exhibit10_1.htm


    

      
        
           


        

        
           


          
          

        

        
          
            

            

          

           


          
            


            


            CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

          

        

      


       

      EXHIBIT 10.1


       

      


      RESTRUCTURING
SUPPORT AND FORBEARANCE AGREEMENT

      


      BY
AND AMONG

      


      TABERNA
CAPITAL MANAGEMENT LLC,

       

      THE
BANK OF NEW YORK MELLON TRUST COMPANY, N.A., AS SUCCESSOR TO JP MORGAN CHASE
BANK, NATIONAL ASSOCIATION, AS TRUSTEE,

       

      HOLDERS
OF THE AFFILIATE DEBT,

       

      AND

       

      TARRAGON
CORPORATION

       

      


       

      DATED:  OCTOBER
30, 2008

       

      


      



      
        
           


        

        
           


          
          

          
            

            

          

        

        
           


          
            CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

            


          

        

      


      RESTRUCTURING
SUPPORT AND FORBEARANCE AGREEMENT

      


      


      This
Restructuring Support and Forbearance Agreement (this “Agreement”) dated as
of October 30, 2008, is entered into by and among TABERNA CAPITAL MANAGEMENT
LLC, a Delaware limited liability company (“Taberna”), as
collateral manager for the benefit of TABERNA PREFERRED FUNDING II, LTD.,
TABERNA PREFERRED FUNDING III, LTD., TABERNA PREFERRED FUNDING IV, LTD., TABERNA
PREFERRED FUNDING V, LTD. AND TABERNA PREFERRED FUNDING VI,
LTD.  (collectively, the “Taberna Debt
Holders”), THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL
ASSOCIATION (“BNY”), as successor to JP Morgan Chase Bank, National Association,
as Trustee under those certain subordinated unsecured notes issued pursuant to
the subordinated indentures between Tarragon Corporation and BNY dated as of
June 15, 2005, September 12, 2005, and March 1, 2006 (as amended, extended,
supplemented, increased, consolidated, renewed or otherwise modified or replaced
from time to time), ROBERT ROTHENBERG and BEACHWOLD PARTNERS, L.P., a Texas
Limited Partnership and TARRAGON CORPORATION, a Nevada corporation (“Tarragon”).  Capitalized
terms used herein and not defined herein shall have the meaning ascribed to them
in Section 17.

       

      RECITALS

       

      A. Tarragon
is a developer, owner and manager of real estate.

       

      B. The
Taberna Debt Holders own, in the aggregate, $125,000,000 (One Hundred Twenty
Five Million Dollars) principal amount of promissory notes of Tarragon issued
pursuant to the Loan Documents and all Claims associated therewith (the “Taberna
Debt”).

       

      C. Taberna
is a collateral manager that manages various collateral debt obligation
vehicles, including those issued by the Taberna Debt Holders evidencing the
Taberna Debt.

       

      D. The
parties hereto have engaged in good faith negotiations with the objective of
reaching an agreement regarding the financial restructuring of Tarragon and the
Tarragon Subsidiaries, including the restructuring of the Taberna Debt and the
Affiliate Debt, pursuant to the terms of the Affiliate Debt
Agreement.

       

      E. Tarragon
intends to implement a financial restructuring under which a substantial portion
of Tarragon’s senior unsecured creditor claims are resolved (the “Financial
Restructuring”) which, at Tarragon’s discretion, may result in the
Tarragon Debtors filing voluntary petitions for relief (the “Filing”) under
chapter 11 of the Bankruptcy Code (“Chapter 11”) and
seeking approval by the Bankruptcy Court of a disclosure statement (the “Disclosure
Statement”) and a plan of reorganization (the “Plan”).  To
the extent the Financial Restructuring is not implemented pursuant to a Filing,
the form and terms of such Financial Restructuring must be acceptable to Taberna
in its sole and absolute discretion.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      F. Taberna
has informed Tarragon that the failure of Tarragon to make the October 30, 2008
interest payment with respect to the Taberna Debt would preclude Taberna from
entering into negotiations with respect to the Financial
Restructuring.

       

      G. Any
Filing by Tarragon would constitute an event of default under the Taberna
Promissory Note and Loan Documents evidencing the Taberna Debt.

       

      H. Tarragon
is also the issuer of the Affiliate Debt, which is held by Beachwold and
Rothenberg (Beachwold, Rothenberg, William S. Friedman, a partner of Beachwold,
and any of their affiliates are hereinafter collectively referred to as the
“holders of the
Affiliate Debt”).

       

      I. Tarragon
also anticipates that, in connection with the Financial Restructuring, some or
all of the membership interests in Newco shall be issued to ***, or its
affiliates (“***”) or some other
third party(ies), which shall not include, directly or indirectly, any holders
of the Affiliate Debt (“Third
Party”).

       

      J. The
parties hereto wish to further agree to use their commercially reasonable
efforts to timely complete the Financial Restructuring in accordance with, the
terms, conditions and limitations contained herein.

       

      STATEMENT
OF AGREEMENT

       

      In
consideration of the premises and the mutual covenants and agreements set forth
herein, and for other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
bound hereby, do hereby agree as follows:

       

      1.           Agreements
of BNY, Taberna and the Taberna Debt Holders.  BNY and Taberna,
for itself and on behalf of the Taberna Debt Holders, agree that, so long as
this Agreement has not been terminated in accordance with Section 15 hereof,
it:

       

      (i) will not
vote or take any action whatsoever to oppose the Financial Restructuring or, if
applicable, the Plan or otherwise agree to, consent to, or provide any support
to any other plan of reorganization of the Tarragon Debtors that is not
supported by Tarragon;

       

      (ii) will not
object to or otherwise commence any proceeding to oppose or alter the Financial
Restructuring or the Plan (or any other document filed in furtherance of the
Financial Restructuring) or take any other action that is inconsistent with
consummation of the Plan and the Financial Restructuring;

       

      (iii) will not
sell, transfer, assign, mortgage, pledge or otherwise encumber any of the
Taberna Debt owned by it or grant any option thereon or any right or interest
(voting or otherwise) therein, or enter into any agreement, letter of intent or
understanding to do any of the foregoing;

       

        
          

        

      

       

