Exhibit 10.3


PROMISSORY NOTE


	
  $370,000,000.00

  	
  New York, New York

  July 14, 2006

  



 


FOR VALUE RECEIVED, KAPALUA BAY,
LLC, a Delaware limited liability company, having an address at c/o Maui
Land & Pineapple Company, Inc., 120 Kane Street, Kapalua, Maui, Hawaii
96732 (“Borrower”),
hereby unconditionally promises to pay to the order of LEHMAN
BROTHERS HOLDINGS INC.,  a
Delaware corporation, having an address at 399 Park Avenue, New York, New York
10022 (“Lender”),
as payee, at its office set forth above or at such other place as the holder
hereof may from time to time designate in writing, the principal sum of THREE
HUNDRED SEVENTY MILLION and 00/100 DOLLARS ($370,000,000.00), or so much
thereof as is advanced pursuant to the Loan Agreement (hereinafter defined) in
lawful money of the United States of America with interest thereon to be
computed on the unpaid principal balance from time to time outstanding at the
Applicable Rate or, if applicable, the Default Rate, and to be paid in accordance
with the terms of this Note and that certain Construction Loan Agreement dated
the date hereof between Borrower and Lender (the “Loan
Agreement”).  All capitalized
terms not defined herein shall have the respective meanings set forth in the
Loan Agreement.


ARTICLE I


PAYMENT
TERMS


Borrower agrees to pay the principal sum of
this Note and interest on the outstanding principal balance of this Note in
accordance with this Note and the Loan Agreement.  The outstanding principal balance of this Note
may only be prepaid in accordance with the Loan Agreement.  The outstanding principal balance of this
Note, all accrued and unpaid interest thereon and all other amounts due
hereunder and under the Mortgage and the other Loan Documents shall be due and
payable on the Maturity Date or such other date on which by acceleration or
otherwise the principal sum of this Note becomes due and payable in accordance
with the Loan Agreement.


Interest on the outstanding principal balance
of this Note shall accrue at the Applicable Rate and shall be calculated as
provided in Section 5.1(f) of the Loan Agreement.


On or before 3:00 PM (New York time) on each
Payment Date, Borrower shall make payments of interest due and payable
hereunder by deposit of immediately available funds to such account as Lender
may designate from time to time.


ARTICLE II


DEFAULT
AND ACCELERATION


The Debt shall without notice become immediately due
and payable at the option of Lender if any payment required in this Note is not
paid on or prior to the date when due or if









 



 


not paid on the Maturity
Date or on the happening of any other Event of Default which continues beyond
applicable notice and grace periods.


ARTICLE III


DEFAULT
INTEREST


Borrower hereby agrees that upon the occurrence and
during the continuance of an Event of Default, Lender shall be entitled to
receive and Borrower shall pay interest on the entire unpaid principal sum at
the Default Rate.  The Default Rate shall
be computed from the occurrence of the Event of Default until the earlier of
the date upon which the Event of Default is cured or waived or the date upon
which the Debt is paid in full.  Interest
calculated at the Default Rate shall be added to the Debt, and shall be deemed
secured by the Mortgage and the other Loan Documents.  This clause, however, shall not be construed
as an agreement or privilege to extend the date of the payment of the Debt, nor
as a waiver of any other right or remedy accruing to Lender by reason of the
occurrence and continuance of any Event of Default.


ARTICLE IV


LOAN
DOCUMENTS


This Note is secured by the Mortgage and the other
Loan Documents.  All of the terms,
covenants and conditions contained in the Loan Agreement, the Mortgage and the
other Loan Documents are hereby made part of this Note to the same extent and
with the same force as if they were fully set forth herein.  In the event of a conflict or inconsistency
between the terms of this Note and the Loan Agreement, the terms and provisions
of the Loan Agreement shall govern.


ARTICLE V


SAVINGS
CLAUSE


Notwithstanding anything to the contrary, (a) all
agreements and communications between Borrower and Lender are hereby and shall
automatically be limited so that, after taking into account all amounts deemed
interest, the interest contracted for, charged or received by Lender shall
never exceed the maximum legal rate, (b) in calculating whether any
interest exceeds the maximum legal rate, all such interest shall be amortized,
prorated, allocated and spread over the full amount and term of all outstanding
principal indebtedness with respect to the Loan to Borrower by Lender, and
(c) if through any contingency or event, Lender receives or is deemed to
receive interest in excess of the maximum legal rate, any such excess shall be
deemed to have been applied to the outstanding principal amount of the Loan,
with any excess refunded to Borrower.



