Document:

Exhibit 10.3

SECOND AMENDED AND RESTATED AGREEMENT

OF LIMITED PARTNERSHIP

OF

BEHRINGER HARVARD OPERATING PARTNERSHIP I LP

January 1, 2007

 

 

TABLE OF CONTENTS

	
  

  	
   

  	
  

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE I  DEFINED
  TERMS

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II  PARTNERSHIP
  FORMATION AND IDENTIFICATION

  	
   

  	
   

  
	
  2.01

  	
   

  	
  Formation.

  	
   

  	
   

  
	
  2.02

  	
   

  	
  Name, Office and Registered Agent.

  	
   

  	
   

  
	
  2.03

  	
   

  	
  Partners.

  	
   

  	
   

  
	
  2.04

  	
   

  	
  Term and Dissolution.

  	
   

  	
   

  
	
  2.05

  	
   

  	
  Filing of Certificate and Perfection of Limited
  Partnership.

  	
   

  	
   

  
	
  2.06

  	
   

  	
  Certificates Describing Partnership Units.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III  BUSINESS
  OF THE PARTNERSHIP

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV  CAPITAL
  CONTRIBUTIONS AND ACCOUNTS

  	
   

  	
   

  
	
  4.01

  	
   

  	
  Capital Contributions.

  	
   

  	
   

  
	
  4.02

  	
   

  	
  Additional Capital Contributions and Issuances of
  Additional Partnership Interests.

  	
   

  	
   

  
	
  4.03

  	
   

  	
  Additional Funding.

  	
   

  	
   

  
	
  4.04

  	
   

  	
  Capital Accounts.

  	
   

  	
   

  
	
  4.05

  	
   

  	
  Percentage Interests.

  	
   

  	
   

  
	
  4.06

  	
   

  	
  No Interest on Contributions.

  	
   

  	
   

  
	
  4.07

  	
   

  	
  Return of Capital Contributions.

  	
   

  	
   

  
	
  4.08

  	
   

  	
  No Third-Party Beneficiary.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V  PROFIT
  AND LOSS; DISTRIBUTIONS

  	
   

  	
   

  
	
  5.01

  	
   

  	
  Allocation of Profit and Loss.

  	
   

  	
   

  
	
  5.02

  	
   

  	
  Distributions of Cash.

  	
   

  	
   

  
	
  5.03

  	
   

  	
  REIT Distribution Requirements.

  	
   

  	
   

  
	
  5.04

  	
   

  	
  No Right to Distributions in Kind.

  	
   

  	
   

  
	
  5.05

  	
   

  	
  Limitations on Return of Capital Contributions.

  	
   

  	
   

  
	
  5.06

  	
   

  	
  Distributions Upon Liquidation.

  	
   

  	
   

  
	
  5.07

  	
   

  	
  Substantial Economic Effect.

  	
   

  	
   

  
	
  5.08

  	
   

  	
  Withholding.

  	
   

  	
   

  
	
  5.09

  	
   

  	
  Tax Consequences to Limited Partners.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI  RIGHTS,
  OBLIGATIONS AND POWERS OF THE GENERAL PARTNER

  	
   

  	
   

  
	
  6.01

  	
   

  	
  Management of the Partnership.

  	
   

  	
   

  
	
  6.02

  	
   

  	
  Delegation of Authority.

  	
   

  	
   

  
	
  6.03

  	
   

  	
  Indemnification and Exculpation of Indemnitees.

  	
   

  	
   

  
	
  6.04

  	
   

  	
  Liability of the General Partner.

  	
   

  	
   

  
	
  6.05

  	
   

  	
  Reimbursement of or by General Partner.

  	
   

  	
   

  
	
  6.06

  	
   

  	
  Outside Activities.

  	
   

  	
   

  
	
  6.07

  	
   

  	
  Employment or Retention of Affiliates.

  	
   

  	
   

  

 

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  6.08

  	
   

  	
  Reserved.

  	
   

  	
   

  
	
  6.09

  	
   

  	
  Title to Partnership Assets.

  	
   

  	
   

  
	
  6.10

  	
   

  	
  Miscellaneous.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII  TRANSFERS OF GENERAL PARTNERSHIP
  INTERESTS

  	
   

  	
   

  
	
  7.01

  	
   

  	
  Transfers of General Partnership Interests.

  	
   

  	
   

  
	
  7.02

  	
   

  	
  Admission of a Substitute or Additional General
  Partner.

  	
   

  	
   

  
	
  7.03

  	
   

  	
  Effect of Bankruptcy, Withdrawal, Death or
  Dissolution of a General Partner.

  	
   

  	
   

  
	
  7.04

  	
   

  	
  Removal of a General Partner.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII  RIGHTS AND OBLIGATIONS OF THE
  LIMITED PARTNERS

  	
   

  	
   

  
	
  8.01

  	
   

  	
  Management of the Partnership.

  	
   

  	
   

  
	
  8.02

  	
   

  	
  Power of Attorney.

  	
   

  	
   

  
	
  8.03

  	
   

  	
  Limitation on Liability of Limited Partners.

  	
   

  	
   

  
	
  8.04

  	
   

  	
  Ownership by Limited Partner of Corporate General
  Partner or Affiliate.

  	
   

  	
   

  
	
  8.05

  	
   

  	
  Exchange Right.

  	
   

  	
   

  
	
  8.06

  	
   

  	
  Call Right.

  	
   

  	
   

  
	
  8.07

  	
   

  	
  Duties and Conflicts.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX  TRANSFERS OF LIMITED PARTNERSHIP
  INTERESTS

  	
   

  	
   

  
	
  9.01

  	
   

  	
  Purchase for Investment.

  	
   

  	
   

  
	
  9.02

  	
   

  	
  Restrictions on Transfer of Limited Partnership
  Interests.

  	
   

  	
   

  
	
  9.03

  	
   

  	
  Admission of Substitute Limited Partner.

  	
   

  	
   

  
	
  9.04

  	
   

  	
  Rights of Assignees of Partnership Interests.

  	
   

  	
   

  
	
  9.05

  	
   

  	
  Effect of Bankruptcy, Death, Incompetence or
  Termination of a Limited Partner.

  	
   

  	
   

  
	
  9.06

  	
   

  	
  Joint Ownership of Interests.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE X  BOOKS AND RECORDS; ACCOUNTING; TAX
  MATTERS

  	
   

  	
   

  
	
  10.01

  	
   

  	
  Books and Records.

  	
   

  	
   

  
	
  10.02

  	
   

  	
  Custody of Partnership Funds; Bank Accounts.

  	
   

  	
   

  
	
  10.03

  	
   

  	
  Fiscal and Taxable Year.

  	
   

  	
   

  
	
  10.04

  	
   

  	
  Annual Tax Information and Report.

  	
   

  	
   

  
	
  10.05

  	
   

  	
  Tax Matters Partner; Tax Elections; Special Basis
  Adjustments.

  	
   

  	
   

  
	
  10.06

  	
   

  	
  Reports to Limited Partners.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XI  AMENDMENT OF AGREEMENT; MEETINGS

  	
   

  	
   

  
	
  11.01

  	
   

  	
  Amendment.

  	
   

  	
   

  
	
  11.02

  	
   

  	
  Meetings of Partners.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XII  MERGER, EXCHANGE OR CONVERSION

  	
   

  	
   

  
	
  12.01

  	
   

  	
  Merger, Exchange or Conversion of Partnership.

  	
   

  	
   

  
	
  12.02

  	
   

  	
  Approval of Plan of Merger, Exchange or Conversion.

  	
   

  	
   

  
	
  12.03

  	
   

  	
  Rights of Dissenting Limited Partners.

  	
   

  	
   

  
	
  12.04

  	
   

  	
  Roll-Up Transactions.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

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  ARTICLE XIII  GENERAL
  PROVISIONS

  	
   

  	
   

  
	
  13.01

  	
   

  	
  Notices.

  	
   

  	
   

  
	
  13.02

  	
   

  	
  Survival of Rights.

  	
   

  	
   

  
	
  13.03

  	
   

  	
  Additional Documents.

  	
   

  	
   

  
	
  13.04

  	
   

  	
  Severability.

  	
   

  	
   

  
	
  13.05

  	
   

  	
  Entire Agreement.

  	
   

  	
   

  
	
  13.06

  	
   

  	
  Pronouns and Plurals.

  	
   

  	
   

  
	
  13.07

  	
   

  	
  Headings.

  	
   

  	
   

  
	
  13.08

  	
   

  	
  Counterparts.

  	
   

  	
   

  
	
  13.09

  	
   

  	
  Governing Law.

  	
   

  	
   

  
	
  13.10

  	
   

  	
  Arbitration.

  	
   

  	
   

  
	
  13.11

  	
   

  	
  Vote of Affiliated Limited Partners.

  	
   

  	
   

  
	
  13.12

  	
   

  	
  Acknowledgement as to Exculpation and
  Indemnification.

  	
   

  	
   

  

 

EXHIBIT A — Limited Partners and Limited Partners’ Capital
Contributions and Partnership Units

EXHIBIT B — Notice of
Exercise of Exchange Right

EXHIBIT C — Call Notice

 

 iii

SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP

OF

BEHRINGER HARVARD OPERATING PARTNERSHIP I LP

January 1, 2007

This Second Amended and Restated Agreement of Limited
Partnership (this “Agreement”) is
entered into effective as of January 1, 2007 by and among BHR, Inc., a Delaware
corporation (the “General Partner”),
BHR Business Trust, a Maryland business trust (“BHR Business
Trust”), BHR Partners, LLC, a Delaware limited liability company (“BHR Partners” and, collectively with BHR Business Trust, the
“Original Limited Partners”), Behringer
Harvard REIT I, Inc., a Maryland corporation (the “Company”),
the McCormick Family Trust 1/20/82, a California trust, Gary S. Carr, an
individual, and the Limited Partner(s) set forth or which may, in the future,
be set forth on Exhibit A hereto, as amended from time to time, with
respect to Behringer Harvard Operating Partnership I LP  (the “Partnership”),
a limited partnership formed under the laws of the State of Texas, pursuant to
a Certificate of Limited Partnership filed with the Office of the Secretary of
State of the State of Texas effective as of June 27, 2002.

RECITALS

WHEREAS, that certain Agreement of Limited Partnership of the
Partnership dated June 27, 2002, as amended by that certain Amended and Restated
Agreement of Limited Partnership of the Partnership dated May 11, 2005
(collectively, the “Original Agreement”),
was entered into by and among the Company as the general partner and BHR
Partners as the original limited partner;

WHEREAS, the McCormick Family Trust 1/20/82 and Gary S. Carr
were each admitted as an Additional Limited Partner to the Partnership on July
28, 2005;

WHEREAS, the parties hereto desire to amend and
restate the Original Agreement in order to set forth (a) the number of issued and
outstanding Partnership Units as of the date hereof, (b) the terms and
conditions under which the Partnership will be operated and (c) the rights,
obligations, and limitations of the parties thereto and any additional Limited
Partners with respect to each other and the Partnership as a whole;

WHEREAS, simultaneously with the execution of this Agreement,
the Company transferred 100% of its General Partnership Interest to its
wholly-owned subsidiary, BHR, Inc.;

WHEREAS, simultaneously with the execution of this Agreement,
BHR Partners transferred approximately 88% of its Limited Partnership Interest
to BHR Business Trust, a wholly-owned subsidiary of BHR BT, Inc., a Delaware
corporation, which is itself a wholly-owned subsidiary of the Company;

 

WHEREAS, BHR, Inc. has executed any and all documents
necessary to be admitted as General Partner of the Partnership in substitution
of the Company; and

WHEREAS, BHR Business Trust has executed any and all
documents necessary to be admitted as a Limited Partner in the Partnership in
partial substitution of BHR Partners.

NOW, THEREFORE, in consideration of the foregoing, of
mutual covenants between the parties hereto, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties, the parties hereto agree as follows:

AGREEMENT

ARTICLE I

DEFINED
TERMS

The following defined terms used in this Agreement
shall have the meanings specified below:

“Act” means the
Texas Revised Uniform Limited Partnership Act, as it may be amended from time
to time.

“Additional Funds”
has the meaning set forth in Section 4.03 hereof.

“Additional Limited Partner”
means a Person admitted to the Partnership as a Limited Partner pursuant to
Section 4.02 hereof and who is shown as such on the books and records of the
Partnership.

“Additional Securities”
means any additional REIT Shares (other than REIT Shares issued in connection
with an exchange pursuant to Section 8.05 hereof) or rights, options, warrants
or convertible or exchangeable securities containing the right to subscribe for
or purchase REIT Shares, as set forth in Section 4.02(a)(ii).

“Administrative Expenses”
means (i) all administrative and operating costs and expenses incurred by the
Partnership, (ii) those administrative costs and expenses of the General
Partner, including any salaries or other payments to directors, officers or
employees of the General Partner, any expenses of the Company that are paid or
incurred by the Company or any of its Affiliates on behalf of the General
Partner and reimbursable by the General Partner, and any accounting and legal
expenses of the General Partner, which expenses, the Partners have agreed, are
expenses of the Partnership and not the General Partner, and (iii) to the
extent not included in clause (ii) above, REIT Expenses; provided, however,
that Administrative Expenses shall not include any administrative costs and
expenses incurred by the General Partner that are attributable to Properties or
partnership interests in a Subsidiary Partnership that are owned by the Company
directly.