      *** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE
COMMISSION***

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (iv) will not
take any action or otherwise pursue any right or remedy under the Loan
Documents, with respect to any Default or Event of Default (as defined in the
Loan Documents), or  initiate, or have initiated on its behalf, any
litigation or proceeding of any kind with respect to the Taberna Debt, other
than to enforce this  Agreement; and

       

      (v)  will
not exercise any of its rights or remedies under the Taberna Promissory Notes or
any other Loan Documents or applicable law with respect to any event of default
now existing or hereafter arising under the Taberna Promissory Notes or any
other Loan Document, including  (i) accelerating the maturity of the
Taberna Promissory Notes or initiating proceedings for the collection of the
principal amount of, any interest on, or any other amount with respect to the
Notes; and (ii) filing or joining in filing any involuntary petition in
bankruptcy with respect to Tarragon, or otherwise initiate or participate in
similar insolvency, reorganization or moratorium proceedings for the benefit of
creditors of Tarragon (other than the Filing as contemplated herein)
..

       

      2. Exchange.  Subject
to the terms and conditions hereof, on the Effective Date Tarragon, Taberna and
the holders of the Affiliate Debt agree to observe and perform the following
agreements and covenants:

       

      (a) Each
Taberna Debt Holder shall sell, assign and deliver to Newco all Taberna Debt
owned by it, and in exchange therefor, Newco shall issue, sell and deliver to
such Taberna Debt Holder Newco’s secured senior promissory notes having the
terms and provisions set forth below in Section 3 (the “Newco Senior Notes”),
which terms and provisions shall be set forth in an Indenture(s) (the
“Indenture”), the form and substance of which shall be acceptable to BNY and
U.S. Bank National Association (together, BNY and U.S. Bank National Association
are referred to herein as the “Trustees”).  The
principal amount of Newco Senior Notes issued, sold and delivered to each
Taberna Debt Holder shall be equal to the principal amount of Taberna Promissory
Notes delivered in exchange therefor by such Taberna Debt Holder, and the final
maturity date of such Newco Senior Notes so issued, sold and delivered shall
match the final maturity date of the Taberna Promissory Notes so
surrendered.    The aggregate principal amount of all Newco
Senior Notes to be issued, sold and delivered by Newco to the Taberna Debt
Holder shall be equal to $125,000,000 (One Hundred Twenty Five Million
Dollars).  (Such issuance of the Newco Senior Notes in exchange for
the Taberna Debt being herein sometimes called the “Exchange”.)

       

      (b) The
holders of the Affiliate Debt shall pledge all equity securities of Newco and
Tarragon received or held by them in respect of any disposition of the
Affiliated Debt under the Financial Restructuring to secure the full payment and
discharge of all of Newco’s obligations under the Newco Senior Notes pursuant to
a pledge and security agreement, in form and substance reasonably acceptable to
Taberna (the “Affiliate Pledge and
Security Agreement”), that such holders and each Taberna Debt Holder
agree to execute and deliver on the Effective Date.  The Affiliate
Pledge and Security Agreement will be non-recourse to the holders of the
Affiliate Debt and will contain customary exculpation provisions with respect
thereto.  To the extent the holders of the Affiliate Debt sell, assign
and deliver to Newco all or a portion of the Affiliate Debt owned by them, and
in exchange therefor, Newco issues and delivers to such holders
Newco’s  subordinated notes, such subordinated notes shall have
substantially the terms and provisions set forth below in Section
4  (the “Newco Subordinated
Notes”).

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (c) Newco’s
claim against Tarragon with respect to the Taberna Debt shall be satisfied
through the issuance to Newco of shares of Restructured Tarragon’s stock (which
may be preferred stock (with an aggregate dividend preference sufficient to pay
interest on the Newco Senior Notes and Newco Subordinated Notes as and when such
interest is due), common stock or a combination thereof) which shares shall have
the same terms and shall vote with Tarragon’s common stock (collectively, the
“Replacement
Securities”). The Replacement Securities and any equity securities
pledged by the holders of the Affiliate Debt under the Affiliate Pledge and
Security Agreement shall, at the Effective Date, represent at least 80% of
Restructured Tarragon’s issued and outstanding shares of preferred stock and
common stock in the aggregate.

       

      (d) Newco
shall pledge all Replacement Securities received by it in respect of the Taberna
Debt, pursuant to the Financial Restructuring, to secure the full payment and
discharge of all of Newco’s obligations under the Newco Senior Notes pursuant to
a pledge and security agreement, in form and substance reasonably acceptable to
Taberna  (the “Pledge and Security
Agreement”), that Newco and each Taberna Debt Holder agree to execute and
deliver on the Effective Date.

       

      (e) Newco
shall cause an irrevocable letter of credit with a face amount of $2,500,000
(Two Million Five Hundred Thousand Dollars) (the “Letter of Credit”) to
be issued by a commercial bank reasonably acceptable to Taberna solely to secure
payment of Newco’s obligations under the Newco Senior Notes, as set forth in the
Pledge and Security Agreement.

       

      (f) Newco
shall issue to ***, the
holders of the Affiliate Debt or to the Third Party (which Third Party shall be
subject to the prior written approval of Taberna, which approval shall not be
unreasonably withheld), as applicable, membership interests of Newco which,
after their issuance, shall represent substantially all of the then outstanding
membership interests of Newco; provided, however, that in no event shall the
holders of the Affiliate Debt own more than 49% of the economic or voting
interests in Newco without Taberna’s prior written consent, which consent may be
withheld in Taberna’s sole discretion.  Tarragon agrees to take
commercially reasonable efforts to cause Newco to issue such membership
interests.

       

      (g) So long
as Newco is a wholly owned subsidiary of Tarragon, Tarragon will cause Newco to
comply with Newco’s obligations set forth in this Agreement.

      
         

        
          

        

      

      
        *** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE
COMMISSION***

         

      

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (h) Taberna,
for itself and the Taberna Debt Holders, will direct or request the Trustees to
take such action as may be necessary or required under the terms of the Taberna
Promissory Notes or the other Loan Documents to fulfill such Person's
obligations under this Agreement or in connection with the Financial
Restructuring.

