such decision or action, Yucaipa shall inform the Non-Yucaipa Key
Professionals of such determination prior to exercising such sole control over such decision or
action.



5. Issuance of REF Warrants. Concurrently with the execution and delivery of this
Agreement, MHG hereby issues, sells and delivers in certificated form to Yucaipa, and Yucaipa
hereby receives from MHG:


 


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(a) a warrant in the form annexed hereto as Exhibit A to acquire 2,500,000
shares of MHG common stock, par value $0.01 per share (“Common Stock”), subject to
the terms and conditions set forth therein; and




(b) a warrant in the form annexed hereto as Exhibit B to acquire an additional
2,500,000 shares of Common Stock, subject to the terms and conditions set forth therein.



6. Alternative Structures. If Yucaipa and MHG jointly determine that an alternative
form of pooled investment vehicle, another type of financing vehicle or another type of financing
arrangement (each, an “Alternative Structure”), including, without limitation, (a)
any publicly traded special purpose acquisition company, (b) any separate investment
account, or (c) any contractual co-investment relationship, should be formed, arranged or
used in addition or in lieu of the Fund for purposes of undertaking in whole or in part the purpose
or functions of the Fund, then the Yucaipa and MHG shall interpret this Agreement to apply mutatis
mutandis to such Alternative Structure and otherwise effectuate the intent of this Agreement to the
fullest extent reasonably practicable as if references hereunder to the “Fund” also refer to such
Alternative Structure and references hereunder to the capital commitments to the Fund also refer to
the capital of such Alternative Structure; provided that a contractual co-investment
relationship shall only be used in addition to the Fund or another Alternative Structure and shall
invest on a pro rata basis with the Fund or such other Alternative Structure.



7. Termination. This Agreement and the rights and obligations of the parties hereto
hereunder shall terminate automatically on January 30, 2011 if on or prior thereto the Fund has not
closed on at least $100,000,000 in aggregate capital commitments.



8. Amendments and Waivers. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto. Except as otherwise provided in this
Agreement, any failure of any party to comply with any obligation, covenant, agreement or condition
herein may be waived by the party entitled to the benefits thereof only by a written instrument
signed by the party granting such waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure. The failure of any party hereto to
assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such
rights.



9. Assignment. This Agreement and the rights and obligations hereunder shall not be
assignable or transferable by any party hereto without the prior written consent of the other party
hereto. Any attempted assignment in violation of this
Section 9 shall be void.



10. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the
parties hereto and their permitted assigns, and nothing herein expressed or implied shall give or
be construed to give to any person, other than the parties hereto and such permitted assigns, any
legal or equitable rights hereunder.



11. Notices. All notices or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered by hand or sent by a nationally recognized
overnight courier service (with tracking capability), and shall be deemed given when received, as
follows:



 


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(a) if to Yucaipa, then to:




Yucaipa American Alliance Fund II, LLC

9130 W. Sunset Boulevard

Los Angeles, California 90069

Attention:       Robert P. Bermingham




with a copy (which shall not constitute notice) to:




Munger, Tolles & Olson LLP

355 South Grand Avenue, 35th Floor

Los Angeles, California 90071

Attention:       Judith T. Kitano

Fax:                (213) 683-4052

Email:             judith.kitano@mto.com




(b) if to MHG, then to:




Morgans Hotel Group Co.

475 Tenth Avenue

New York, New York 10018

Attention:       David Smail




with a copy (which shall not constitute notice) to:




Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attention:       Robert W. Downes

Fax:
               (212) 558-3588

Email:            downesr@sullcrom.com



12. Counterparts. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective when one or more
such counterparts have been signed by each party hereto and delivered to the other party hereto.



13. Entire Agreement. This Agreement, including the exhibits hereto, contains the
entire agreement and understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such subject matter.
None of the parties hereto shall be liable or bound to any other party in any manner by any
representations, warranties or covenants relating to such subject matter, except (a) as
specifically set forth herein or, (b) in the case of MHG, as set forth in (i) the
Securities
Purchase Agreement, dated as of the hereof, by and among MHG, Yucaipa American Alliance Fund
II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (the “Securities Purchase
Agreement”), or (ii) the Ancillary Agreements (as defined in the Securities Purchase
Agreement).