“Advisor” or “Advisors” means the Person or Persons, if any, appointed,
employed or contracted with by the Company pursuant to its Articles of
Incorporation and responsible for 

 2
 

 

directing or performing the day-to-day business affairs of the Company,
including any Person to whom the Advisor subcontracts all or substantially all
of such functions.

“Affiliate” or “Affiliated” means, with respect to any
Person, (i) any Person directly or indirectly owning, controlling or holding,
with the power to vote, 10% or more of the outstanding voting securities of
such other Person; (ii) any Person 10% or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held, with the power
to vote, by such other Person; (iii) any Person directly or indirectly
controlling, controlled by or under common control with such other Person; (iv)
any executive officer, director, trustee or general partner of such other
Person; and (v) any legal entity for which such Person acts as an executive
officer, director, trustee or general partner.

“Agreed Value”
means (i) the fair market value of a Partner’s non-cash Capital Contribution as
of the date of contribution as agreed to by such Partner and the General
Partner as of the date of contribution as set forth on Exhibit A hereto,
as it may be amended from time to time, or (ii) in the case of any contribution
or distribution of property other than cash not set forth on Exhibit A,
the fair market value of such property as determined by the General Partner at
the time such property is contributed or distributed, reduced by liabilities
either assumed by the Partnership or Partner upon such contribution or
distribution or to which such property is subject when the property is
contributed or distributed.

“Agreement”
means this Second Amended and Restated Agreement of Limited Partnership, as it
may be amended or restated from time to time.

“Articles of Incorporation”
means the Articles of Incorporation of the Company filed with the Maryland
State Department of Assessments and Taxation, as amended or restated from time
to time.

“Call Notice”
means a Call Notice, as defined in Section 8.06(a) hereof and substantially in
the form of Exhibit C hereto.

“Call Right” has
the meaning provided in Section 8.06(a) hereof.

“Capital Account”
has the meaning provided in Section 4.04 hereof.

“Capital Contribution”
means the total amount of cash, cash equivalents, and the Agreed Value of any
Property or other asset contributed or agreed to be contributed, as the context
requires, to the Partnership by each Partner pursuant to the terms of the
Agreement.  Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a predecessor
holder of the Partnership Interest of such Partner.

“Cash Amount”
means an amount of cash equal to the Value of the REIT Shares Amount on the
date of receipt by the General Partner of an Exchange Notice.

“Certificate”
means any instrument or document that is required under the laws of the State
of Texas, or any other jurisdiction in which the Partnership conducts business,
to be signed 

 3
 

 

and sworn to by the Partners of the Partnership (either by themselves
or pursuant to the power-of-attorney granted to the General Partner in Section 8.02
hereof) and filed for recording in the appropriate public offices within the
State of Texas or such other jurisdiction to perfect or maintain the
Partnership as a limited partnership, to effect the admission, withdrawal, or
substitution of any Partner from or to the Partnership, or to protect the
limited liability of the Limited Partners as limited partners under the laws of
the State of Texas or such other jurisdiction.

“Code” means the
Internal Revenue Code of 1986, as amended, and as hereafter amended from time
to time.  Reference to any particular
provision of the Code shall mean that provision in the Code at the date hereof
and any successor provision of the Code.

“Commission”
means the U.S. Securities and Exchange Commission.

“Company” means
Behringer Harvard REIT I, Inc., a Maryland corporation.

“Competent Independent Expert” shall mean a Person with no material
current or prior business or personal relationship with the Advisor, the
General Partner or the Partnership who is engaged to a substantial extent in
the business of rendering opinions regarding the value of the assets of the
type held by the Partnership and who is qualified to perform such work.  Membership in a nationally recognized
appraisal society such as the American Institute of Real Estate Appraisers or
the Society of Real Estate Appraisers shall be conclusive evidence of such
qualification.

“Conversion Factor”
means 1.0, provided, that in the event that the Company (i) declares or pays a
dividend on its outstanding REIT Shares in REIT Shares or makes a distribution
to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides
its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into
a smaller number of REIT Shares, the Conversion Factor shall be adjusted by
multiplying the Conversion Factor by a fraction, the numerator of which shall
be the number of REIT Shares issued and outstanding on the record date for such
dividend, distribution, subdivision or combination (assuming for such purposes
that such dividend, distribution, subdivision or combination has occurred as of
such time), and the denominator of which shall be the actual number of REIT
Shares (determined without the above assumption) issued and outstanding on such
date, and provided further, that in the event that an entity other than an
Affiliate of the Company shall become General Partner pursuant to any merger,
consolidation or combination of the Company with or into another entity (the “Successor Entity”), the Conversion Factor shall be adjusted
by multiplying the Conversion Factor by the number of shares of the Successor
Entity into which one REIT Share is converted pursuant to such merger,
consolidation or combination, determined as of the date of such merger,
consolidation or combination.  Any
adjustment to the Conversion Factor shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event; provided, however, that if the General Partner receives an Exchange
Notice after the record date, but prior to the effective date of such dividend,
distribution, subdivision or combination, the Conversion Factor shall be
determined as if the General Partner had received the Exchange Notice
immediately prior to the record date for such dividend, distribution,
subdivision or combination; and provided further, however, that if the General
Partner, in its sole 

 4
 

 

and absolute discretion, causes the Partnership to make a distribution
of Partnership Units or to subdivide or combine the outstanding Partnership
Units in order to give equivalent effect to a dividend or distribution of REIT
Shares or a subdivision or combination or REIT Shares, then the Conversion
Factor shall remain the factor which it was immediately prior to such dividend
or distribution of REIT Shares or subdivision or combination of REIT Shares.

“Dissenting
Limited Partner” has the meaning provided in Section 12.03(a)
hereof.

“Event of Bankruptcy”
as to any Person means (i) the filing of a petition for relief as to such
Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar
provision of law of any jurisdiction (except if such petition is contested by
such Person and has been dismissed within 90 days); (ii) the insolvency or
bankruptcy of such Person as finally determined by a court proceeding; (iii)
the filing by such Person of a petition or application to accomplish the same
or for the appointment of a receiver or a trustee for such Person or a
substantial part of his assets; and (iv) the commencement of any proceedings
relating to such Person as a debtor under any other reorganization,
arrangement, insolvency, adjustment of debt or liquidation law of any
jurisdiction, whether now in existence or hereinafter in effect, either by such
Person or by another, provided, that if such proceeding is commenced by
another, such Person indicates his approval of such proceeding, consents
thereto or acquiesces therein, or such proceeding is contested by such Person
and has not been finally dismissed within 90 days.

“Exchange Amount”
means either the Cash Amount or the REIT Shares Amount, as selected by the
Company in its sole and absolute discretion pursuant to Section 8.05(b) hereof.

“Exchange Notice”
means a Notice of Exercise of Exchange Right, as defined in Section 8.05(a)
hereof and substantially in the form of Exhibit B hereto.

“Exchange Right”
has the meaning provided in Section 8.05(a) hereof.

“Exchanging Partner”
has the meaning provided in Section 8.05(a) hereof.

“General Partner”
means BHR, Inc., a Delaware corporation, and any Person who becomes a
substitute or additional General Partner as provided herein, and any successors
thereto.

“General Partnership
Interest” means a Partnership Interest held by the General Partner
that is a general partnership interest.

“GP Capital”
means the aggregate of Capital Contributions of cash made by the General
Partner in accordance with Sections 4.01 and 4.02 hereof.

“GP Minimum Return”
means such amount as may be necessary or required to allow the Company to meet
its distribution requirement for qualification as a REIT as set forth in
Section 857 of the Code and to avoid any federal income or excise tax liability
imposed by the Code.

 5
 

 

“Holding Period”
means, with respect to Partnership Units acquired by Additional Limited
Partners hereunder, the period commencing on the date of issuance of such Units
through and including the fourth anniversary of such date of acquisition.

“Indemnitee”
means (i) any Person made a party to a proceeding by reason of its status as
the General Partner, as the sole owner of all of the voting securities of the
General Partner, or a director, officer or employee of the General Partner or
the Partnership, and (ii) such other Persons (including Affiliates of the
General Partner or the Partnership) as the General Partner may designate from
time to time, in its sole and absolute discretion.

“Independent Director”
means a member of the board of directors of the Company who is not on the date
of determination, and within the last two (2) years from the date of determination
has not been, directly or indirectly associated with the Company, the Sponsor
or the Advisor or any of their respective Affiliates by virtue of (i) ownership
of an interest in the Sponsor or the Advisor or any of their respective
Affiliates, other than the Company, (ii) employment by the Company, the Sponsor
or the Advisor or any of their respective Affiliates, (iii) service as an
officer or director of the Sponsor or the Advisor or their respective
Affiliates, other than as a director of the Company, (iv) performance of
services, other than as a director of the Company, (v) service as a director or
trustee of more than three (3) real estate investment trusts organized by the
Sponsor or advised by the Advisor, or (vi) maintenance of a material business
or professional relationship with the Company, the Sponsor or the Advisor or
any of their respective Affiliates.  A
business or professional relationship is considered “material” if the gross
revenue derived by the director from the Sponsor and the Advisor and their
Affiliates exceeds five percent (5%) of either the director’s annual gross
income during either of the last two (2) years or the director’s net worth on a
fair market value basis.  An indirect
relationship with the Sponsor or the Advisor shall include circumstances in
which a director’s spouse, parent, child, sibling, mother- or father-in-law,
son- or daughter-in-law or brother- or sister-in-law is or has been associated
with the Sponsor or the Advisor, any of their respective Affiliates or the
Company.

“Joint Venture”
means any joint venture or partnership arrangement in which the Partnership is
a co-venturer or general partner established to acquire or hold Properties,
Mortgages or other investments of the Company.

“Limited Partner”
means the Original Limited Partners, any Person named as a Limited Partner on Exhibit
A attached hereto, and any Person who becomes a Substitute or Additional
Limited Partner in such person’s capacity as a Limited Partner in the
Partnership.

“Limited Partnership Interest”
means the ownership interest of a Limited Partner in the Partnership at any
particular time, including the right of such Limited Partner to any and all
benefits to which such Limited Partner may be entitled as provided in this
Agreement and in the Act, together with the obligations of such Limited Partner
to comply with all the provisions of this Agreement and of such Act.

“Liquidating Event”
has the meaning set forth in Section 2.04 hereof.

 6
 

 

“Loss” has the
meaning provided in Section 5.01(f) hereof.

“LP Capital”
means the aggregate of Capital Contributions in cash or cash equivalents and
the Agreed Value of any non-cash contributions to the Partnership made by a
Limited Partner in accordance with Sections 4.01 and 4.02 hereof.

“LP Return”
means, with regard to any Limited Partner, an amount equal to the aggregate
cash dividends that would have been payable to such Limited Partner with
respect to the applicable fiscal period if such Limited Partner had owned REIT
Shares equal in number to the number of Partnership Units owned by such Limited
Partner during such fiscal period.

“Mortgage”
means, in connection with mortgage financing provided, invested in or purchased
by the Partnership, any note, deed of trust, security interest or other
evidence of indebtedness or obligations, which is secured or collateralized by
real property owned by the borrower under such note, deed of trust, security
interest or other evidence of indebtedness or obligations.

“Net Capital Proceeds”
means the net cash proceeds received by the Partnership in connection with (i)
any Sale, (ii) any borrowing or refinancing of borrowing(s) by the Partnership,
(iii) any condemnation or deeding in lieu of condemnation of all or a portion
of any Property, (iv) any collection in respect of property, hazard, or
casualty insurance (but not business interruption insurance) or any damage
award; or (v) any other transaction the proceeds of which, in accordance with
generally accepted accounting principles, are considered to be capital in
nature, in each case, after deduction of (a) all costs and expenses incurred by
the Partnership with regard to such transactions (including, without
limitation, any repayment of any indebtedness required to be repaid as a result
of such transaction or which the General Partner elects to pay out of the
proceeds of such transaction, together with accrued interest and premium, if
any, thereon and any sales commissions or other costs or expenses due and
payable to any Person in connection therewith, including to a Partner or its
Affiliates), and (b) all amounts expended by the Partnership for the
acquisition of additional Properties, Mortgages or other investments or for
capital repairs or improvements to any Property with such cash proceeds.

“Offer” has the
meaning set forth in Section 7.01(c)(ii) hereof.

“Offering” means
the offer and sale of REIT Shares to the public by the Company.

“Original Limited Partners”
means the Limited Partners designated as such on Exhibit A hereto.

“Partner” means
any General Partner or Limited Partner.

“Partner Nonrecourse Debt
Minimum Gain” has the meaning set forth in Regulations Section
1.704-2(i).  A Partner’s share of Partner
Nonrecourse Debt Minimum Gain shall be determined in accordance with
Regulations Section 1.704-2(i)(5).

 7
 

 

“Partnership”
means Behringer Harvard Operating Partnership I LP, a Texas limited
partnership.

“Partnership Interest”
means an ownership interest in the Partnership held by either a Limited Partner
or the General Partner and includes any and all benefits to which the holder of
such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement.

“Partnership Minimum Gain”
has the meaning set forth in Regulations Section 1.704-2(b)(2).  In accordance with Regulations Section
1.704-2(d), the amount of Partnership Minimum Gain is determined by first
computing, for each Partnership nonrecourse liability, any gain the Partnership
would realize if it disposed of the property subject to that liability for no
consideration other than full satisfaction of the liability, and then
aggregating the separately computed gains. 
A Partner’s share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(1).