       

      3. The Newco
Senior Notes.   The Newco Senior Notes will be in the principal
amount of $125 million and will mature in 2035-6. The Newco Senior Notes will
bear cumulative interest at the rate of 2% per annum for the first seven years
following the issuance thereof, which rate shall thereafter increase by 2% per
annum each of the following three years until the Newco Senior Notes shall bear
cumulative interest at the rate of 8% per annum.  The Newco Senior
Notes shall continue to bear cumulative interest at the rate of 8% per annum
until the 15th anniversary of issuance of the Newco Senior Notes, at which time
the interest rate shall increase to a cumulative rate of 18% and shall remain at
such rate until maturity.  Interest shall be payable quarterly. The
Newco Senior Notes will be prepayable by Newco at any time in whole or in part
without premium or penalty. The Newco Senior Notes will be secured by the
Affiliate Pledge and Security Agreement, the Pledge and Security Agreement and
the Letter of Credit.  It will be an event of default under the Newco
Senior Notes if there is a default under the Newco Subordinated Notes, unless
waived in writing by Taberna.  The Newco Senior Notes (and/or any
related agreements as may be necessary or desirable) will contain the following
covenants:

       

      (a) Without
prior consent from Taberna in its sole discretion, a prohibition on the
incurrence, or any guaranty, by Newco of any additional indebtedness other than
the Newco Senior Notes and, if applicable, the Newco Subordinated
Notes.

       

      (b) A
prohibition on related party transactions between Tarragon, *** or the
Third Party and their affiliates on the one hand, and Newco on the other hand,
except on arm’s length terms and subject to Taberna’s prior written approval
(such approval not to be unreasonably withheld) or as otherwise provided
herein.

       

      (c) Any
transfer (directly or indirectly) by *** or the Third Party to any person of (i)
equity interests in Newco that in the aggregate results in *** or the Third
Party having less than a controlling economic or voting interest in Newco, (ii)
control over the management of, or day-to-day responsibilities with respect to,
Newco, (iii) any right to appoint a majority (or any lesser controlling number)
of the members of the Newco board of managers, or (iv) any right of first offer
with respect to *** or the Third Party’s equity interests in Newco, or any
issuance of any warrants or options with respect to *** or the Third Party’s
equity interests in Newco, that would result in any of the circumstances
described in (i) through (iii) above, will be subject to prior written approval
of Taberna, which approval may be withheld in Taberna’s sole
discretion.  All proceeds of any such transfer or issuance shall be
immediately applied to reduce amounts due or payable or to become due or payable
with respect to the Newco Senior Notes.

       

       

        
          

        

      

      *** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE
COMMISSION***

      
        
           

        

        
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TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (d) Newco may
not issue any additional equity securities that would result in *** or the
Third Party holding less than 51% of the economic or voting interest in Newco
without Taberna’s prior written consent, which consent may be withheld in
Taberna’s sole discretion. Proceeds from any such issuance of equity must be
used either to reduce the obligations under the Newco Senior Notes or fund
Tarragon’s operations in accordance with Tarragon’s business plan.

       

      (e) Newco and
the holders of the Affiliate Debt, as applicable, may not transfer any of their
equity interest in Restructured Tarragon that would have the effect of reducing
Newco’s or such holders’ aggregate economic or voting interest in Restructured
Tarragon to less than 51%, without Taberna’s prior written consent, which
consent may be withheld in Taberna’s sole discretion. In the event that Taberna
consents to such transfer, all proceeds of any such transfer shall be
immediately applied to reduce amounts due or payable or to become due or payable
with respect to the Newco Senior Notes.

       

      (f) Without
Taberna’s prior written consent, which consent may be withheld in Taberna’s sole
discretion, Newco and the holders of the Affiliate Debt shall cause Restructured
Tarragon not to either (i) issue any equity securities that would have the
effect of reducing Newco’s and such holders’ aggregate economic or voting
interest in Restructured Tarragon to less than 51%, or (ii) issue common stock
or securities convertible into common stock at a price less than the value
accorded the shares of Restructured Tarragon’s common stock in the Financial
Restructuring.

       

      (g) Subject
to its fiduciary obligations, Newco and, if applicable, the holders of the
Affiliate Debt shall not allow Restructured Tarragon (or any wholly-owned
subsidiary) to sell certain assets that are mutually agreed upon in good faith
by Restructured Tarragon and Taberna and are identified in the Indenture at a
price less than their value in the Financial Restructuring, except with
Taberna’s prior written approval (provided that Taberna shall be deemed to have
consented to any sale that is approved by the Bankruptcy Court after notice and
a hearing).

       

      (h) Other
than dividends to pay interest on the Newco Senior Notes as contemplated under
Section 2(c) and the dividends described in Section 3(k), and without Taberna’s
prior written consent, which consent may be withheld in Taberna’s sole
discretion, Restructured Tarragon shall not pay any dividend or make any
distribution to Newco or the holders of the Affiliate Debt on account of or with
respect to Newco’s or such holders’ equity interest(s) in Restructured Tarragon,
except that such a dividend or distribution may be made from GAAP net income as
follows:  (i) up to $1 million during the calendar year ending
December 31, 2009, which shall be reduced by the amount of  $2,739.72
for each day in 2009 that elapsed prior to the Plan becoming “effective”; (ii)
up to $1.5 million during the calendar year ending December 31, 2010; (iii) up
to $2 million during the calendar year ending December 31, 2011; and (iv) up to
$2.5 million during the calendar year ending December 31, 2012. and (v) for each
year thereafter in an amount not greater than 120% of the amount of such
dividend or distribution made during the immediately preceding calendar year;
provided, however, that any
allowable distribution or dividend that could have been made in any given
calendar year as described above but that was not made in any given calendar
year may be made in, or carried over to, any subsequent calendar year provided
that there exists sufficient GAAP net income to make such additional
distribution or dividend.

       

       

        
          

        

      

      *** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE
COMMISSION***

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (i) If
applicable, without Taberna’s prior written consent, which consent may be
withheld in Taberna’s sole discretion, Newco shall not make any payment of
principal on account of any of the Newco Subordinated Notes.