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ARTICLE VI


NO ORAL
CHANGE


This Note may not be modified, amended, waived,
extended, changed, discharged or terminated orally or by any act or failure to
act on the part of Borrower or Lender, but only by an agreement in writing
signed by the party against whom enforcement of any modification, amendment,
waiver, extension, change, discharge or termination is sought.


ARTICLE VII


WAIVERS


Except as otherwise provided in the Loan Agreement,
Borrower and all others who may become liable for the payment of all or any
part of the Debt do hereby severally waive presentment and demand for payment,
notice of dishonor, notice of intention to accelerate, notice of acceleration,
protest and notice of protest and non-payment and all other notices of any
kind.  No release of any security for the
Debt or extension of time for payment of this Note or any installment hereof,
and no alteration, amendment or waiver of any provision of this Note, the Loan
Agreement or the other Loan Documents made by agreement between Lender or any
other Person shall release, modify, amend, waive, extend, change, discharge,
terminate or affect the liability of Borrower, and any other Person who may
become liable for the payment of all or any part of the Debt.  No notice to or demand on Borrower shall be
deemed to be a waiver of the obligation of Borrower or of the right of Lender
to take further action without further notice or demand as provided for in this
Note.  If Borrower is a partnership, the
agreements herein contained shall remain in force and applicable,
notwithstanding any changes in the individuals comprising the partnership, and
the term “Borrower,” as used herein, shall include any alternate or successor
partnership, but any predecessor partnership shall not thereby be released from
any liability.  If Borrower is a
corporation, the agreements contained herein shall remain in full force and
applicable notwithstanding any changes in the shareholders comprising, or the
officers and directors relating to, the corporation, and the term “Borrower” as
used herein, shall include any alternative or successor corporation, but any
predecessor corporation shall not be relieved of liability hereunder.  If Borrower is a limited liability company,
the agreements herein contained shall remain in force and applicable,
notwithstanding any changes in the individuals comprising the members thereof,
and the term “Borrower,” as used herein, shall include any alternate or
successor limited liability company, but any predecessor limited liability
company shall not thereby be released from any liability hereunder.  Nothing in this Article VII shall be
construed as a consent to, or a waiver of, any prohibition or restriction on
transfers of interests in such partnership, limited liability company or
corporation, which may be set forth in the Loan Agreement or any of the other
Loan Documents.



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ARTICLE VIII


TRANSFER


Subject to and in accordance with the Loan Agreement,
upon the transfer of this Note, Borrower hereby waiving notice of any such
transfer, Lender may deliver all the collateral mortgaged, granted, pledged or
assigned pursuant to the Loan Documents, or any part thereof, to the transferee
who shall thereupon become vested with all the rights herein or under
applicable Laws given to Lender with respect thereto, and Lender shall
thereafter forever be relieved and fully discharged from any liability or
responsibility in the matter arising after the date of transfer, provided that
Lender shall retain all rights hereby given to it and obligations hereunder
with respect to any liabilities and the collateral not so transferred.


ARTICLE IX


EXCULPATION


The Loan shall be non-recourse to Borrower and its
respective officers, directors, employees, members, partners and Affiliates
(collectively, the “Exculpated Parties”), and accordingly, Lender shall
not enforce the liability and obligation of Borrower to perform and observe the
obligations contained in this Note and the other Loan Documents by an action or
proceeding wherein a money judgment shall be sought against Borrower or any of
the other Exculpated Parties, except that Lender may bring a foreclosure
action, an action for specific performance or any other appropriate action or
proceeding to enable Lender to enforce and realize upon this Note and the other
Loan Documents, and the interests in the Project and any other collateral given
to Lender pursuant to the Mortgage or any of the other Loan Documents; provided,
however, that, except as specifically provided in this Article IX,
any judgment in any such action or proceeding shall be enforceable against
Borrower only to the extent of Borrower’s interest in the Project and in any
other collateral given to Lender pursuant to the Mortgage or any of the other
Loan Documents.  Lender, by accepting
this Note and the other Loan Documents, agrees that it shall not sue for, seek
or demand any deficiency judgment against Borrower or the Exculpated Parties in
any such action or proceeding, under, by reason of or in connection with this
Note or the other Loan Documents.  The
provisions of this Article IX shall not, however: (i) constitute a
waiver, release or impairment of any obligation evidenced or secured by this
Note or the other Loan Documents; (ii) impair the right of Lender to name
Borrower as a party defendant in any action or suit for foreclosure and sale
under the Mortgage; (iii) affect the validity or enforceability of any guaranty
or indemnity made in connection with this Note or the other Loan Documents
against the party having made the same; (iv) impair the right of Lender to
obtain the appointment of a receiver; (v) impair the enforcement of the
assignment of leases and rents in favor of Lender; (vi) impair the right of
Lender to bring suit with respect to fraud or intentional misrepresentation by
Borrower or any other person or entity in connection with this Note or the
other Loan Documents; or (vii) affect the validity or enforceability of the
Environmental Indemnity or limit the liability of Borrower or any other party
thereunder.