“Partnership Record Date”
means the record date established by the General Partner for the distribution
of cash pursuant to Section 5.02 hereof, which record date shall be the same as
the record date established by the General Partner for a distribution to its
stockholders.

“Partnership Unit”
means a fractional, undivided share of the Partnership Interests of all
Partners issued hereunder.  The number of
Partnership Units held by the Original Limited Partners will, as of any
relevant date, equal the difference between (a) the product of the number of
shares of the Company issued since the formation of the Company through such
relevant date (adjusted to reflect any subdivisions or combinations of shares
of the Company through such relevant date), multiplied by the inverse of the
Conversion Factor as of such relevant date (i.e., one (1) divided by the
Conversion Factor as of such relevant date), and (b) the sum of (i) the number
of Partnership Units of the Original Limited Partners deemed purchased or
redeemed pursuant to Section 6.10 since the inception of the Partnership
through such relevant date and (ii) all Partnership Units held by the General
Partner.  It is acknowledged that the
Original Limited Partners will contribute the proceeds from the sale of shares
in the Company to the Partnership and the Partnership Units resulting from the
contribution of such proceeds by the Original Limited Partners to the
Partnership will be issued by the Partnership to the Original Limited Partners.  Furthermore, it is acknowledged that if the
Partnership makes a distribution of Partnership Units or subdivides or combines
the outstanding Partnership Units in order to give equivalent effect to a
dividend or distribution of the Company’s shares or a subdivision or
combination of the Company’s shares, then the Partnership Units held by the
Original Limited Partners will not be entitled to any such distribution of
Partnership Units or affected by any such subdivision or combination of
Partnership Units because the number of the Original Limited Partners’
Partnership Units will have already been adjusted by virtue of the dividend or
distribution of the Company’s shares or the subdivision or combination of the
Company’s shares.

“Percentage Interest”
means the percentage ownership interest in the Partnership of each Partner, as
determined by dividing the number of Partnership Units owned by a Partner by
the aggregate number of Partnership Units owned by all Partners.

 8
 

 

“Person” means
any individual, partnership, corporation, joint venture, limited liability
company, trust or other entity.

“Profit” has the
meaning provided in Section 5.01(f) hereof.

“Property” means
any office, industrial or other commercial real property in which the
Partnership holds an ownership interest, either directly or pursuant to the
Partnership’s ownership of an interest in a subsidiary which owns an interest
in any such office, industrial or other commercial real property.

“Prospectus”
means the final prospectus, as amended or supplemented, that is delivered to
purchasers of REIT Shares in the Offering.

“Regulations”
means the Federal Income Tax Regulations, including temporary or proposed
regulations, issued under the Code, as amended and as hereafter amended from
time to time.  Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any successor provision of the Regulations.

“REIT” means a
real estate investment trust under Sections 856 through 860 of the Code.

“REIT Expenses”
means (i) costs and expenses relating to the formation and continuity of
existence and operation of the Company and any Subsidiaries thereof (which
Subsidiaries shall, for purposes hereof, be included within the definition of “Company”),
including taxes, fees and assessments associated therewith, any and all costs,
expenses or fees payable to any director, officer, or employee of the Company,
(ii) costs and expenses relating to (A) any registration and public offering of
securities by the Company, the net proceeds of which were used to make a
contribution to the Partnership, and (B) all statements and reports incidental
thereto, including, without limitation, underwriting discounts and selling
commissions applicable to any such offering of securities, and any costs and
expenses associated with any claims made by any holders of such securities or
any underwriters or placement agents thereof, (iii) costs and expenses
associated with any repurchase of any securities by the Company, (iv) costs and
expenses associated with the preparation and filing, of any periodic or other
reports and communications by the Company under federal, state or local laws or
regulations, including filings with the Commission, (v) costs and expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body, including the Commission and any securities
exchange, (vi) costs and expenses associated with any section 401(k) plan,
incentive plan, bonus plan or other plan providing for compensation for the
employees of the Company, (vii) costs and expenses incurred by the Company
relating to any issuance or redemption of Partnership Interests or REIT Shares,
and (viii) all other operating or administrative costs of the Company incurred in
the ordinary course of its business on behalf of or in connection with the
Partnership.

“REIT Share”
means a share of common stock in the Company (or Successor Entity, as the case
may be).

 9

 

“REIT Shares Amount”
means a number of REIT Shares equal to the product of the number of Partnership
Units offered for exchange by an Exchanging Partner, multiplied by the
Conversion Factor as adjusted to and including the Specified Exchange Date;
provided that in the event the Company issues to all holders of REIT Shares
rights, options, warrants or convertible or exchangeable securities entitling
the stockholders to subscribe for or purchase REIT Shares, or any other
securities or property (collectively, the “Rights”), and
the rights have not expired at the Specified Exchange Date, then the REIT
Shares Amount shall also include the rights issuable to a holder of the REIT
Shares on the record date fixed for purposes of determining the holders of REIT
Shares entitled to Rights.

“Sale” means any
transaction or series of transactions whereby (i) the Partnership directly or
indirectly (except as described in other subsections of this definitions)
sells, grants, transfers, conveys or relinquishes its ownership of any Property
or portion thereof, including the lease of any Property consisting of a
building only, and including any event with respect to any Property which gives
rise to a significant amount of insurance proceeds or condemnation awards; (ii)
the Partnership directly or indirectly (except as described in other
subsections of this definition) sells, grants, transfers, conveys or
relinquishes its ownership of all or substantially all the interest of the
Partnership in any Joint Venture in which it is a co-venturer or partner; (iii)
any Joint Venture directly or indirectly (except as described in other
subsections of this definition) in which the Partnership as a co-venturer or
partner sells, grants, transfers, conveys or relinquishes its ownership of any Property
or portion thereof, including any event with respect to any Property which
gives rise to insurance claims or condemnation awards; (iv) the Partnership
directly or indirectly (except as described in other subsections of this
definition) sells, grants, conveys or relinquishes its interest in any Mortgage
or portion thereof (including with respect to any Mortgage, all payments
thereunder or in satisfaction thereof other than regularly scheduled interest
payments) of amounts owed pursuant to such Mortgage and any event with respect
to a Mortgage which gives rise to a significant amount of insurance proceeds or
similar awards, or (v) the Partnership directly or indirectly (except as
described in other subsections of this definition) sells, grants, transfers,
conveys or relinquishes its ownership of any other asset (other than
investments in bank accounts, money market funds or other current assets) not
previously described in this definition or any portion thereof.

“Securities Act”
means the Securities Act of 1933, as amended.

“Service” means
the Internal Revenue Service.

“Specified Exchange Date”
means the first business day of the month first occurring after the expiration
of 60 business days from the date of receipt by the General Partner of the
Exchange Notice.

“Sponsor” means any
Person which (i) is directly or indirectly instrumental in organizing, wholly
or in part, the Company, (ii) will manage or participate in the management of
the Company, and any Affiliate of any such Person, other than a Person whose
only relationship with the Company is that of an independent property manager
and whose only compensation is as such, (iii) takes the initiative, directly or
indirectly, in founding or organizing the Company, either alone or in
conjunction with one or more other Persons, (iv) receives a material 

 10
 

 

participation in
the Company in connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both services and
property, (v) has a substantial number of relationships and contacts with the
Company, (vi) possesses significant rights to control Properties, (vii)
receives fees for providing services to the Company which are paid on a basis
that is not customary in the industry, or (viii) provides goods or services to
the Company on a basis which was not negotiated at arm’s-length with the
Company.

“Subsidiary”
means, with respect to any Person, any corporation or other entity of which a
majority of (i) the voting power of the voting equity securities or (ii) the
outstanding equity interests is owned, directly or indirectly, by such Person.

“Subsidiary Partnership”
means any partnership, limited liability company or other entity taxed as a
partnership for federal income tax purposes in which interests are owned by the
Company or by a wholly-owned Subsidiary or Subsidiaries of the Company.

“Substitute Limited Partner”
means any Person admitted to the Partnership as a Limited Partner pursuant to
Section 9.03 hereof.

“Successor Entity”
has the meaning provided in the definition of “Conversion Factor” contained
herein.

“Survivor” has
the meaning set forth in Section 7.01(d) hereof.

“Transaction”
has the meaning set forth in Section 7.01(c) hereof.

“Transfer” has
the meaning set forth in Section 9.02(a) hereof.

“Transfer Restriction Date”
means the effective date upon which Behringer Advisors LP, a Texas limited
partnership, shall cease acting as the advisor to the Company under the terms
of an advisory agreement entered into between Behringer Advisors LP and the Company.

“Unaffiliated
Percentage Interest” means a Percentage Interest held by a Limited
Partner that is not an Affiliate of the Company.

“Unpaid Return”
means any accrued but unpaid LP Return or GP Minimum Return less all amounts
distributed by the Partnership to a Limited Partner or the General Partner in
reduction thereof.

“Value” means,
with respect to any security, the average of the daily market price of such
security for the ten consecutive trading days immediately preceding the date as
of which such Value is to be determined. 
The market price for each such trading day shall be: (i) if the security
is listed or admitted to trading on any securities exchange, the sale price,
regular way, on such day, or if no such sale takes place on such day, the average
of the closing bid and asked prices, regular way, on such day; (ii) if the
security is not listed or admitted to trading on any securities exchange, the
last reported sale price on such day or, if no sale takes place on such day,
the average of the closing bid and asked prices on such day, as reported by a
reliable 

 11
 

 

quotation source designated by the Company; or (iii) if the security is
not listed or admitted to trading on any securities exchange and no such last
reported sale price or closing bid and asked prices are available, the average
of the reported high bid and low asked prices on such day, as reported by a
reliable quotation source designated by the Company, or if there shall be no
bid and asked prices on such day, the average of the high bid and low asked
prices, as so reported, on the most recent day (not more than ten days prior to
the date in question) for which prices have been so reported; provided, that if
there are no bid and asked prices reported during the ten days prior to the
date in question, the value of the security shall be determined by the Company
acting in good faith on the basis of such quotations and other information as
it considers, in its reasonable judgment, appropriate.  In the event the security includes any
additional rights, then the value of such rights shall be determined by the
Company acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate.

ARTICLE
II

PARTNERSHIP
FORMATION AND IDENTIFICATION

2.01        Formation.  The
Partnership is a limited partnership formed pursuant to the Act and upon the
terms and conditions set forth in the Original Agreement.  The Partnership shall continue upon the
execution of this Agreement.

2.02        Name, Office and Registered Agent.  The
name of the Partnership is “Behringer Harvard
Operating Partnership I LP” 
The registered office and principal place of business of the Partnership
shall be 15601 Dallas Pkwy., Suite 600, Addison, Texas 75001.  The General Partner may at any time change
the location of such office, provided the General Partner gives notice to the
Partners of any such change.  The name
and address of the Partnership’s registered agent is CT Corporation System, 350
North St. Paul, Dallas, Texas 75201.  The
sole duty of the registered agent as such is to forward to the Partnership any
notice that is served on it as registered agent.

2.03        Partners.

(a)           The
General Partner of the Partnership is BHR, Inc., a Delaware corporation.  Its principal place of business is the same
as that of the Partnership.

(b)           The
Limited Partners are those Persons identified as Limited Partners (including
the Original Limited Partners) on Exhibit A hereto, as it may be amended
from time to time.

2.04        Term and Dissolution.

(a)           The
term of the Partnership shall continue in full force and effect until
December 31, 2054, except that the Partnership shall be dissolved earlier
upon the first to occur of any of the following events (“Liquidating
Events”):

(i)            the occurrence of an Event of Bankruptcy
as to a General Partner or the dissolution, death, removal or withdrawal of a
General Partner unless the business of the Partnership is continued pursuant to
Section 7.03(b) hereof, provided, that if a General 

 12
 

 

Partner is on the date of such occurrence a partnership, the
dissolution of such General Partner as a result of the dissolution, death,
withdrawal, removal or Event of Bankruptcy of a partner in such partnership
shall not be an event of dissolution of the Partnership if the business of such
General Partner is continued by the remaining partner or partners thereof,
either alone or with additional partners, and such General Partner and such
partners comply with any other applicable requirements of this Agreement;

(ii)           the passage of 90 days after the sale
or other disposition of all or substantially all of the assets of the
Partnership (provided, that if the Partnership receives an installment
obligation as consideration for such sale or other disposition, the Partnership
shall continue, unless sooner dissolved under the provisions of this Agreement,
until such time as such obligation is paid in full);

(iii)          the exchange of all Limited
Partnership Interests (other than any of such interests held by the General
Partner or Affiliates of the General Partner); or

(iv)          the election by the General Partner
that the Partnership should be dissolved.

(b)           Upon
dissolution of the Partnership (unless the business of the Partnership is
continued pursuant to Section 7.03(b) hereof), the General Partner (or its trustee,
receiver, successor or legal representative) shall amend or cancel the
Certificate and liquidate the Partnership’s assets and apply and distribute the
proceeds thereof in accordance with Section 5.06 hereof.  Notwithstanding the foregoing, the liquidating
General Partner may either (i) defer liquidation of, or withhold from
distribution for a reasonable time, any assets of the Partnership (including
those necessary to satisfy the Partnership’s debts and obligations), or (ii)
distribute the assets to the Partners in kind.