       

      (j) Without
Taberna’s prior written consent, which consent may be withheld in Taberna’s sole
discretion, Newco shall not pay any dividend or make any distribution on account
of or with respect to, or otherwise redeem, any of its equity securities, except
that during the calendar year 2009 and for each subsequent calendar year
thereafter such a dividend or distribution may be made only from GAAP net income
in the following amounts:  (i) up to $1 million during the calendar
year ending December 31, 2009; (ii) up to $1.5 million during calendar year
ending  December 31, 2010; (iii) up to $2.0 million during the
calendar year ending December 31, 2011; (iv) up to $2.5 million during the
calendar year ending December 31, 2012; and (v) for each year thereafter in an
amount not greater than 120% of the amount of such dividend or distribution made
during the immediately preceding calendar year; provided, however, that any
allowable distribution or dividend that could have been made in any given
calendar year as described above but that was not made in any given calendar
year may be made in, or carried over to, any subsequent calendar year provided
that there exists sufficient GAAP net income to make such additional
distribution or dividend.

       

      (k) Restructured
Tarragon may make to Newco and the holders of the Affiliate Debt, and Newco and
the holders of the Affiliate Debt may receive and retain, annual distributions
in addition to the dividends to pay interest on the Newco Senior Notes as
contemplated under Section 2(c) and the dividends described in Section 3(h)
(whether or not such amounts were distributed) from Cash Available for
Distribution (as defined below) so long as the outstanding principal balance of
the Newco Senior Notes is paid down in an amount that is equal to 400% of the
incremental distribution allowed under this Section 3(k), which payment of the
Newco Senior Notes may be paid by Restructured Tarragon to Newco as a special
dividend or otherwise.  For purposes hereof, “Cash Available for
Distribution” means cash flow from Tarragon’s operating activities, as reported
in accordance with GAAP; plus the net cash proceeds from sales or refinancing of
properties, less amounts of such net proceeds distributed to minority partners;
after deducting payments of dividends on preferred investments as described
herein.

       

      4. Newco
Subordinated Notes.   The Newco Subordinated Notes will be
issued in the principal amount of $10,000,000 and will mature in
2038.  The Newco Subordinated Notes will be prepayable by Newco in
whole or in part without premium or penalty. The Newco Subordinated Notes will,
until the 17th
anniversary of issuance, pay cumulative interest in an amount not to exceed
$760,000 per annum.  The Newco Subordinated Notes will be subordinated
in all respects to the Newco Senior Notes, which subordination shall be further
evidenced by an intercreditor agreement by and between Taberna and the holders
of the Newco Subordinated Notes. The Newco Subordinated Notes will be
unsecured.

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      5. Payments on Signing of This
Agreement.

       

      (a) Simultaneously
with the execution and delivery of this Agreement, Tarragon  shall pay
Taberna the sum of  (i) $2,462,366.67 on account of interest payable
on the Taberna Debt (the “Interest Payment”),
and  (ii) $300,000 on account of the fees and expenses incurred by
Taberna in connection with its evaluation, negotiation and/or documentation of
this  Agreement and related documents  (the “Expense Payment”).
The Payment and Expense Payment shall each be paid by wire transfer in
immediately available funds to an account designated in writing by
Taberna.

       

      (b) In
addition to the Interest Payment and the Expense Payment, Tarragon, *** or the
Third Party shall make the following payments to Taberna by wire transfer to the
same account designated above: (i) the sum of $625,000 on or before January 30,
2009; and (ii) the sum of $625,000 on before April 30, 2009 (collectively, the
“Additional
Payments”).  The Additional Payments shall be made in
satisfaction of all of the payments due on the Taberna Debt on January 30, 2009
and April 30, 2009.

       

      6. Board
Composition.  There shall be at least one “independent”
director on the board of restructured Tarragon.  The parties shall
further take commercially reasonable efforts to afford observation rights on
Tarragon’s Board to a representative of Taberna until all obligations under the
Newco Senior Notes have been paid in full.  Newco agrees to afford
observation rights on Newco’s board of managers to a representative of Taberna
until all obligations under the Newco Senior Notes have been paid in
full.

       

      7. Management
Agreement.  Taberna will consent to a commercially reasonable
management agreement entered into by Tarragon and *** or any Third Party, to the
extent required and approved by holders of the Affiliate Debt.  The
terms, provisions and counter-party of and to such management agreement shall be
subject to Taberna’s reasonable approval, and such agreement shall not be
amended or modified without Taberna’s written consent (such consent not to be
unreasonably withheld).

       

      8. Representations
and Warranties of Taberna and Each Taberna Debt
Holder.  Taberna, for itself and on behalf of each of the
Taberna Debt Holders, represents and warrants to Tarragon and Newco that the
following statements are true, correct and complete insofar as they relate to
it:

       

      (a) It is a
corporation, partnership, limited liability company or other legal entity, as
the case may be, duly organized, validly existing and in good standing under the
laws of its corporation or formation.

       

       

        
          

        

      

      *** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (b) It has
all requisite corporate, partnership, limited liability company or similar
authority to enter into this Agreement and, subject to Bankruptcy Court
approval, carry out the transactions contemplated hereby and perform its
obligations contemplated hereunder, and the execution and delivery of this
Agreement and the performance of such party’s obligations hereunder have been
duly authorized by all necessary corporate, limited liability, partnership or
other similar action on its part.

       

      (c) The
execution, delivery, and, subject to any necessary Bankruptcy Court approval,
performance by it of this Agreement does not and shall not violate any provision
of Law applicable to it or its charter or bylaws (or other similar governing
documents) or any material agreement by which it is bound or to which its assets
are subject.

       

      (d) The
execution, delivery and performance by such party of this Agreement does not and
shall not require any registration or filing with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or foreign
governmental authority or regulatory body.

       

      (e) This
Agreement is its legally valid and binding obligation, enforceable in accordance
with its terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors’ rights generally or by equitable principles relating to
enforceability or a ruling of the Bankruptcy Court.

       

      (f) The
Taberna Debt is owned free and clear of all liens, mortgages, charges, security
interests, burdens, encumbrances or other restrictions or limitations of any
nature whatsoever (“Liens”) other than
this Agreement and other than under the Loan Documents.

       

      (g) On
consummation of the Exchange pursuant to the terms hereof, the Taberna Debt
shall be sold, assigned and delivered to Newco free and clear of all Liens other
than this Agreement and other than under the Loan Documents.