Nothing in this Article IX shall be deemed to
be a waiver of any right which Lender may have under Section 506(a), 506(b),
1111(b) or any other provisions of the Bankruptcy Code to file a claim for the
full amount of the Debt or to require that all
collateral



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shall continue to secure
all of the Debt in accordance with this Note and the other Loan Documents.


Notwithstanding the foregoing provisions of this Article
IX or any other provision in the Loan Documents, Borrower shall be fully
liable for, and shall indemnify and defend Lender from and against any actual
loss, cost, liability, judgment, claim, damage or expense sustained, suffered
or incurred by Lender
(including, without limitation, reasonable attorneys’ fees and expenses)
arising out of or attributable or relating to:


(i)            fraud or intentional
misrepresentation by Borrower, Borrower Principals or any of the Exculpated
Parties in connection with the Loan;


(ii)           the gross negligence or willful
misconduct of Borrower, Borrower Principals or any Guarantor;


(iii)          the physical waste or willful
destruction of the Project or any part thereof which is attributable to the
acts or omissions of Borrower, Borrower Principals or any of the Exculpated
Parties;


(iv)          the breach of provisions in the Loan
Agreement concerning Environmental Laws and Hazardous Material, including any
obligation to indemnify Lender with respect to such Environmental Laws or
Hazardous Material;


(v)           the removal of any portion of the
Personal Property in violation of the Loan Documents (other than fixtures,
furniture and equipment in the ordinary course of business, or as otherwise
permitted under the Loan Documents);


(vi)          the misapplication, misappropriation
or conversion by Borrower in violation of the Loan Documents of (A) any
insurance proceeds paid by reason of any loss, damage or destruction to the
Project; (B) any awards or other amounts received in connection with the
condemnation of all or a portion of the Project; or (C) rents, issues, profits,
proceeds, security deposits, or Contract Deposits (as defined in the Loan
Agreement);


(vii)         any financial information concerning
Borrower, Borrower Principals or any of the Exculpated Parties delivered to
Lender by Borrower, Borrower Principals or any of the Exculpated Parties
proving to be fraudulent in any material respect of the financial condition of
Borrower, Borrower Principals or any of the Exculpated Parties;


(viii)        any unapplied security deposits
collected with respect to the Project which are not delivered to Lender upon a
foreclosure of the Project or action in lieu thereof in accordance with the
terms of the Loan Documents;


(ix)           Borrower’s failure to permit on-site
inspections of the Project  in accordance
with the Loan Documents or to provide financial statements pertaining to the
Project as required by the Loan Agreement, unless, in either case, such failure
is cured within five (5) days after a second notice therefor is delivered to
Borrower;


(x)            Borrower’s failure to comply with
the single-purpose entity provisions of the Loan Documents;


(xi)           the Project or any part thereof
becoming an asset in (A) a voluntary bankruptcy or insolvency proceeding or (B)
an involuntary bankruptcy or insolvency



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proceeding
(unless such proceeding is dismissed within ninety (90) days after the
commencement thereof) where Lender reasonably determines that Borrower
(including Borrower’s employees, partners, directors, Affiliates, Member,
Guarantor, Guarantor’s members or Borrower Principals) has colluded with any
Persons to cause the filing of the same (other than an involuntary bankruptcy
or insolvency proceeding commenced or approved in writing by Lender);


(xii)          mechanic’s, materialmen’s and other
similar liens and encumbrances against the Project or any portion thereof to
the extent that Borrower had sufficient funds to discharge same or the work
being the subject matter of such liens was not approved of by Lender or
otherwise permitted by the Loan Documents;


(xiii)         Borrower’s failure to timely pay taxes
to the extent sufficient funds were available to Borrower to pay same from the
operating revenue of the Project;


(xiv)        Intentionally Deleted


(xv)         Borrower’s failure to deliver an
estoppel certificate to Lender pursuant to the Loan Agreement unless such
failure is cured within five (5) days after a second notice therefor is
delivered to Borrower;


(xvi)        any amendment or modification to the
organizational documents of Borrower or Borrower Principals, as the case may
be, without obtaining Lender’s prior written consent therefor or as is
otherwise permitted under the Loan Documents;


(xvii)       any amendment, modification or
termination of the Ground Lease without obtaining Lender’s prior written
consent therefor or as is otherwise permitted under the Loan Documents;


(xviii)      any breach of Article XVIII of the Loan
Agreement;


(xix)         any breach of Section 7.2 of the Loan
Agreement; and


(xx)          Intentionally Deleted;


(xxi)         failure to comply (to the extent
sufficient cash was available from the operating revenue of the Property to
effect compliance) with known and material legal requirements.