2.05        Filing of Certificate and Perfection of
Limited Partnership.  The General Partner
shall execute, acknowledge, record and file, at the expense of the Partnership,
the Certificate and any and all amendments thereto and all requisite fictitious
name statements and notices in such places and jurisdictions as may be
necessary to cause the Partnership to be treated as a limited partnership
under, and otherwise to comply with, the laws of each state or other
jurisdiction in which the Partnership conducts business.

2.06        Certificates Describing Partnership
Units.  At the request of a Limited Partner,
the General Partner may, at its option and in its discretion, issue a
certificate summarizing the terms of such Limited Partner’s interest in the
Partnership, including the number of Partnership Units owned as of the date of
such certificate.  If issued, any such
certificates (a) shall be in form and substance as approved by the General
Partner, (b) shall not be negotiable, and (c) shall bear a legend substantially
similar to the following:

“This certificate is not negotiable. 
The Partnership Units represented by this certificate are governed by
and transferable only in accordance with the provisions of the Agreement of
Limited Partnership of Behringer Harvard Operating Partnership I LP, as amended
from time to time.”

 13
 

 

ARTICLE III

BUSINESS
OF THE PARTNERSHIP

The purpose and nature of the business to be conducted
by the Partnership is (a) to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the Act, provided,
however, that such business shall be limited to and conducted in such a manner
as to permit the General Partner at all times to qualify as a REIT, unless the
General Partner otherwise ceases to qualify as a REIT, (b) to enter into any
partnership, joint venture or other similar arrangement to engage in any of the
foregoing or the ownership of interests in any entity engaged in any of the
foregoing, and (c) to do anything necessary or incidental to the
foregoing.  In connection with the
foregoing, and without limiting the Company’s right in its sole and absolute
discretion to cease qualifying as a REIT, the Partners acknowledge that the
Company’s current status as a REIT and the avoidance of income and excise taxes
on the Company inures to the benefit of all the Partners and not solely to the
Company and the General Partner. 
Notwithstanding the foregoing, the Limited Partners agree that the
Company may terminate its status as a REIT under the Code at any time to the
full extent permitted under its Articles of Incorporation.  The General Partner shall be empowered to do
any and all acts and things necessary or prudent to ensure that the Partnership
will not be classified as a “publicly traded partnership” for purposes of
Section 7704 of the Code.

ARTICLE
IV

CAPITAL
CONTRIBUTIONS AND ACCOUNTS

4.01        Capital Contributions.  As
of January 1, 2007, the parties hereto, or their respective predecessors in
interest as the case may be, have made Capital Contributions to the
Partnership, as applicable, in exchange for the number of Partnership Units
(estimated as of January 1, 2007 with respect to the Original Limited Partners
only) set forth opposite their names on Exhibit A.  After the Company has filed its Annual Report
on Form 10-K for the fiscal year ended December 31, 2006, the General Partner
shall, without the approval of any other Partner, attach an amended Exhibit
A to this Agreement to reflect the actual number of Partnership Units held
by the Original Limited Partners as of January 1, 2007.  At such time as Additional Limited Partners
are admitted to the Partnership, each shall make Capital Contributions as set
forth opposite their names on Exhibit A, as it may be amended from time
to time.  Exhibit A shall be
deemed amended upon, and the General Partner may, without the approval of any
other Partner, attach an amended Exhibit A to this Agreement to reflect:
(a) the issuance of Partnership Units issued to Additional Limited Partners or
to any existing Limited Partner pursuant to Section 4.02 (including the
Original Limited Partners), (b) any Partnership Units purchased or redeemed
pursuant to Section 6.10, (c) any redemption or purchase of Partnership Units
by the Partnership or the Company by reason of the exercise by a Limited
Partner of the Exchange Right, (d) any purchase by the Company (or any of its
Affiliates) of Partnership Units pursuant to the Call Right and (e) any changes
required pursuant to the second sentence of this Section 4.01.

4.02        Additional Capital Contributions and
Issuances of Additional Partnership Interests.

Except as provided in this Section 4.02 or in Section
4.03, the Partners shall have no right 

 14
 

 

or obligation to make any
additional Capital Contributions or loans to the Partnership.  The General Partner may contribute additional
capital to the Partnership, from time to time, and receive additional
Partnership Units in respect thereof in the manner contemplated by this Section
4.02.

(a)           Issuances
of Additional Partnership Interests.

(i)            General.  The General Partner is hereby authorized to
cause the Partnership to issue additional Partnership Interests in the form of
Partnership Units for any Partnership purpose, at any time or from time to
time, to the Partners (including the General Partner) or to other Persons for
such consideration and on such terms and conditions as shall be established by
the General Partner in its sole and absolute discretion, all without the
approval of any Limited Partners.  Any
additional Partnership Interests issued thereby may be issued in one or more
classes, or one or more series of any of such classes, with such designations,
preferences and relative participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to Limited
Partnership Interests, all as shall be determined by the General Partner in its
sole and absolute discretion and without the approval of any Limited Partner,
subject to Texas law, including, without limitation, (A) the allocations of items
of Partnership income, gain, loss, deduction and credit to each such class or
series of Partnership Interests; (B) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (C) the rights
of each such class or series of Partnership Interests upon dissolution and
liquidation of the Partnership; provided, however, that no additional
Partnership Interests shall be issued to the General Partner or the Original
Limited Partners unless:

(1)           the
additional Partnership Interests are issued in connection with an issuance of
REIT Shares or other interests in, the Company, which shares or interests have
designations, preferences and other rights such that the economic interests are
substantially similar to the designations, preferences and other rights of the
additional Partnership Interests issued to the General Partner or the Original
Limited Partners by the Partnership in accordance with this Section 4.02, and
the General Partner, on its own or with the Original Limited Partners, shall
make a Capital Contribution to the Partnership in an amount equal to the
aggregate proceeds raised in connection with the issuance of such shares of
stock of or other interests in the Company;

(2)           the
additional Partnership Interests are issued in exchange for property or other
assets owned by the General Partner or Original Limited Partners with a fair
market value, as determined by the General Partner, in good faith, equal to the
value of the Partnership Interests; or

(3)           the
additional Partnership Interests are issued to all Partners in proportion to
their respective Percentage Interests.

Without limiting the foregoing, the General Partner is
expressly authorized to cause the Partnership to issue Partnership Units for
less than fair market value, so long as the General 

 15
 

 

Partner concludes in good
faith that such issuance is in the best interests of the Company and the
Partnership.

(ii)           Issuance of Additional Securities.  The Company shall not issue any additional
REIT Shares (other than REIT Shares issued in connection with an exchange made
pursuant to Section 8.05 hereof) or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase REIT
Shares (collectively, “Additional Securities”), other than to all holders of
REIT Shares or pursuant to an Offering, unless (A) the General Partner shall
cause the Partnership to issue to the General Partner (or to the General
Partner and/or the Original Limited Partners), as the General Partner may
designate, Partnership Interests or rights, options, warrants or convertible or
exchangeable securities of the Partnership having designations, preferences and
other rights such that the economic interests are substantially similar to
those of the Additional Securities, and (B) the Company through the General
Partner (or the General Partner and/or the Original Limited Partners)
contributes the proceeds from the issuance of such Additional Securities and
from any exercise of rights contained in such Additional Securities to the
Partnership; provided, however, that the Company is allowed to issue Additional
Securities in connection with an acquisition of a Property or other asset to be
held directly by the General Partner, but if and only if, such direct
acquisition and issuance of Additional Securities have been approved and
determined to be in the best interests of the Company and the Partnership by a
majority of the Independent Directors and Limited Partners holding more than
50% of the Unaffiliated Percentage Interests, if any.  Without limiting the foregoing, the General
Partner is expressly authorized to issue Additional Securities for less than
fair market value, and to cause the Partnership to issue to the General Partner
(or to the General Partner and/or the Original Limited Partners) corresponding
Partnership Interests, so long as (1) the Company concludes in good faith that
such issuance is in the best interests of the Company and the Partnership,
including without limitation, the issuance of REIT Shares and corresponding
Partnership Units pursuant to an employee share purchase plan providing for
employee purchases of REIT Shares at a discount from fair market value or
employee stock options that have an exercise price that is less than the fair market
value of the REIT Shares, either at the time of issuance or at the time of
exercise, and (2) the Company through the General Partner (or the General
Partner and/or the Original Limited Partners) contributes all proceeds from
such issuance to the Partnership.

(b)           Certain
Deemed Contributions of Proceeds of Issuance of REIT Shares.  In connection with any and all issuances of
REIT Shares, the Company through the General Partner (or the General Partner
and/or the Original Limited Partners) shall make Capital Contributions to the
Partnership of the proceeds therefrom, provided, that if the proceeds actually
received and contributed by the Company are less than the gross proceeds of
such issuance as a result of any underwriter’s discount or other fees or expenses
paid or incurred in connection with such issuance, then the General Partner (or
the General Partner together with the Original Limited Partners, as applicable)
shall be deemed to have made Capital Contributions to the Partnership in the
aggregate amount of the gross proceeds of such issuance and the Partnership
shall be deemed simultaneously to have paid such offering expenses in
accordance with Section 6.05 hereof and in connection with the required
issuance of additional Partnership Units for such Capital Contributions
pursuant to Section 4.02(a) hereof.

 

 16

 

(c)           Original
Limited Partner Deemed Contributions. 
In the event that any Original Limited Partner elects to defer any
distribution of cash hereunder to be made to it pursuant to Section 5.02(a)
hereof, then such amount shall be deemed to be an additional contribution of
capital to the Partnership by the Original Limited Partner, which shall be
added to the Original Limited Partner’s Capital Contribution to the Partnership
and the Original Limited Partner’s Capital Account as established and
maintained under Section 4.04 hereof.

4.03        Additional Funding.  If
the General Partner determines that it is in the best interests of the
Partnership to provide for additional Partnership funds (“Additional Funds”) for any Partnership
purpose, the General Partner may (a) cause the Partnership to obtain such funds
from outside borrowings, or (b) elect to have the General Partner or any of its
Affiliates provide such Additional Funds to the Partnership through loans or
otherwise.

4.04        Capital Accounts.  A
separate capital account (a “Capital Account”)
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv). 
If (a) a new or existing Partner acquires an additional Partnership
Interest in exchange for more than a de minimis Capital Contribution, (b) the
Partnership distributes to a Partner more than a de minimis amount of
Partnership property as consideration for the redemption of a Partnership
Interest, or (c) the Partnership is liquidated within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the property of
the Partnership to its fair market value (as determined by the General Partner,
in its sole and absolute discretion, and taking into account Section 7701(g) of
the Code) in accordance with Regulations Section 1.704-l(b)(2)(iv)(f).  When the Partnership’s property is revalued
by the General Partner, the Capital Accounts of the Partners shall be adjusted
in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which generally
require such Capital Accounts to be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the Capital Accounts previously) would be allocated among the Partners
pursuant to Section 5.01 hereof if there were a taxable disposition of such
property for its fair market value (as determined by the General Partner, in
its sole and absolute discretion, and taking into account Section 7701(g) of
the Code) on the date of the revaluation.

4.05        Percentage Interests.  If
the number of outstanding Partnership Units increases or decreases during a
taxable year, each Partner’s Percentage Interest shall be adjusted by the
General Partner effective as of the date of each such increase or decrease to a
percentage equal to the number of Partnership Units held by such Partner
divided by the aggregate number of Partnership Units outstanding after giving
effect to such increase or decrease.  In
such event, the General Partner shall revalue the property of the Partnership
and the Capital Account for each Partner shall be adjusted as set forth in
Section 4.04 hereof.  If the Partners’
Percentage Interests are adjusted pursuant to this Section 4.05, the Profit and
Loss for the taxable year in which the adjustment occurs shall be prorated
between the part of the year ending on the day when the Partnership’s property
is revalued by the General Partner and the part of the year beginning on the
following day and, as so divided, shall be allocated to the Partners based on
their Percentage Interests before adjustment, and their adjusted Percentage
Interests, respectively, either (a) as if the taxable year had ended on the
date of the adjustment or (b) based on the number of days in each part.  The General Partner, in its sole and absolute
discretion, shall determine which method 

 17
 

 

shall be used
to allocate Profit and Loss for the taxable year in which an adjustment occurs,
as may be required or permitted under Section 706 of the Code.

4.06
       No Interest on Contributions.  No
Partner shall be entitled to interest on its Capital Contribution, except as
specifically provided in this Agreement.

4.07        Return of Capital Contributions.  No
Partner shall be entitled to withdraw any part of its Capital Contribution or
its Capital Account or to receive any distribution from the Partnership, except
as specifically provided in this Agreement. 
Except as otherwise provided herein, there shall be no obligation to
return to any Partner or withdrawn Partner any part of such Partner’s Capital
Contribution for so long as the Partnership continues in existence.