       

      (h) There are
no actions, suits, claims or legal or administrative arbitration or other
alternative dispute resolution proceedings, audits or investigations (each a “
Legal
Proceeding” and collectively “Legal Proceedings”)
pending or threatened against it that, if adversely determined, (i) could have a
material adverse effect on it or its ability to consummate the transactions
provided for herein or (ii) would reduce, limit or otherwise adversely affect
the obligations of the Tarragon Debtors under the Taberna Debt.

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (i) It is an
“accredited investor” as such term is defined under Rule 501 under the
Securities Act of 1933, as amended (the “Securities Act”), and
has such knowledge and experience in business and financial matters as to be
capable of evaluating the merits and risks of the investment in the Newco Senior
Notes; is capable of bearing the economic risks associated with the investment
in the Newco Senior Notes, and has been provided access to such information and
documents regarding  Newco and Tarragon as are necessary in order to
make a fully informed decision on whether or not to purchase the Newco Senior
Notes; has been afforded an opportunity to ask questions of, and receive answers
from, ***, Newco
and Tarragon concerning the Newco Senior Notes and has performed its own due
diligence in making the decision to invest in the Newco Senior Notes; is
acquiring the Newco Senior Notes for its own account, for investment and no with
a view to any “distribution” thereof within the meaning of the Securities Act,
and has no present intention of selling, transferring or otherwise distributing
such securities; has been advised that the Newco Senior Notes have not been and
are not being registered under the Securities Act, Newco is not obligated to and
does not intend to register the Newco Senior Notes under the Securities Act and
that Newco, in issuing the Newco Senior Notes, is relying upon, among other
things, the representations and warranties of such Taberna
Debt  Holder in this Agreement in concluding that the issuance of the
Newco Senior Notes will be exempt from the provisions of the Securities Act and
the rules and regulations promulgated thereunder.

       

      (j) (i) the
Taberna Debt Holders are the holders of 100% of the Taberna Debt, (ii) Taberna
has been authorized by the Taberna Debt Holders to execute, deliver and perform
this Agreement on behalf of the Taberna Debt Holders and (iii) by Taberna’s and
BNY’s execution hereof, this Agreement constitutes valid and binding obligations
of the Taberna Debt Holders enforceable against the Taberna Debt Holders in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
limiting creditors’ rights generally or by equitable principles relating to
enforceability.

       

      9. Representations
and Warranties of Tarragon. Tarragon represents and
warrants to Taberna and each Taberna Debt Holder that the following statements
are true, correct and complete:

       

      (a) It is a
corporation duly organized, validly existing and in good standing under the laws
of Nevada.

       

      (b) It has
all requisite corporate authority to enter into this Agreement and, subject to
any necessary Bankruptcy Court approval, carry out the transactions contemplated
hereby and perform its obligations contemplated hereunder, and the execution and
delivery of this Agreement and the performance of its obligations hereunder have
been duly authorized by all necessary corporate action on its part.

       

      (c) The
execution, delivery, and, subject to Bankruptcy Court approval, performance by
it of this Agreement does not and shall not violate any provision of Law
applicable to it or its charter or bylaws (or other similar governing documents)
or any material agreement by which it is bound or to which its assets are
subject.

       

      (d) The
execution, delivery and performance by it of this Agreement does not and shall
not require any registration or filing with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or foreign governmental
authority or regulatory body.

       

       

        
          

        

      

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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (e) This
Agreement is its legally valid and binding obligation, enforceable in accordance
with its terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors’ rights generally or by equitable principles relating to
enforceability or a ruling of the Bankruptcy Court.

       

      10. Agreement
with Respect to Newco.  Tarragon will
promptly create Newco in a manner reasonably acceptable to Taberna.

       

      11. Notification
of Certain Matters.  Taberna shall
give prompt notice to Tarragon and Newco, and *** or
Third Party and Newco shall give prompt notice to Taberna, of (i) Taberna,
Tarragon or Newco, as the case may be, becoming aware that any representation or
warranty made by any party to this Agreement is untrue or inaccurate in any
material respect, (ii) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which reasonably could be expected to cause
any representation or warranty contained in the Disclosure Statement to be
untrue or inaccurate in any material respect and (iii) any failure of any
party to this Agreement to comply with or satisfy any covenant or agreement to
be complied with or satisfied by it hereunder; and Taberna, Tarragon and
Newco  shall give prompt notice to each other of any notice or other
communication from any person alleging that the consent of such person is
required in connection with any of the Financial Restructuring or the
Exchange.

       

      12. Consents and
Approvals.  

       

      (a) The
parties hereto shall cooperate with each other and use their commercially
reasonable efforts to promptly (i) prepare and file all necessary
documentation, (ii) effect all applications, notices, petitions and filings
and (iii) obtain all permits, consents, approvals and authorizations of all
third parties and governmental authorities, which are necessary or advisable to
consummate the Financial Restructuring and the Exchange.  The parties
hereto shall consult with each other with respect to the obtaining of all such
permits, consents, approvals and authorizations, and each party will keep the
other apprised of the status of matters relating to completion of the Financial
Restructuring and the Exchange.  Each of the parties shall each use
its reasonable commercial efforts to resolve any objections that may be asserted
by any governmental authority or any other person with respect to this Exchange
Agreement or the Financial Restructuring.  The parties, with respect
to any threatened or pending preliminary or permanent injunction or other order,
decree or ruling or statute, rule, regulation or executive order that would
adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby, shall use reasonable commercial efforts to
prevent the entry, enactment or promulgation thereof, as the case may
be.

       

      (b) The
parties shall promptly advise each other upon receiving any communication from
any governmental authority whose consent or approval is required for
consummation of any of the transactions contemplated hereby which causes such
party to believe that there is a reasonable likelihood that any such consent or
approval will not be obtained or that the receipt of any such approval will be
materially delayed.

       

       

        
          

        

      

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TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      13. Conditions to Closing of the
Exchange.