The liabilities listed in
clauses (i) through (xxi) of this Paragraph are collectively known as the “Recourse
Obligations”.


For purposes of this Note,
the term “Borrower Principal(s)” shall mean each of  Guarantor, Member, MLP KB Partner LLC, a
Hawaii limited liability company, ER Kapalua Investors Fund, LLC, a Delaware
limited liability company, and MH Kapalua Venture, LLC, a Delaware limited
liability company.



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ARTICLE X


GOVERNING
LAW; SUBMISSION TO JURISDICTION


THIS NOTE WAS NEGOTIATED IN THE STATE OF NEW YORK,
AND MADE BY BORROWER AND ACCEPTED BY LENDER IN THE STATE OF NEW YORK, AND THE
PROCEEDS OF THIS NOTE WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE
THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE
UNDERLYING TRANSACTION EMBODIED HEREBY. 
IN ALL RESPECTS, INCLUDING, WITHOUT LIMITATION, MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS NOTE AND THE OBLIGATIONS ARISING HEREUNDER SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES
OF AMERICA.  TO THE FULLEST EXTENT
PERMITTED BY LAW, BORROWER AND, BY ITS ACCEPTANCE HEREOF, LENDER HEREBY
UNCONDITIONALLY AND IRREVOCABLY WAIVE ANY CLAIM TO ASSERT THAT THE LAW OF ANY
OTHER JURISDICTION GOVERNS THIS NOTE AND THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.


TO THE
EXTENT PERMITTED BY APPLICABLE LAW, ANY LEGAL SUIT, ACTION OR PROCEEDING
AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS NOTE MAY, AT THE
OPTION OF LENDER, BE INSTITUTED IN ANY FEDERAL COURT SITTING IN THE STATE OF
HAWII OR STATE COURT SITTING IN THE ISLAND AND COUNTY OF MAUI, HAWAII, OR NEW
YORK COUNTY, NEW YORK, AND BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR
HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT,
ACTION OR PROCEEDING.


ARTICLE XI


NOTICES


All notices or other written communications hereunder
shall be delivered in accordance with Article XXIII of the Loan Agreement.


ARTICLE XII


TRIAL BY
JURY


BORROWER AND, BY ITS ACCEPTANCE OF THIS NOTE,
LENDER EACH AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF



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RIGHT BY JURY, AND WAIVE ANY
RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR
HEREAFTER EXIST WITH REGARD TO THIS NOTE OR ANY CLAIM, COUNTERCLAIM OR OTHER
ACTION ARISING IN CONNECTION HEREWITH. 
THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY
BY BORROWER AND, BY ITS ACCEPTANCE OF THIS NOTE, LENDER, AND IS INTENDED TO
ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A
TRIAL BY JURY WOULD OTHERWISE ACCRUE. 
EITHER PARTY IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN
ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY THE OTHER.


[SIGNATURE
PAGE TO FOLLOW]



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IN WITNESS WHEREOF, THIS SECURITY INSTRUMENT has been executed by
Borrower as of the day and year first above written.


	
   

  	
  BORROWER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  KAPALUA BAY, LLC,

  	
   

  
	
   

  	
  a Delaware limited liability company

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Kapalua Bay Holdings, LLC,

  
	
   

  	
   

  	
  a Delaware
  limited liability company,

  
	
   

  	
   

  	
  Its Managing
  Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  MLP KB Partner LLC,

  
	
   

  	
   

  	
   

  	
  a Hawaii limited
  liability company,

  
	
   

  	
   

  	
   

  	
  Its Managing
  Member

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  Maui Land & Pineapple Company,

  Inc., a Hawaii corporation,

  
	
   

  	
   

  	
   

  	
   

  	
  Managing Member

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /S/ ROBERT WEBBER

  
	
   

  	
   

  	
  Name:

  	
    R. WEBBER

  
	
   

  	
   

  	
  Title:

  	
            CFO

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /S/ RYAN CHURCHILL

  
	
   

  	
   

  	
  Name:

  	
       RYAN CHURCHILL

  
	
   

  	
   

  	
  Title:

  	
  VICE PRESIDENT/COMMUNITY

  
	
   

  	
   

  	
   

  	
  DEVELOPMENT