4.08        No Third-Party Beneficiary.  No
creditor or other third party having dealings with the Partnership shall have
the right to enforce the right or obligation of any Partner to make Capital
Contributions or loans or to pursue any other right or remedy hereunder or at
law or in equity, it being understood and agreed that the provisions of this
Agreement shall be solely for the benefit of, and may be enforced solely by,
the parties hereto and their respective successors and assigns.  None of the rights or obligations of the
Partners herein set forth to make Capital Contributions or loans to the
Partnership shall be deemed an asset of the Partnership for any purpose by any
creditor or other third party, nor may such rights or obligations be sold,
transferred or assigned by the Partnership or pledged or encumbered by the
Partnership to secure any debt or other obligation of the Partnership or of any
of the Partners.  In addition, it is the
intent of the parties hereto that no distribution to any Limited Partner shall
be deemed a return of money or other property in violation of the Act.  However, if any court of competent
jurisdiction holds that, notwithstanding the provisions of this Agreement, any
Limited Partner is obligated to return such money or property, such obligation
shall be the obligation of such Limited Partner and not of the General
Partner.  Without limiting the generality
of the foregoing, a deficit Capital Account of a Partner shall not be deemed to
be a liability of such Partner nor an asset or property of the Partnership.

ARTICLE V

PROFIT
AND LOSS; DISTRIBUTIONS

5.01        Allocation of Profit and Loss.

(a)           After giving effect to the special
allocations set forth in Sections 5.01(b), (c) and (d), Profit for each fiscal
year of the Partnership shall be allocated as follows: (i) first to the
Partners, pro rata, in accordance with and in proportion to their respective
Partnership Interests, in amounts equal to the amount of cash distributed to
the Partners pursuant to Section 5.02(a) hereof with respect to such fiscal
year; (ii) second, to the extent the amount of Profit for such fiscal year
exceeds the amount of cash distributed to the Partners pursuant to Section
5.02(a) hereof, such excess shall be allocated to the General Partner and the
Limited Partners in amounts and in proportion to the cumulative Loss allocated
to the General Partner pursuant to clause (y) of this Section 5.01(a) and the
cumulative Loss allocated to the Limited Partners pursuant to clause (x) of
this Section 5.01(a), respectively; and (iii) finally, the balance, if any, of
Profit shall be allocated to the Partners in accordance with and in proportion
to their respective Percentage 

 18
 

 

Interests. 
Notwithstanding the foregoing, however, it is the intent of the Partners
that allocations of Profit to the Limited Partners be such that the amount of
Profit allocated to each Limited Partner be equal to the amount of income that
would have been allocated to such Limited Partner with respect to the
applicable fiscal period if such Limited Partner had owned REIT Shares equal in
number to the number of Partnership Units owned by such Limited Partner during
such fiscal period, and if, for any reason, the foregoing allocations of Profit
result in any material variation from this concept, Profit shall be allocated
to each Limited Partner in an amount equal to the aggregate amount of income
that would have been allocated to such Limited Partner with respect to the
applicable fiscal period if such Limited Partner had owned REIT Shares equal in
number to the number of Partnership Units owned by such Limited Partner during
such fiscal period.  After giving effect
to the special allocations set forth in Sections 5.01(b), (c) and (d), Loss for
a fiscal year of the Partnership shall be allocated as follows: (w) first, to
the Partners, pro rata, in accordance with and in proportion to their
respective Partnership Interests, until the cumulative Loss allocated to each
Partner under this clause (w) equals the cumulative Profit allocated to each
Partner under clause (ii) of this Section 5.01(a); (x) second, to the Limited
Partners in an amount equal to each such Limited Partner’s Capital Account
balance prior to the allocation made under this clause (x); (y) third, to the
General Partner in an amount equal to the General Partner’s Capital Account
balance prior to the allocation made under this clause (y); and (z) fourth, to
the General Partner to the extent that any further allocation of Loss to
Limited Partners would result in any such Limited Partners having a deficit
balance in their Capital Accounts.

(b)           Notwithstanding
any provision to the contrary herein, (i) any expense of the Partnership that
is a “nonrecourse deduction” within the meaning of Regulations Section
1.704-2(b)(1) shall be allocated in accordance with the Partners’ respective
Percentage Interests, (ii) any expense of the Partnership that is a “partner
nonrecourse deduction” within the meaning of Regulations Section 1.704-2(i)(2)
shall be allocated to the Partner that bears the “economic risk of loss” of
such deduction in accordance with Regulations Section 1.704-2(i)(1), (iii) if
there is a net decrease in Partnership Minimum Gain within the meaning of
Regulations Section 1.704-2(f)(1) for any Partnership taxable year, then,
subject to the exceptions set forth in Regulations Section 1.704-2(f)(2), (3),
(4) and (5), items of gain and income shall be allocated among the Partners in
accordance with Regulations Section 1.704-2(f) and the ordering rules contained
in Regulations Section 1.704-2(j), and (iv) if there is a net decrease in
Partner nonrecourse debt minimum gain within the meaning of Regulations Section
1.704-2(i)(4) for any Partnership taxable year, then, subject to the exceptions
set forth in Regulations Section 1.704-2(g), items of gain and income shall be
allocated among the Partners, in accordance with Regulations Section
1.704-2(i)(4) and the ordering rules contained in Regulations Section
1.704-2(j).  A Partner’s “interest in
partnership profits” for purposes of determining its share of the nonrecourse
liabilities of the Partnership within the meaning of Regulations Section
1.752-3(a)(3) shall be such Partner’s Percentage Interest.

(c)           If
a Partner receives in any taxable year an adjustment, allocation, or
distribution described in subparagraphs (4), (5), or (6) of Regulations Section
1.704-1(b)(2)(ii)(d) that causes or increases a deficit balance in such Partner’s
Capital Account that exceeds the sum of such Partner’s shares of Partnership
Minimum Gain and Partner nonrecourse debt minimum gain, as determined in
accordance with Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner
shall be allocated specially for such taxable year (and, if necessary, later
taxable years) items of income and gain in an amount and manner sufficient to
eliminate such deficit Capital Account 

 19
 

 

balance as quickly as possible as provided in
Regulations Section 1.704-1(b)(2)(ii)(d). 
After the occurrence of an allocation of income or gain to a Partner in
accordance with this Section 5.01(c), to the extent permitted by Regulations
Section 1.704-1(b), items of expense or loss shall be allocated to such Partner
in an amount necessary to offset the income or gain previously allocated to such
Partner under this Section 5.01(c).

(d)           Loss
shall not be allocated to a Limited Partner to the extent that such allocation
would cause a deficit in such Partner’s Capital Account (after reduction to
reflect the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5)
and (6)) to exceed the sum of such Partner’s shares of Partnership Minimum Gain
and Partner nonrecourse debt minimum gain. 
Any Loss in excess of that limitation shall be allocated to the General
Partner.  After the occurrence of an
allocation of Loss to the General Partner in accordance with this Section
5.01(d), to the extent permitted by Regulations Section 1.704-1(b), Profit
shall be allocated to the General Partner in an amount necessary to offset the
Loss previously allocated to the General Partner under this Section 5.01(d).

(e)           If
a Partner transfers any part or all of its Partnership Interest, the
distributive shares of the various items of Profit and Loss allocable among the
Partners during such fiscal year of the Partnership shall be allocated between
the transferor and the transferee Partner either (i) as if the Partnership’s
fiscal year had ended on the date of the transfer, or (ii) based on the number
of days of such fiscal year that each was a Partner without regard to the
results of Partnership activities in the respective portions of such fiscal
year in which the transferor and the transferee were Partners.  The General Partner, in its sole and absolute
discretion, shall determine which method shall be used to allocate the
distributive shares of the various items of Profit and Loss between the
transferor and the transferee Partner.

(f)            “Profit” and “Loss” and any
items of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially
allocated pursuant to Sections 5.01(b), 5.01(c), or 5.01(d).  All allocations of income, Profit, gain,
Loss, and expense (and all items contained therein) for federal income tax
purposes shall be identical to all allocations of such items set forth in this
Section 5.01, except as otherwise required by Section 704(c) of the Code and
Regulations Section 1.704-1(b)(4).  Any
deductions, income, gain or loss (“Tax Items”)
with respect to Partnership property that is contributed to the Partnership by
a Partner shall be shared among the Partners for income tax purposes pursuant
to Regulations promulgated under Section 704(c) of the Code, so as to take into
account the variation, if any, between the basis of the property to the
Partnership and its initial Agreed Value. 
With respect to any property that is contributed to the Partnership by
Ryanco Partners Ltd. No. X, a California limited partnership, such variation
between basis and initial Agreed Value shall be taken into account under the “traditional
method” with curative allocations on sale as described in Regulations Section
1.704-3.  With respect to any other
non-cash properties subsequently contributed to the Partnership, the
Partnership shall account for such variation under any method approved under
Section 704(c) of the Code and the applicable regulations as chosen by the
General Partner.  In the event Agreed
Value of any Partnership asset is adjusted, subsequent allocations of Tax Items
with respect to such asset shall take account of the variation, if any, between
the adjusted basis of such asset and its Agreed Value in the same manner as
under Section 704(c) of the Code and the applicable 

 20
 

 

regulations consistent with the requirements of
Regulations Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c)
of the Code and the applicable regulations as chosen by the General Partner.

(g)           If
the General Partner determines that is advantageous to the business of the
Partnership to amend the allocation provisions of this Agreement so as to
permit the Partnership to avoid the characterization of Partnership income
allocable to various qualified plans, IRAs and other entities which are exempt
from federal income taxation (“Tax Exempt
Partners”) as constituting Unrelated Business Taxable Income (“UBTI”) within the meaning of the Code,
specifically including, but not limited to, amendments to satisfy the so-called
“fractions rule” contained in Code Section 514(c)(9), the General Partner
is authorized, in its discretion, to amend this Agreement so as to allocate
income, gain, loss, deduction or credit (or items thereof) arising in any year
differently than as provided for in this Section if, and to the extent, that
such amendments will achieve such result or otherwise permit the avoidance of
characterization of Partnership income as UBTI to Tax Exempt Partners.  Any allocation made pursuant to this
Section 5.01(g) shall be deemed to be a complete substitute for any
allocation otherwise provided for in this Agreement, and no further amendment
of this Agreement or approval by any Limited Partner shall be required to
effectuate such allocation.  In making
any such allocations under this Section 5.01(g) (“New Allocations”), the General Partner is
authorized to act in reliance upon advice of counsel to the Partnership or the
Partnership’s regular certified public accountants that, in their opinion,
after examining the relevant provisions of the Code and any current or future
proposed or final Treasury Regulations thereunder, the New Allocation will
achieve the intended result of this Section 5.01(g).

New Allocations made by the General Partner in
reliance upon the advice of counsel or accountants as described above shall be
deemed to be made in the best interests of the Partnership and all of the
Partners, and any such New Allocations shall not give rise to any claim or
cause of action by any Partner against the Partnership or any General
Partner.  Nothing herein shall require or
obligate the General Partner, by implication or otherwise, to make any such
amendments or undertake any such action.

5.02        Distributions of Cash.

(a)           The
Partnership shall distribute cash on a quarterly (or, at the election of the
General Partner, more frequent) basis, in an amount determined by the General
Partner in its sole and absolute discretion, to the Partners who are Partners
on the Partnership Record Date with respect to such quarter (or other
distribution period) in the following manner: (i) first, to the General Partner
in an amount equal to the GP Minimum Return with respect to the fiscal year of
the General Partner; (ii) second, to the Limited Partners pro rata among them
in proportion to the their respective Unpaid Return, if any, owing to each such
Limited Partners with respect to prior fiscal years, in an amount equal to
their respective Unpaid Return for such prior fiscal years owing to each such
Limited Partner; (iii) third, after the establishment of reasonable cash
reserves to meet REIT Expenses and other obligations of the Partnership, as
determined in the sole and absolute discretion of the General Partner, to the
General Partner and the Limited Partners in such aggregate amount as may be
determined by the General Partner in its sole and absolute discretion to be
allocated among the General Partner and the Limited Partners such that each
Limited Partner will receive an amount equal to its LP Return for such fiscal
year; and (iv) 

 21
 

 

finally, to the Partners in accordance with and in
proportion to their respective Percentage Interests; provided, however, that if
a new or existing Partner acquires an additional Partnership Interest in
exchange for a Capital Contribution on any date other than a Partnership Record
Date, the cash distribution attributable to such additional Partnership
Interest relating to the Partnership Record Date next following the issuance of
such additional Partnership Interest shall be reduced to the proportion thereof
which equals (i) the number of days that such additional Partnership Interest
is held by such Partner divided by (ii) the number of days between such
Partnership Record Date and the immediately preceding Partnership Record
Date.  Notwithstanding the foregoing,
however, the Original Limited Partners may, in their sole and absolute
discretion, elect to defer any distribution to be made to it, in which case the
amount so deferred shall be deemed to be an additional Capital Contribution
made on behalf of the Original Limited Partners under Section 4.02(c) hereof,
to be distributed to the Original Limited Partners upon liquidation of the
Partnership under Section 5.06 hereof, or at such time as the Original Limited Partners
may otherwise be allowed to withdraw from the Partnership after the Transfer
Restriction Date.