       

      13.1 Conditions to Each Party’s
Obligation to Close.  The obligation of each party to effect
the Exchange shall be subject to the satisfaction at or prior to the Effective
Date, of the following conditions:

       

      (a) The
Financial Restructuring shall have been concluded and, to the extent applicable,
the Bankruptcy Court shall have entered a Final Order approving the Confirmed
Plan, and such Confirmed Plan shall be effective;

       

      (b) The
Trustees and Newco shall have executed all necessary documents, including any
Indentures required by the Trustees;

       

      (c) All
material filings, notifications, consents or approvals required by Law with
respect to the Exchange shall have been made and, to the extent required,
obtained, and any waiting period (and any extension thereof) applicable by Law
to the Exchange shall have expired or terminated; and

       

      (d) No action
shall be pending which seeks to challenge or enjoin the Exchange under any Law,
and no temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Exchange shall be in
effect; nor shall there be any statute, rule, regulation or order enacted,
entered, enforced by any governmental authority which prevents or prohibits the
consummation of the Exchange.  In the event an injunction or other
order shall have been issued, each party agrees to use its commercially
reasonable efforts to have such injunction
or other order lifted.

       

      13.2 Newco’s
Conditions.  In addition to the conditions set forth in Section
13.1, all obligations of Newco to effect the Exchange under this Agreement are
subject to the fulfillment, as determined by Newco in its reasonable discretion,
prior to or at the Effective Date, of each of the following
conditions:

       

      (a) The
representations and warranties of Taberna contained in this Agreement shall be
true and correct when made as of the date of this Agreement and as of the
Closing as though made as of the Closing.

       

      (b) Each of
Taberna and the Taberna Debt Holders shall have performed and complied with all
covenants, undertakings, agreements and conditions required by
this  Agreement to be performed or complied with by it prior to or at
the Effective Date.

       

      (c) Taberna
shall have delivered to Newco a certificate of an executive officer
of  Taberna to the effect that each of the conditions specified above
in Sections 13.2(a) and 13.2(b), as applicable, are satisfied in all respects
and certifying as to the due authority and incumbency of each Person executing
this Agreement and any other document or instrument executed in connection with
the Closing.

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (d) Taberna  shall
have delivered or shall have caused to be delivered to Newco (i) the originals
of the Taberna Promissory Notes to be exchanged by it for Newco Senior Notes,
together with any necessary allonge or assignment, duly executed by such Taberna
Debt Holder, or (ii) a certification that the original Taberna Promissory
Note(s) cannot be located.

       

      13.3 Taberna’s
Conditions.  In addition to the conditions set forth in Section
13.1, all obligations of Taberna and the Taberna Debt Holders to effect the
Exchange under this Agreement are subject to the fulfillment, as determined by
Taberna in its reasonable discretion, prior to or at the Effective Date, of each
of the following conditions:

       

      (a) The
representations and warranties of Tarragon and Newco contained in this Agreement
shall be true and correct when made as of the date of this Agreement and as of
the Closing as though made as of the Closing.

       

      (b) Each of
Tarragon and Newco shall have performed and complied with all covenants,
undertakings, agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Effective Date.

       

      (c) Each of
Tarragon and Newco shall have delivered to Taberna a certificate of one of its
executive officers to the effect that each of the conditions specified above in
Sections 13.3(a) and 13.3(b), as applicable, are satisfied as to it in all
respects and certifying as to the due authority and incumbency of each Person
executing this Agreement and any other document or instrument executed in
connection with the Closing.

       

      (d) Newco
shall have delivered to each Taberna Debt Owner the originals of the Newco
Senior Notes to be exchanged by it for Taberna Debt.

       

      (e) Tarragon
and Newco shall have delivered to Taberna a certificate of the Secretary of
State of the state of organization of *** and
Newco as to the good standing of each such entity in such jurisdiction as of the
most recent practicable date.

       

      14. Closing of the
Exchange.

       

      (a) The
closing of the Exchange (the “Closing”) shall take
place on the Effective Date.

       

      (b) At the
Closing, (i) Taberna shall deliver or shall cause to be delivered to Newco the
various certificates, instruments, and documents referred to in Section 13.2.
above, and (ii) Newco will deliver to the Taberna Debt Holders the various
certificates, instruments and documents referred to in Section 13.3
above.

       

      15. Termination
of the Agreement.  

       

       

        
          

        

      

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DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      15.1 Taberna
may elect (in its sole and absolute discretion) to terminate this Agreement in
the event that the Interest Payment and Expense Payment are not made to Taberna
on or before October 30, 2008.

       

      15.2 Taberna
may elect (in its sole and absolute discretion) to terminate this Agreement in
the event that the Additional Payments are not made as an when due under Section
5(b) hereof.

       

      15.3 Taberna
may elect (in its sole and absolute discretion) to terminate this Agreement in
the event that, by January 31, 2009, Tarragon has not either (i) made a Filing,
or (ii) presented Taberna with an acceptable Financial Restructuring that does
not contemplate a Filing.  In the event Taberna elects to terminate
under this Section 15.3, such termination shall be effective unless, on or
before February 28, 2009, Tarragon shall have made a Filing or presented an
acceptable Financial Restructuring to Taberna that does not contemplate a
Filing.

       

      15.4 Any of
the parties may terminate this Agreement as provided below:

       

      (a) Taberna,
Tarragon and Newco may terminate this Agreement by mutual written consent at any
time.

       

      (b) Tarragon
or Newco may terminate this Agreement by giving written notice to Taberna at any
time prior to the Closing (i) in the event any of Taberna or any Taberna
Debt Owner has breached any representation, warranty, or covenant contained in
this Agreement in any material respect, Tarragon and/or Newco has notified
Taberna and Newco of the breach, and the breach has continued without cure for a
period of thirty (30) days after the notice of breach, or (ii) if the
Closing shall not have occurred on or before sixty (60) days following the
Effective Date by reason of the failure of any condition precedent under
Sections 13.1 or 13.3 hereof, or upon the satisfaction of any such condition
precedent hereof becoming impossible or impracticable with the use of
commercially reasonable efforts (unless the failure results primarily from
Tarragon or Newco breaching any representation, warranty, or covenant contained
in this Agreement).

       

      (c) Taberna
may terminate this Agreement by giving written notice to Tarragon and Newco at
any time prior to the Closing (i) in the event Tarragon or Newco has
breached any representation, warranty, or covenant contained in this Agreement
in any material respect, Taberna has notified Tarragon and Newco of the breach,
and the breach has continued without cure for a period of thirty (30) days after
the notice of breach, or (ii) if the Closing shall not have occurred on or
before sixty (60) days following the Effective Date by reason of the failure of
any condition precedent under Sections 13.1 or 13.3 hereof, or upon the
satisfaction of any such condition becoming impossible or impracticable with the
use of commercially reasonable efforts (unless the failure results primarily
from any of Taberna or a Taberna Debt Owner itself breaching any representation,
warranty, or covenant contained in this Agreement).