 


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14. Interpretation; Exhibits. The headings contained in this Agreement and in any
exhibit hereto are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. All exhibits annexed hereto or referred to herein are hereby
incorporated in and made a part of this Agreement as if set forth in full herein. Any capitalized
terms used in any exhibit but not otherwise defined therein shall have the meaning assigned to such
term in this Agreement. When a reference is made in this Agreement to a “Section” or “Exhibit”,
such reference shall be to a section of, or an exhibit to, this Agreement unless otherwise
indicated. For purposes of this Agreement, (a) an “affiliate” of any person means
another person that, directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person, and (b) for purposes of
the foregoing clause (a), a person shall be deemed to control another person if such first
person possesses, directly or indirectly, the power to direct, or cause the direction of, the
management and policies of such other person, whether through the ownership of voting securities,
by contract or otherwise; provided that the existence of a management contract by a person
or an affiliate of such person to manage another person shall not be deemed to be control by such
person; provided further that neither MHG nor any of its subsidiaries shall be
deemed hereunder to be an affiliate of Yucaipa. For purposes of this Agreement, “person”
means any individual, firm, corporation, partnership, limited liability company, trust, joint
venture, governmental entity or other entity.



15. Severability. If any provision of this Agreement (or any portion thereof) or the
application of any such provision (or any portion thereof) to any person or circumstance shall be
held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision hereof (or the
remaining portion thereof) or the application of such provision to any other person or
circumstances.



16. Consent to Jurisdiction. All actions and proceedings arising out of or relating
to this Agreement shall be heard and determined exclusively in any New York state or federal court
sitting in the Borough of Manhattan of The City of New York. The parties hereto hereby (a)
submit to the exclusive jurisdiction of any state or federal court sitting in the Borough of
Manhattan of The City of New York for the purpose of any action or proceeding arising out of or
relating to this Agreement brought by any party hereto, and (b) irrevocably waive, and
agree not to assert by way of motion, defense, or otherwise, in any such action or proceeding, any
claim that it is not subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that the action or proceeding is brought
in an inconvenient forum, that the venue of such action or proceeding is improper, or that this
Agreement or the transactions contemplated by this Agreement may not be enforced in or by any of
the above-named courts.



17. Governing Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.



18. Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in respect to any litigation
directly or indirectly arising out of, under or in connection with this Agreement or any
transaction contemplated hereby. Each party hereto (a) certifies that no representative,
agent or



 


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attorney of any other party has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the foregoing waiver and (b)
acknowledges that it and the other party hereto have been induced to enter into this Agreement by,
among other things, the mutual waivers and certifications in this
Section 18.




19. No Personal Liability of Partners, Directors, Officers, Owners, Etc.




(a) No director, officer, employee, incorporator, stockholder, managing member, member,
general partner, limited partner, principal or other agent of Yucaipa, or any affiliate of
Yucaipa, or any director, officer, employee, incorporator, stockholder, managing member,
member, general partner, limited partner, principal or other agent of such affiliate, shall
have any liability for any obligations of Yucaipa under this Agreement or for any claim
based on, in respect of, or by reason of, the obligations of Yucaipa hereunder. MHG hereby
waives and releases all such liability. This waiver and release is a material inducement to
Yucaipa’s entry into this Agreement.




(b) No director, officer, employee, incorporator, stockholder, managing member, member,
general partner, limited partner, principal or other agent of MHG, or any affiliate of MHG,
or any director, officer, employee, incorporator, stockholder, managing member, member,
general partner, limited partner, principal or other agent of such affiliate, shall have any
liability for any obligations of MHG under this Agreement or for any claim based on, in
respect of, or by reason of, the obligations of MHG hereunder. Yucaipa hereby waives and
releases all such liability. This waiver and release is a material inducement to MHG’s
entry into this Agreement.



20. Rights of Holders. Each party hereto shall have the absolute right to exercise or
refrain from exercising any right or rights that such party may have by reason of this Agreement,
including, without limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such party shall not incur any liability to any other party or other
holder of any securities of MHG as a result of exercising or refraining from exercising any such
right or rights.



21. Construction. The parties hereto acknowledge that each such party and its counsel
have participated in the negotiation and preparation of this Agreement. This Agreement shall be
construed without regard to any presumption or other rule requiring construction against the party
causing this Agreement to be drafted. Every covenant, term and provision of this Agreement shall
be construed according to its fair meaning and not strictly for or against any party hereto.



[Signature page follows.]






 


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In witness whereof, Yucaipa and MHG have executed and delivered this Agreement as of
the date first above written.



	 	 	 	 	 
	 	YUCAIPA





Yucaipa American Alliance Fund II, LLC

 	 
	 	By:  	/s/
Robert P. Bermingham 	 
	 	 	Name:  	Robert P. Bermingham 	 
	 	 	Title:  	Vice President 	 
	 
	 	MHG





Morgans Hotel Group Co.

 	 
	 	By:  	/s/
Marc Gordon 	 
	 	 	Name:  	Marc Gordon 	 
	 	 	Title:  	President 	 



 


 









 





	 	 	 	 	 



Exhibit A




Form
of Warrant Issuable under Section 5(a) 




[See Attachment.]




 


 









 







Exhibit B




Form
of Warrant Issuable under Section 5(b)




[See Attachment.]