(b)           Notwithstanding
any other provision of this Agreement, the General Partner is authorized to
take any action that it determines to be necessary or appropriate to cause the
Partnership to comply with any withholding requirements established under the
Code or any other federal, state or local law including, without limitation,
the requirements of Sections 1441, 1442, 1445 and 1446 of the Code.  To the extent that the Partnership is
required to withhold and pay over to any taxing authority any amount resulting
from the allocation or distribution of income to a Partner or its assignee
(including by reason of Section 1446 of the Code), either (i) if the actual
amount to be distributed to the Partner or assignee equals or exceeds the
amount required to be withheld by the Partnership, the amount withheld shall be
treated as a distribution of cash in the amount of such withholding to such
Partner or assignee, or (ii) if the actual amount to be distributed to the
Partner or assignee is less than the amount required to be withheld by the
Partnership, the amount required to be withheld shall be treated as a loan (a “Partnership Loan”) from the Partnership to the Partner or
assignee on the day the Partnership pays over such amount to a taxing
authority.  A Partnership Loan shall be
repaid through withholding by the Partnership with respect to subsequent
distributions to the applicable Partner or assignee.  In the event that a Limited Partner (a “Defaulting Limited Partner”) fails to pay any amount owed to
the Partnership with respect to the Partnership Loan within 15 days after
demand for payment thereof is made by the Partnership on the Limited Partner,
the General Partner, in its sole and absolute discretion, may elect to make the
payment to the Partnership on behalf of such Defaulting Limited Partner.  In such event, on the date of payment, the
General Partner shall be deemed to have extended a loan (a “General Partner Loan”) to the Defaulting Limited Partner in
the amount of the payment made by the General Partner and shall succeed to all
rights and remedies of the Partnership against the Defaulting Limited Partner
as to that amount.  Without limitation,
the General Partner shall have the right to receive any distributions that
otherwise would be made by the Partnership to the Defaulting Limited Partner
until such time as the General Partner Loan has been paid in full, and any such
distributions so received by the General Partner shall be treated as having
been received by the Defaulting Limited Partner and immediately paid to the
General Partner.  Any amounts treated as
a Partnership Loan or a General Partner Loan pursuant to this Section 5.02(b)
shall bear interest at the lesser of (A) the base rate on corporate loans at
large United States money center commercial banks, as published from time to
time in The Wall Street Journal, or (B) the maximum lawful rate of interest on
such 

 22
 

 

obligation, such interest to accrue from the date the
Partnership or the General Partner, as applicable, is deemed to extend the loan
until such loan is repaid in full.

(c)           To
the extent not utilized for expenses of the Partnership or for investment in
additional Properties, the General Partner may, in its discretion, cause the
Partnership to distribute Net Capital Proceeds in such amount as shall be
determined by the General Partner in its discretion in accordance with the
provisions of Section 5.02(a) hereof.

(d)           In
no event may a Partner receive a distribution of cash with respect to a
Partnership Unit if such Partner is entitled to receive a cash dividend as the
holder of record of a REIT Share for which all or part of such Partnership Unit
has been or will be exchanged, and the Unpaid Return with respect to such
Partnership Unit shall be deemed to be reduced by the amount of any such cash
dividend.

 23

 

5.03        REIT Distribution Requirements.  The
General Partner shall use its reasonable efforts to cause the Partnership to
distribute amounts sufficient to enable the Company to pay stockholder
dividends that will allow the Company to (a) meet its distribution requirement
for qualification as a REIT as set forth in Section 857 of the Code and (b)
avoid any federal income or excise tax liability imposed by the Code.

5.04        No Right to Distributions in Kind.  No
Partner shall be entitled to demand property other than cash in connection with
any distributions by the Partnership.

5.05        Limitations on Return of Capital
Contributions.  Notwithstanding any of the
provisions of this Article V, no Partner shall have the right to receive and
the General Partner shall not have the right to make a distribution that
includes a return of all or part of a Partner’s Capital Contributions, unless
after giving effect to the return of a Capital Contribution, the sum of all
Partnership liabilities, other than the liabilities to a Partner for the return
of its Capital Contribution, does not exceed the fair market value of the
Partnership’s assets.

5.06        Distributions Upon Liquidation.  Upon
liquidation of the Partnership, after payment of, or adequate provision for,
debts and obligations of the Partnership, including any Partner loans, any
remaining assets of the Partnership shall be distributed to all Partners with
positive Capital Accounts in accordance with their respective positive Capital
Account balances.  For purposes of the
preceding sentence, the Capital Account of each Partner shall be determined
after all adjustments made in accordance with Sections 5.01 and 5.02 resulting
from Partnership operations and from all sales and dispositions of all or any
part of the Partnership’s assets have been made.  To the extent deemed advisable by the General
Partner, appropriate arrangements (including the use of a liquidating trust)
may be made to assure that adequate funds are available to pay any contingent
debts or obligations.

5.07        Substantial Economic Effect.  It
is the intent of the Partners that the allocations of Profit and Loss under
this Agreement have substantial economic effect (or be consistent with the
Partners’ interests in the Partnership in the case of the allocation of losses
attributable to nonrecourse debt) within the meaning of Section 704(b) of the
Code as interpreted by the Regulations promulgated pursuant thereto.  Article V and other relevant provisions of
this Agreement shall be interpreted in a manner consistent with such intent.

5.08        Withholding.

All amounts required to be withheld pursuant to
Section 1446 of the Code or any other provision of federal, state, or local tax
law shall be treated as amounts actually distributed to the affected Partners
for all purposes under this Agreement. 
If the Partnership’s withholding obligations with respect to a Partner
shall exceed the cash distributable to such Partner, such Partner shall be
liable for a mandatory capital contribution equal to such excess.  Failure to make such capital contribution
shall result in the deemed sale by such Partner of a portion of such Partner’s
Partnership Interest; such portion having an agreed value equal to such excess.

5.09        Tax Consequences to Limited Partners.

In exercising its authority under this Agreement, the
General Partner may, but shall be under no obligation to, take into account the
tax consequences to any Partner (including the 

 24
 

 

General Partner) of any action taken by it. The
General Partner and the Partnership shall not have liability to a Partner under
any circumstances as a result of an income tax liability incurred by such
Limited Partner as a result of an action (or inaction) by the General Partner
pursuant to its authority under this Agreement.

ARTICLE
VI

RIGHTS,
OBLIGATIONS AND

POWERS OF THE GENERAL PARTNER

6.01        Management of the Partnership.

(a)           Except
as otherwise expressly provided in this Agreement, the General Partner shall
have full, complete and exclusive discretion to manage and control the business
of the Partnership for the purposes herein stated, and shall make all decisions
affecting the business and assets of the Partnership.  Subject to the restrictions specifically
contained in this Agreement, the powers and obligations, as the context
requires, of the General Partner shall include, without limitation, the
authority to take the following actions on behalf of the Partnership:

(i)            to acquire, purchase, own, operate,
lease and dispose of any real property and any other property or assets
including, but not limited to notes, Mortgages, partnership or joint venture
interests or securities, that the General Partner determines are necessary or
appropriate or in the best interests of the business of the Partnership;

(ii)           to construct buildings and make other
improvements on the Properties owned or leased by the Partnership;

(iii)          to authorize, issue, sell, redeem or
otherwise purchase any Partnership Interests or any securities (including
secured and unsecured debt obligations of the Partnership, debt obligations of
the Partnership convertible into any class or series of Partnership Interests,
or options, rights, warrants or appreciation rights relating to any Partnership
Interests) of the Partnership;

(iv)          to borrow or lend money for the
Partnership, issue or receive evidences of indebtedness in connection
therewith, refinance, increase the amount of, modify, amend or chance the terms
of, or extend the time for the payment of, any such indebtedness, and secure
such indebtedness by mortgage, deed of trust, pledge or other lien on the
Partnership’s assets;

(v)           to pay, either directly or by
reimbursement, for all operating costs and general administrative expenses of
the Partnership to third parties or to the Company, the General Partner or any
of their Affiliates as set forth in this Agreement;

(vi)          to guarantee or become a co-maker of
indebtedness of the Company or any Subsidiary thereof, refinance, increase the
amount of, modify, amend or change the terms of, or extend the time for the
payment of, any such guarantee or indebtedness, and secure such guarantee or
indebtedness by mortgage, deed of trust, pledge or other lien on the
Partnership’s assets;

 25
 

 

(vii)         to use assets of the Partnership
(including, without limitation, cash on hand) for any purpose consistent with
this Agreement, including, without limitation, payment, either directly or by
reimbursement, of all operating costs and general administrative expenses of
the Company, the General Partner, the Partnership or any Subsidiary of any of
them, to third parties or to the Company or the General Partner as set forth in
this Agreement;

(viii)        to lease all or any portion of any of
the Partnership’s assets, whether or not the terms of such leases extend beyond
the termination date of the Partnership and whether or not any portion of the
Partnership’s assets so leased are to be occupied by the lessee, or, in turn,
subleased in whole or in part to others, for such consideration and on such
terms as the General Partner may determine;

(ix)           to prosecute, defend, arbitrate, or
compromise any and all claims or liabilities in favor of or against the
Partnership, on such terms and in such manner as the General Partner may
reasonably determine, and similarly, to prosecute, settle or defend litigation
with respect to the Partners, the Partnership, or the Partnership’s assets;

(x)            to file applications, communicate,
and otherwise deal with any and all governmental agencies having jurisdiction
over, or in any way affecting, the Partnership’s assets or any other aspect of
the Partnership business;

(xi)           to make or revoke any election
permitted or required of the Partnership by any taxing authority;

(xii)          to maintain such insurance coverage
for public liability, fire and casualty, and any and all other insurance for
the protection of the Partnership, for the conservation of Partnership assets,
or for any other purpose convenient or beneficial to the Partnership, in such
amounts and such types, as it shall determine from time to time;

(xiii)         to determine whether or not to apply
any insurance proceeds for any Property to the restoration of such Property or
to distribute the same;

(xiv)        to establish one or more divisions of
the Partnership, to hire and dismiss employees of the Partnership or any
division of the Partnership, and to retain legal counsel, accountants,
consultants, real estate brokers, and such other persons, as the General
Partner may deem necessary or appropriate in connection with the Partnership
business and to pay such persons remuneration as the General Partner may deem
reasonable and proper;

(xv)         to retain other services of any kind or
nature in connection with Partnership business and to pay such remuneration as
the General Partner may deem reasonable and proper for same;

(xvi)        to negotiate and conclude agreements on
behalf of the Partnership with respect to any of the rights, powers and
authority conferred upon the General Partner;

 26
 

 

(xvii)       to maintain accurate accounting records
and to file promptly all federal, state and local income tax returns on behalf
of the Partnership;

(xviii)      to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;

(xix)         to form or acquire an interest in, and
contribute property to, any further limited or general partnerships, joint
ventures, limited liability companies or other entities or relationships that
it deems desirable (including, without limitation, the acquisition of interests
in, and the contributions of property to, its Subsidiaries and any other Person
in which it has an equity interest from time to time);

(xx)          to establish Partnership reserves for
working capital, capital expenditures, contingent liabilities, or any other
valid Partnership purpose;

(xxi)         to merge, consolidate or combine the
Partnership with or into another Person;

(xxii)        to do any and all acts and things
necessary or prudent to ensure that the Partnership will not be classified as a
“publicly traded partnership” for purposes of Section 7704 of the Code; and

(xxiii)       to take such other action, execute,
acknowledge, swear to or deliver such other documents and instruments, and
perform any and all other acts that the General Partner deems necessary or
appropriate for the formation, continuation and conduct of the business and
affairs of the Partnership (including, without limitation, all actions
consistent with allowing the Company at all times to qualify as a REIT unless
the Company voluntarily terminates its REIT status) and to possess and enjoy
all of the rights and powers of a general partner as provided by the Act.

(b)           Except
as otherwise provided herein, to the extent the duties of the General Partner
require expenditures of funds to be paid to third parties, the General Partner
shall not have any obligations hereunder except to apply Partnership funds to
the extent that Partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend
its individual funds for payment to third parties or to undertake any individual
liability or obligation on behalf of the Partnership.

(c)           Any
actions taken by the General Partner pursuant to its authority under this
Agreement on behalf of the Partnership regarding the approval of any
transaction between the Partnership and the Sponsor, Advisor, a member of the
Board of Directors of the Company or any Affiliate thereof, shall require
approval by a majority of the members of the Board of Directors of the Company
(including a majority of the independent directors) not otherwise interested in
such transaction as being fair and reasonable to the Company and the
Partnership on terms and conditions not less favorable to the Company or the
Partnership, as applicable, than those available from unaffiliated third
parties.

 27
 

 

6.02        Delegation of Authority.  The
General Partner may delegate any or all of its powers, rights and obligations
hereunder, and may appoint, employ, contract or otherwise deal with any Person
(including without limitation officers or other agents of the Partnership, the
Company or the General Partner appointed by the General Partner) for the
transaction of the business of the Partnership, which Person may, under
supervision of the General Partner, perform any acts or services for the
Partnership as the General Partner may approve.