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      (d) Taberna
may terminate this Agreement by giving written notice to Tarragon and Newco in
the event that the Closing does not occur for any reason on or before June 30,
2009.

       

      (e) Taberna
may terminate this Agreement by written notice to Tarragon and Newco in the
event that the Bankruptcy Court shall have entered any order dismissing the
Chapter 11 Case or an order pursuant to Section 1112 of the Bankruptcy Code
converting the Chapter 11 Case with respect to Tarragon (but not any Tarragon
Subsidiary) to a case under chapter 7 of the Bankruptcy Code. For clarification,
if the Bankruptcy Court issues such an order converting the Chapter 11 Case with
respect to a Tarragon Subsidiary to a case under chapter 7 of the Bankruptcy
Code but such order does not convert the Chapter 11 Case with respect to
Tarragon to a case under said chapter 7, Taberna will not have a right to
terminate this  Agreement under this Section 15.3(e).

       

      15.5 Effect of
Termination.  If any party terminates this Agreement pursuant
to this Section 15, all rights and obligations of the parties hereunder shall
terminate without any liability of any party to any other parties (except for
any liability of any party then in breach), and all of the parties hereto shall
have all rights, claims and defenses against one another.

       

      16. Additional
Claims or Equity Interests.  Notwithstanding
anything in this Agreement, no party to this agreement (or any party under their
control) will acquire additional debt or claims against the Tarragon Debtors to
the extent that such acquisition, when considered in the context of other
acquisitions or restructuring terms, would be reasonably likely to prejudice
Tarragon’s ability to preserve its net operating losses for income tax
purposes.

       

      17. Definitions.

       

      17.1 Certain
Definitions

       

      “Affiliate Debt” means $38
million principal amount of subordinated promissory notes of Tarragon issued
pursuant to the related loan documents and all Claims associated
therewith.

       

      “Affiliate Debt Agreement”
means, if applicable, an agreement by and among the holders of the Affiliate
Debt, Tarragon and Newco pursuant to which Newco will acquire, own and exchange
the Affiliate Debt for the Newco Subordinated Notes as described herein, which
agreement shall be consistent with the terms of this Agreement and the Financial
Restructuring.

       

      “Approved Plan” means a plan of
reorganization of Tarragon that results in Replacement Securities being issued
to Newco with respect to and/or in exchange for the Taberna Debt and Affiliate
Debt, which Replacement Securities will represent a supermajority of Tarragon’s
issued and outstanding shares of common and preferred stock upon their
issuance.

       

      “Bankruptcy Code” means the
United States Bankruptcy Code, 11 U.S.C. § 101, et. Seq.

       

      
        
           

        

        
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      CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

      


       

       

      “Bankruptcy Court” means the
United States Bankruptcy Court for the district in which the Filing is
made.

       

      “Board of Directors” means the
Board of Directors of any Tarragon Debtor and “Boards of Directors” means the
Board of Directors of two or more Tarragon Debtors.

       

      “Chapter 11 Case” means the
Chapter 11 bankruptcy proceeding of Tarragon initiated by the
Filing.

       

      “Claims” means claims, rights,
causes of action arising out of or otherwise relating to the Taberna
Debt.

       

      “Confirmed Plan” means an
Approved Plan that has been confirmed by the Bankruptcy Court in the Chapter 11
Case.

       

      “Control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

       

       

      “Effective Date” means the date
the transactions contemplated by the Financial Restructuring close, which may,
as applicable, be the effective date of a Confirmed Plan, or at such other date,
time or place as the parties may agree.

       

       

      “Final
Order” means an order
entered by a court exercising jurisdiction over the subject matter as to which
(i) no appeal, certiorari proceeding or other review or rehearing has been
requested or is still pending, and (ii) the time for filing a notice of appeal
or petition for certiorari or further review or rehearing has
expired.

       

      “Law” means any United States
or non-United States law (statutory, common or otherwise), including any
statute, ordinance, regulation, rule, code, executive order, injunction,
judgment, degree or other order of a governmental authority.

      


      “Loan Documents” means the
indentures, loan agreements, the Taberna Promissory Notes and other documents
that evidence the Taberna Debt.

       

      “Newco” means a Delaware
limited liability company, or any other entity acceptable to Taberna, that is
initially a direct, wholly-owned subsidiary of Tarragon, and that is formed
promptly after the date hereof.

       

      “Person” means an individual,
corporation, partnership, limited partnership, limited liability company, joint
venture, syndicate, trust or association.

       

      “Plan Filing Date” means the
date on which the Tarragon Debtors first file a plan of reorganization in the
Chapter 11 Case.

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      “Restructured Tarragon” means
Tarragon as it is constituted after the Effective Date.

       

      “Replacement Securities” means
any debt, equity or other securities of any nature distributable with respect to
and/or in exchange for the Taberna Debt and Affiliate Debt under a Confirmed
Plan or Financial Restructuring.

       

      “Tarragon Subsidiary” or “Tarragon Subsidiaries” means
any Person which is directly or indirectly controlled by Tarragon.

       

      “Tarragon Debtors” means
Tarragon and those Tarragon Subsidiaries that join as petitioners in the
Filing.

       

      “Taberna Promissory Notes”
means the promissory notes issued under the Loan Documents that evidence the
Taberna Debt.