6.03        Indemnification and Exculpation of
Indemnitees.

(a)           The
Partnership shall indemnify an Indemnitee from and against any and all losses,
claims, damages, liabilities, joint or several, expenses (including reasonable
legal fees and expenses), judgments, fines, settlements, and other amounts
arising from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the operations of the
Partnership as set forth in this Agreement in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, as a result
of acting on behalf of or performing services for the Partnership, only if it
is determined that (i) the Indemnitee acted in good faith and (ii) that the Indemnitee
reasonably believed that the act or omission was in the Partnership’s best
interests, or if the act or omission was outside the Indemnitee’s official
capacity as a general partner of the Partnership, that the act or omission was
at least not opposed to the Partnership’s best interests.  Notwithstanding the foregoing, each
Indemnitee shall be liable, responsible and accountable, and the Partnership
shall not be liable to an Indemnitee, other than for reasonable expenses
actually incurred by the Indemnitee with respect to a proceeding in which (i)
the Indemnitee is found liable on the basis that the Indemnitee improperly
received personal benefit, whether or not the benefit resulted from an action
taken in the Indemnitee’s official capacity, or (ii) the Indemnitee is found
liable to the Partnership or the Limited Partners.  The Partnership shall not indemnify or hold
harmless the Indemnitee:  (a) in the case
in which the Indemnitee is an Independent 
Director, if the loss or liability was the result of gross negligence or
willful misconduct by the Indemnitee, or (b) in any other case, if the loss or
liability was the result of negligence or misconduct by the Indemnitee.  The termination of any proceeding by judgment,
order or settlement does not create a presumption that the Indemnitee did not
meet the requisite standard of conduct set forth in this Section 6.03(a).  The termination of any proceeding by
conviction or upon a plea of nolo contendere or its equivalent, or an entry of
an order of probation prior to judgment, does not alone determine that the
Indemnitee acted in a manner contrary to that specified in this Section
6.03(a).  Any indemnification pursuant to
this Section 6.03 shall be made only out of the assets of the Partnership.

(b)           Notwithstanding
anything to the contrary contained in the provisions of subsection (a) of this
Section, the Partnership shall not provide indemnification for any loss,
liability or expense arising from or out of an alleged violation of federal or
state securities laws by an Indemnitee unless one or more of the following
conditions are met:  (i) there has been a
successful adjudication on the merits of each count involving alleged
securities law violations as to the particular Indemnitee, (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular Indemnitee, or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular
Indemnitee and finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for indemnification
has been advised of the position of the SEC and of the published 

 28
 

 

position of any state securities regulatory authority
in which securities of the Partnership were offered or sold as to
indemnification for violations of securities laws.

(c)           The
Partnership shall pay or reimburse reasonable legal expenses and other costs
incurred by an Indemnitee in advance of final disposition of a proceeding if
all of the following are satisfied:  (i)
the proceeding relates to acts or omissions with respect to the performance of
duties for services on behalf of the Partnership, (ii) the Indemnitee provides
the Partnership with written affirmation of the Indemnitee’s good faith belief
that the Indemnitee has met the standard of conduct necessary for
indemnification by the Partnership as authorized in this Section 6.03, (iii)
the legal proceeding was initiated by a third party who is not a stockholder of
the Company or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement,
and (iv) the Indemnitee provides the Partnership with a written agreement to
repay the amount paid or reimbursed by the Partnership, together with the
applicable legal rate of interest thereon, if it is ultimately determined that
the Indemnitee did not comply with the requisite standard of conduct and is not
entitled to indemnification.

(d)           The
Indemnification provided by this Section 6.03 shall be in addition to any other
rights to which an Indemnitee or any other Person may be entitled under any
agreement, pursuant to any vote of the Partners, as a matter of law or
otherwise, and shall continue as to an Indemnitee who has ceased to serve in
such capacity.

(e)           The
Partnership may purchase and maintain insurance or establish other
arrangements, including without limitation trust arrangements and letters of
credit on behalf of or to secure indemnification obligations owed to the
Indemnitees and such other Persons as the General Partner shall determine
against any liability that may be asserted against or expenses that may be
incurred by such Person in connection with the Partnership’s activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.

(f)            For
purposes of this Section 6.03, (i) the Partnership shall be deemed to have
requested an Indemnitee to serve as a fiduciary of an employee benefit plan
whenever the performance by the Indemnitee of its duties to the Partnership
also imposes duties on the Indemnitee, or otherwise involves services by the
Indemnitee to the plan or participants or beneficiaries of the plan; (ii)
excise taxes assessed on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall constitute fines within the meaning of this
Section 6.03; and (iii) actions taken or omitted by the Indemnitee with respect
to an employee benefit plan in the performance of its duties for a purpose
reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Partnership.

(g)           In
no event may an Indemnitee subject the Limited Partners to personal liability
by reason of the indemnification provisions set forth in this Agreement.

(h)           An
Indemnitee shall not be denied indemnification in whole or in part under this
Section 6.03 because the Indemnitee had an interest in the transaction with
respect to which the indemnification applies if the transaction was otherwise
permitted by the terms of this Agreement.

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(i)            The
provisions of this Section 6.03 are for the benefit of the Indemnitees, their heirs,
successors, assigns and administrators and shall not be deemed to create any
rights in or be for the benefit of any other Persons.

6.04        Liability of the General Partner.

(a)           Notwithstanding
anything to the contrary set forth in this Agreement, the General Partner shall
not be liable for monetary damages to the Partnership or any Partners for
losses sustained or liabilities incurred as a result of errors in judgment or
any act or omission if the General Partner acted in good faith.  The General Partner shall not be in breach of
any duty that the General Partner may owe to the Limited Partners or the
Partnership or any other Persons under this Agreement or of any duty stated or
implied by law or equity, provided, the General Partner, acting in good faith,
abides by the terms of this Agreement. 
In addition, to the extent the General Partner or any officer, director,
employee, agent or stockholder of the General Partner performs its duties in
accordance with the standards provided by the Act, as it may be amended from
time to time, or under any successor statute thereto, such Person or Persons
shall have no liability by reason of being or having been the General Partner,
or by reason of being an officer, director, employee, agent or stockholder of
the General Partner.  To the maximum
extent that the Act and the general laws of the State of Texas, in effect from
time to time, permit limitation of the liability of general partners of a
limited partnership, the General Partner and its officers, directors, employees,
agents and stockholders shall not be liable to the Partnership or to any
Partner for money damages except to the extent that (i) the General Partner or
its officers, directors, employees, agents or stockholders actually received an
improper benefit or profit in money, property or services, in which case the
liability shall not exceed the amount of the benefit or profit in money,
property or services actually received; or (ii) a judgment or other final
adjudication adverse to the General Partner or one or more of its officers,
directors, employees, agents or stockholders is entered in a proceeding based
on a finding in the proceeding that the action or failure to act of the General
Partner or one or more of its officers, directors, employees, agents or
stockholders was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.  Neither the amendment nor repeal of this
Section 6.04(a), nor the adoption or amendment of any other provision of this Agreement
inconsistent with this Section 6.04(a), shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.  In the absence of any Texas statute limiting
the liability of the General Partner or its directors or officers for money
damages in a suit by or on behalf of the Partnership or by any Partner, the
General Partner and the officers, directors, employees, agents and stockholders
of the General Partner shall not be liable to the Partnership or to any Partner
for money damages except to the extent that (i) the General Partner or one or
more of its officers, directors, employees, agents or stockholders actually
received an improper benefit or profit in money, property or services, in which
case the liability shall not exceed the amount of the benefit or profit in
money, property or services actually received; or (ii) a judgment or other
final adjudication adverse to the General Partner or one or more of its
officers, directors, employees, agents or stockholders is entered in a
proceeding based on a finding in the proceeding that the action of the General
Partner or one or more of its officers, directors, employees or stockholders action
or failure to act was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.

 30
 

 

(b)           The
Limited Partners expressly acknowledge that the General Partner is acting on
behalf of the Partnership, itself and its stockholders collectively, that the
General Partner is under no obligation to consider the separate interests of
the Limited Partners (including, without limitation, the tax consequences to
Limited Partners or the tax consequences of some, but not all, of the Limited
Partners) in deciding whether to cause the Partnership to take (or decline to
take) any actions.  In the event of a
conflict between the interests of its stockholders on the one hand and the
Limited Partners on the other, the General Partner shall endeavor in good faith
to resolve the conflict in a manner not adverse to either its stockholders or
the Limited Partners; provided, however, that for so long as the General
Partner directly owns a controlling interest in the Partnership, any such
conflict that the General Partner, in its sole and absolute discretion,
determines cannot be resolved in a manner not adverse to either its
stockholders or the Limited Partners shall be resolved in favor of its
stockholders.  The General Partner shall
not be liable for monetary damages for losses sustained, liabilities incurred,
or benefits not derived by Limited Partners in connection with such decisions,
provided that the General Partner has acted in good faith.

(c)           Subject
to its obligations and duties as General Partner set forth in Section 6.01
hereof, the General Partner may exercise any of the powers granted to it under
this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents. 
The General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by it in good faith.

(d)           Notwithstanding
any other provisions of this Agreement or the Act, any action of the General
Partner on behalf of the Partnership or any decision of the General Partner to
refrain from acting on behalf of the Partnership, undertaken in the good faith
belief that such action or omission is necessary or advisable in order to (i)
protect the ability of the Company to continue to qualify as a REIT or (ii)
prevent the Company from incurring any taxes under Section 857, Section 4981,
or any other provision of the Code, is expressly authorized under this
Agreement and is deemed approved by all of the Limited Partners.

(e)           Any
amendment, modification or repeal of this Section 6.04 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on
the General Partner’s liability to the Partnership and the Limited Partners
under this Section 6.04 as in effect immediately prior to such amendment,
modification or repeal with respect to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when claims
relating to such matters may arise or be asserted.

6.05        Reimbursement of or by General Partner.

(a)           Except
as provided in this Section 6.05 and elsewhere in this Agreement (including the
provisions of Articles V and VI regarding distributions, payments, and
allocations to which it may be entitled), the General Partner shall not be
compensated for its services as general partner of the Partnership.

(b)           The
General Partner shall be reimbursed by the Partnership on a monthly basis, or
such other basis as the General Partner may determine in its sole and absolute discretion,
for all REIT Expenses and Administrative Expenses incurred by the General
Partner.

 31

 

(c)           The
Company shall be reimbursed by the Partnership on a monthly basis, or such
other basis as the General Partner may determine in its sole and absolute
discretion, for all REIT Expenses and Administrative Expenses incurred by the
Company.

6.06        Outside Activities.  Subject
to the Articles of Incorporation and any agreements entered into by the General
Partner or its Affiliates with the Partnership or a Subsidiary, or any officer,
director, manager, employee, agent, trustee, Affiliate or owner of the General
Partner, the Affiliates of the General Partner and the officers, directors,
managers, agents, trustees and owners of the General Partner and its Affiliates
shall be entitled to and may have business interests and engage in business
activities in addition to those relating to the Partnership, including business
interests and activities substantially similar or identical to those of the
Partnership.  Neither the Partnership nor
any of the Limited Partners shall have any rights by virtue of this Agreement
in any such business ventures, interests or activities.  None of the Limited Partners or any other
Person shall have any rights by virtue of this Agreement or the partnership
relationship established hereby in any such business ventures, interests or
activities, and neither the General Partner, nor any Affiliates of the General
Partner nor any officers, directors, managers, employees, agents, trustees or
owners of the General Partner or the General Partner’s Affiliates shall have
any obligation pursuant to this Agreement to offer any interest in any such
business ventures, interests and activities to the Partnership or any Limited
Partner, even if such opportunity is of a character which, if presented to the
Partnership or any Limited Partner, could be taken by such Person.  Without the consent of the Limited Partners
holding more than 50% of the Percentage Interests, the General Partner shall
not, directly or indirectly, enter into or conduct any business, other than in
connection with the ownership, acquisition and disposition of Partnership
Interests as a general partner and the management of the business of the
Partnership, the facilitation of the Company’s operation as a REIT and such
activities as are incidental to the same. 
Without the consent of the Limited Partners holding more than 50% of the
Unaffiliated Percentage Interests (if any), neither the General Partner nor the
Company shall, directly or indirectly, participate in or otherwise acquire any
interest in any real or personal property, except its general partner interest
or its minority interest in any Subsidiary of the Partnership (held directly or
indirectly through a qualified REIT subsidiary (as defined in Code Section
856(i)(2), limited liability company or taxable corporate affiliate, as the
Company shall determine consistent with its need to maintain its status as a
REIT) that the General Partner holds in order to maintain such Subsidiary’s
status as a partnership for federal income tax purpose or to satisfy any
covenants or terms of any documents evidencing a loan that is either made to
such Subsidiary or that relates to any property owned directly or indirectly by
such Subsidiary, and such bank accounts, similar instruments or other short
term investments as it deems necessary to carry out its responsibilities
contemplated under this Agreement and the Certificate.

6.07        Employment or Retention of Affiliates.

(a)           Any
Affiliate of the General Partner may be employed or retained by the Partnership
and may otherwise deal with the Partnership (whether as an advisor, buyer,
lessor, lessee, manager, property management agent, asset manager, furnisher of
goods or services, broker, agent, lender or otherwise) and may receive from the
Partnership any compensation, price, or other payment therefor which the
General Partner determines to be fair and reasonable.

 32
 

 

(b)           The
Partnership may lend or contribute to its Subsidiaries or other Persons in
which it has an equity investment, and such Persons may borrow funds from the
Partnership, on terms and conditions established in the sole and absolute
discretion of the General Partner.  The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.

(c)           The
Partnership may transfer assets to joint ventures, limited liability companies,
other partnerships, corporations or other business entities in which it is or
thereby becomes a participant upon such terms and subject to such conditions as
the General Partner deems to be consistent with this Agreement and applicable law.

(d)           Except
as expressly permitted by this Agreement, neither the General Partner nor any
of its Affiliates shall sell, transfer or convey any property to, or purchase
any property from, the Partnership, directly or indirectly, except pursuant to
transactions that are on terms that are fair and reasonable to the Partnership.