       

      17.2 Additional
Definitions.  The following terms have the meanings set forth
in the Section set forth below:

       

      
        	
                Defined Term

              	
                Location of Definition

              
	
                ***

              	
                Preamble

              
	
                Affiliate
      Pledge and Security Agreement

              	
                Section
      2(b)

              
	
                Chapter
      11

              	
                Recitals

              
	
                Closing

              	
                Section
      14(a)

              
	
                Disclosure
      Statement

              	
                Recitals

              
	
                Exchange

              	
                Section
      3(a)

              
	
                Filing

              	
                Recitals

              
	
                Filing
      Date

              	
                Section
      1

              
	
                Financial
      Restructuring

              	
                Recitals

              
	
                Legal
      Proceedings

              	
                Section
      7(h)

              
	
                Letter
      of Credit

              	
                Section
      3(d)

              
	
                Liens

              	
                Section
      7(f)

              
	
                Plan

              	
                Section
      1

              
	
                Plan
      Filing Date

              	
                Section
      1(f)

              
	
                Pledge
      and Security Agreement

              	
                Section
      3(c)

              
	
                Securities
      Act

              	
                Section
      7(h)

              
	
                Taberna

              	
                Preamble

              
	
                Taberna
      Debt

              	
                Recitals

              
	
                Taberna
      Debt Holders

              	
                Preamble

              
	
                Tarragon

              	
                Recitals

              


      

      


       

        
          

        

      

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DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      18. Amendments
and Waivers.  This Agreement may not be modified, amended or
supplemented except by a written agreement signed by Taberna, Tarragon and
Newco.

       

      19. GOVERNING
LAW; JURISDICTION.  THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO ANY CONFLICTS OF LAW PROVISIONS THAT WOULD REQUIRE THE APPLICATION OF THE LAW
OF ANY OTHER JURISDICTION.  BY ITS EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES
THAT ANY LEGAL ACTION, SUIT OR PROCEEDING AGAINST IT WITH RESPECT TO ANY MATTER
UNDER, OR ARISING OUT OF OR IN CONNECTION WITH, THIS  AGREEMENT, OR
FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT RENDERED IN ANY SUCH ACTION, SUIT
OR PROCEEDING, SHALL BE BROUGHT IN ANY FEDERAL OR STATE COURT IN THE BOROUGH OF
MANHATTAN, THE CITY OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE PARTIES HEREBY IRREVOCABLY ACCEPTS AND SUBMITS ITSELF TO
THE EXCLUSIVE JURISDICTION OF EACH SUCH COURT, GENERALLY AND UNCONDITIONALLY,
WITH RESPECT TO ANY SUCH ACTION, SUIT OR PROCEEDING; PROVIDED, THAT IN THE
EVENT OF A CHAPTER 11 FILING BY THE TARRAGON DEBTORS, THE BANKRUPTCY COURT SHALL
HAVE EXCLUSIVE JURISDICTION OVER ANY ISSUES RELATING TO THIS AGREEMENT.


       

      20. Specific
Performance.  It is understood and agreed by the parties that
money damages would not be a sufficient remedy for any breach of this Agreement
by any party, and each non-breaching party shall be entitled to specific
performance and injunctive or other equitable relief as a remedy of any such
breach.

       

      21. Headings.  The headings of
the Sections, paragraphs and subsections of this  Agreement are
inserted for convenience only, and shall not affect the interpretation
hereof.

       

      22. Successors
and Assigns; Severability; Several Obligations.  This Agreement is
intended to bind and inure to the benefit of the parties and their respective
successors, assigns, heirs, executors, administrators and
representatives.  The invalidity or unenforceability at any time of
any provision hereof shall not affect or diminish in any way the continuing
validity and enforceability of the remaining provisions hereof.  The
agreements, representations and obligations of each of the parties under this
Agreement are, in all respects, several and not joint.

       

      23. Prior
Negotiations; Entire Agreement.  This Agreement constitutes the
entire agreement of the parties related to the Exchange and the Financial
Restructuring and supersedes all other prior negotiations with respect to the
subject matter hereof. 

       

      24. Counterparts.  This
Agreement may be executed and delivered (including by facsimile or other form of
electronic transmission) in one or more counterparts, each of which shall be
deemed an original and all of which shall constitute one and the same
agreement.

       

      
        
           

        

        
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        CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

        


      

       

      25. Notices. All notices and other
communications under this Agreement shall be in writing and shall be given in
the manner set forth in the Taberna Promissory Note or the other Loan Documents.


       

      26. Reservation
of Rights.  Except as expressly provided in this Agreement,
nothing herein is intended to, or does, in any manner waive, limit, impair or
restrict the ability of any of the parties hereto to protect and preserve its
rights, remedies and interests, including its claims against the Tarragon
Debtors with respect to the Taberna Debt.  Nothing herein shall be
deemed an admission of any kind.  If the transactions contemplated
herein are not consummated, or this Agreement is terminated for any reason, the
parties hereto fully reserve any and all of their rights.

       

      [THE
REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

       

      


       

      
 

       

      
        
           


        

        
          19

          
            

          

        

        
           


          
            CONFIDENTIAL
TREATMENT REQUESTED BY TARRAGON CORPORATION – CONFIDENTIAL PORTIONS OF THIS
DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE
COMMISSION

            


          

        

      


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

       

      
        	 
      	
                TABERNA
      CAPITAL MANAGEMENT LLC, as Collateral Manager for the benefit of the
      Taberna Debt Holders

                 

              	 
      
	 
      	
                By:

              	
                /s/
      Howard Altschul

              
	 
      	
                Name:

              	
                Howard
      Altschul

              
	 
      	
                Title:

              	
                Managing
      Director

              


      

       

      
        	 
      	
                THE
      BANK OF NEW YORK MELLON TRUST COMPANY, N.A., As Successor To JP Morgan
      Chase Bank, National Association (as
      to Section 1 hereof only)

                 

              	 
      
	 
      	
                By:

              	
                /s/
      Maria D. Calzado

              
	 
      	
                Name:

              	
                Maria
      D. Calzado

              
	 
      	
                Title:

              	
                Vice
      President

              


      

      


      
        	 
      	
                ROBERT
      ROTHENBERG, as holder of Affiliate Debt

                 

                /s/
      Robert Rothenberg

              


      

      


      
        	 
      	
                BEACHWOLD
      PARTNERS, L.P., as holder of Affiliate Debt

                 

              	 
      
	 
      	
                By:

              	
                /s/
      William S. Friedman

              
	 
      	
                Name:

              	
                William
      S. Friedman

              
	 
      	
                Title:

              	
                General
      Partner

              


      

      


      
        	 
      	
                TARRAGON
      CORPORATION

                 

              	 
      
	 
      	
                By:

              	
                /s/
      William S. Friedman

              
	 
      	
                Name:

              	
                William
      S. Friedman

              
	 
      	
                Title:

              	
                Chief
      Executive Officer

              


      

      



      
        
           


        

        
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