6.08        Reserved.

6.09        Title to Partnership Assets.  Partnership
assets, whether real, personal or mixed and whether tangible or intangible,
shall be deemed to be owned by the Partnership as an entity, and no Partner,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof; provided, that title to any or all
of the Partnership assets may be held in the name of the Partnership, the General
Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. 
The General Partner hereby declares and warrants that any Partnership
assets for which legal title is held in the name of the General Partner or any
nominee or Affiliate of the General Partner shall be held by such Person for
the use and benefit of the Partnership in accordance with the provisions of
this Agreement; provided, that the General Partner shall use its best efforts
to cause legal title to such assets to be vested in the Partnership as soon as
reasonably practicable.  All Partnership
assets shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which legal title to such Partnership
assets is held.

6.10        Miscellaneous.  In
the event the Company redeems any REIT Shares, then the Partnership will be
deemed to have purchased from the Original Limited Partners a number of
Partnership Units determined by, and based upon, the application of the
Conversion Factor on the same terms upon which the Company redeemed such REIT
Shares.  Moreover, if the Company makes a
cash tender offer or other offer to acquire REIT Shares, then the Company shall
be deemed to have made a corresponding offer to the Original Limited Partners
to acquire an equivalent number of Partnership Units held by the Original
Limited Partners based on the application of the Conversion Factor.  In the event any REIT Shares are redeemed by
the Company pursuant to such cash tender offer, then the Partnership shall be
deemed to have redeemed an equivalent number of the Original Limited Partners’
Partnership Units for an equivalent purchase price based on the application of
the Conversion Factor.  If the Original
Limited Partners hold an insufficient number of Partnership Units to effect a
purchase or redemption contemplated by this Section 6.10, then the Partnership
will be deemed to have purchased or redeemed from the General Partner, after it
has purchased or redeemed all of the 

 33
 

 

Original
Limited Partners’ Partnership Units, the number of Partnership Units necessary
to effect such purchase or redemption.

ARTICLE
VII

TRANSFERS
OF GENERAL PARTNERSHIP INTERESTS

7.01        Transfers of General Partnership
Interests.

(a)           The
General Partner shall not transfer all or any portion of its General
Partnership Interest or withdraw as General Partner except as provided in or in
connection with a transaction contemplated by Sections 7.01(c), 7.01(d) or
7.01(e).

(b)           The
Company shall not transfer all or any portion of its interest in the General
Partner except as provided in or in connection with a transaction contemplated
by Sections 7.01(c), 7.01(d) or 7.01(e).

(c)           Except
as otherwise provided in Sections 7.01(d) or (e) hereof, neither the Company
nor the General Partner shall engage in any merger, consolidation or other
combination with or into another Person or sale of all or substantially all of
its assets (other than in connection with a change in the Company’s or the
General Partner’s state of incorporation or organizational form), which, in any
such case, results in a change of control of the Company or the General Partner
(a “Transaction”), unless:

(i)            the consent of Limited Partners
holding more than 50% of the Percentage Interests of the Limited Partners is
obtained; or

(ii)           as a result of such Transaction all
Limited Partners are granted the right to receive for each Partnership Unit an
amount of cash, securities, or other property equal to the product of the
Conversion Factor and the greatest amount of cash, securities or other property
paid in the Transaction to a holder of one REIT Share in consideration of the
transfer of one REIT Share; provided, that if, in connection with the
Transaction, a purchase, tender or exchange offer (“Offer”)
shall have been made to and accepted by the holders of more than 50% of the
outstanding REIT Shares, each holder of Partnership Units shall be given the
option to exchange its Partnership Units for the greatest amount of cash,
securities, or other property which a Limited Partner would have received had
it (A) exercised its Exchange Right and (B) sold, tendered or exchanged
pursuant to the Offer the REIT Shares received upon exercise of the Exchange
Right immediately prior to the expiration of the Offer; or

(iii)          the
Company or the General Partner is the surviving entity in the Transaction and
either (A) the holders of REIT Shares in the case of a Transaction involving
the Company, or the Company in the case of a Transaction involving the General
Partner, do not receive cash, securities, or other property in the Transaction
or (B) all Limited Partners (other than the General Partner or any Subsidiary)
receive an amount of cash, securities, or other property (expressed as an
amount per REIT Share) that is no less than the product of the Conversion
Factor and the greatest amount of cash, securities, or other property
(expressed as an amount per REIT Share) received in the 

 34
 

 

Transaction by any
holder of REIT Shares in the case of a Transaction involving the Company, or
the Company in the case of a Transaction involving the General Partner.

(d)           Notwithstanding
Section 7.01(c), either the Company or the General Partner may merge with or
into or consolidate with another entity if immediately after such merger or consolidation
(i) substantially all of the assets of the successor or surviving entity (the “Survivor”),
other than Partnership Units held by the General Partner, are contributed,
directly or indirectly, to the Partnership as a Capital Contribution in exchange
for Partnership Units with a fair market value equal to the value of the assets
so contributed as determined by the Survivor in good faith and (ii) the
Survivor expressly agrees to assume all obligations of the General Partner, as
appropriate, hereunder.  Upon such
contribution and assumption, the Survivor shall have the right and duty to
amend this Agreement as set forth in this Section 7.01(d).  The Survivor shall in good faith arrive at a
new method for the calculation of the Cash Amount, the REIT Shares Amount and
the Conversion Factor for a Partnership Unit after any such merger or
consolidation so as to approximate the existing method for such calculation as
closely as reasonably possible.  Such
calculation shall take into account, among other things, the kind and amount of
securities, cash and other property that was receivable upon such merger or
consolidation by a holder of REIT Shares or options, warrants or other rights
relating thereto, and which a holder of Partnership Units could have acquired
had such Partnership Units been exchanged immediately prior to such merger or
consolidation.  Such amendment to this
Agreement shall provide for adjustments to such method of calculation, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for herein with respect to the Conversion Factor.  The Survivor also shall in good faith modify
the definition of REIT Shares and make such amendments to Section 8.05 hereof
so as to approximate the existing rights and obligations set forth in Section
8.05 as closely as reasonably possible. 
The above provisions of this Section 7.01(d) shall similarly apply to
successive mergers or consolidations permitted hereunder.

In respect of any transaction described in the
preceding paragraph, the General Partner is required to use its commercially
reasonable efforts to structure such transaction to avoid causing the Limited
Partners to recognize a gain for federal income tax purposes by virtue of the
occurrence of or their participation in such transaction, provided, such
efforts are consistent with the exercise of the Board of Directors’ fiduciary
duties to the stockholders of the General Partner under applicable law.

(e)           Notwithstanding
Section 7.01(c),

(i)            a General Partner may transfer all
or any portion of its General Partnership Interest to (A) a wholly-owned
Subsidiary of such General Partner or (B) the owner of all of the ownership
interests of such General Partner, and following a transfer of all of its
General Partnership Interest, may withdraw as General Partner; and

(ii)           the General Partner or the Company
may engage in a transaction not required by law or by the rules of any national
securities exchange on which the REIT Shares are listed to be submitted to the
vote of the holders of the REIT Shares.

 35
 

 

7.02        Admission of a Substitute or Additional
General Partner.  A Person shall be admitted
as a substitute or additional General Partner of the Partnership only if the
following terms and conditions are satisfied:

(a)           the
Person to be admitted as a substitute or additional General Partner shall have
accepted and agreed to be bound by all the terms and provisions of this
Agreement by executing a counterpart hereof and such other documents or
instruments as may be required or appropriate in order to effect the admission
of such Person as a General Partner, a certificate evidencing the admission of
such Person as a General Partner shall have been filed for recordation and all
other actions required by Section 2.05 hereof in connection with such admission
shall have been performed;

(b)           if
the Person to be admitted as a substitute or additional General Partner is a
corporation or a partnership, it shall have provided the Partnership with
evidence satisfactory to counsel for the Partnership of such Person’s authority
to become a General Partner and to be bound by the terms and provisions of this
Agreement; and

(c)           counsel
for the Partnership shall have rendered an opinion (relying on such opinions
from other counsel in the state or any other jurisdiction as may be necessary)
that the admission of the Person to be admitted as a substitute or additional
General Partner is in conformity with the Act, and that none of the actions
taken in connection with the admission of such Person as a substitute or additional
General Partner will cause (i) the Partnership to be classified other than as a
partnership for federal income tax purposes, or (ii) the loss of any Limited
Partner’s limited liability.

7.03        Effect of Bankruptcy, Withdrawal, Death
or Dissolution of a General Partner.

(a)           Upon
the occurrence of an Event of Bankruptcy as to a General Partner (and its
removal pursuant to Section 7.04(a) hereof) or the death, withdrawal, removal
or dissolution of a General Partner (except that, if a General Partner is, on
the date of such occurrence a partnership, the withdrawal, death, dissolution,
Event of Bankruptcy as to, or removal of a partner in, such partnership shall
be deemed not to be a dissolution of such General Partner if the business of
such General Partner is continued by the remaining partner or partners
thereof), the Partnership shall be dissolved and terminated unless the
Partnership is continued pursuant to Section 7.03(b) hereof.  The merger of the General Partner with or
into any entity that is admitted as a substitute or successor General Partner
pursuant to Section 7.02 hereof shall not be deemed to be the withdrawal,
dissolution or removal of the General Partner.

(b)           Following
the occurrence of an Event of Bankruptcy as to a General Partner (and its
removal pursuant to Section 7.04(a) hereof) or the death, withdrawal, removal
or dissolution of a General Partner (except that, if a General Partner is, on
the date of such occurrence a partnership, the withdrawal, death, dissolution,
Event of Bankruptcy as to, or removal of a partner in, such partnership shall
be deemed not to be a dissolution of such General Partner if the business of
such General Partner is continued by the remaining partner or partners
thereof), the Limited Partners, within 90 days after such occurrence, may elect
to continue the business of the Partnership for the balance of the term
specified in Section 2.04 hereof by selecting, subject to Section 7.02 hereof
and any other provisions of this Agreement, a substitute General Partner by 

 36
 

 

consent of a majority in interest of the Limited
Partners.  If the Limited Partners elect
to continue the business of the Partnership and admit a substitute General
Partner, the relationship with the Partners and of any Person who has acquired
an interest of a Partner in the Partnership shall be governed by this
Agreement.

7.04        Removal of a General Partner.

(a)           Upon
the occurrence of an Event of Bankruptcy as to, or the dissolution of, a
General Partner, such General Partner shall be deemed to be removed automatically;
provided, however, that if a General Partner is on the date of such occurrence
a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or
removal of a partner in such partnership shall be deemed not to be a
dissolution of the General Partner if the business of such General Partner is
continued by the remaining partner or partners thereof.  The Limited Partners may not remove the
General Partner, with or without cause.

(b)           If
a General Partner has been removed pursuant to this Section 7.04 and the
Partnership is continued pursuant to Section 7.03 hereof, such General Partner
shall promptly transfer and assign its General Partnership Interest in the
Partnership to the substitute General Partner approved by a majority in interest
of the Limited Partners in accordance with Section 7.03(b) hereof and otherwise
admitted to the Partnership in accordance with Section 7.02 hereof.  At the time of assignment, the removed
General Partner shall be entitled to receive from the substitute General
Partner the fair market value of the General Partnership Interest of such
removed General Partner as reduced by any damages caused to the Partnership by
such General Partner’s removal.  Such
fair market value shall be determined by an appraiser mutually agreed upon by
the General Partner and Limited Partners holding more than 50% of the
Percentage Interests of the Limited Partners within 10 days following the
removal of the General Partner.  In the
event that the parties are unable to agree upon an appraiser, the removed
General Partner and Limited Partners holding more than 50% of the Percentage
Interests of the Limited Partners shall each select an appraiser.  Each such appraiser shall complete an
appraisal of the fair market value of the removed General Partner’s General
Partnership Interest within 30 days of the General Partner’s removal, and the
fair market value of the removed General Partner’s General Partnership Interest
shall be the average of the two appraisals; provided, however, that if the
higher appraisal exceeds the lower appraisal by more than 20% of the amount of
the lower appraisal, the two appraisers, no later than 40 days after the
removal of the General Partner, shall select a third appraiser who shall
complete an appraisal of the fair market value of the removed General Partner’s
General Partnership Interest no later than 60 days after the removal of the
General Partner.  In such case, the fair
market value of the removed General Partner’s General Partnership Interest
shall be the average of the two appraisals closest in value.

(c)           The
General Partnership Interest of a removed General Partner, during the time
after removal until the date of transfer under Section 7.04(b), shall be
converted to that of a special Limited Partner; provided, however, such removed
General Partner shall not have any rights to participate in the management and
affairs of the Partnership, and shall not be entitled to any portion of the
income, expense, Profit, gain or Loss allocations or cash distributions
allocable or payable, as the case may be, to the Limited Partners.  Instead, such removed General Partner shall
receive and be entitled only to retain distributions or allocations of such
items that it 

 37
 

 

would have been entitled to receive in its capacity as
General Partner, until the transfer is effective pursuant to Section 7.04(b).

(d)           All
Partners shall have given and hereby do give such consents, shall take such
actions and shall execute such documents as shall be legally necessary and
sufficient to effect all the foregoing provisions of this Section 7.04.

ARTICLE
VIII

RIGHTS
AND OBLIGATIONS

OF
THE LIMITED PARTNERS

8.01        Management of the Partnership.  The
Limited Partners shall not participate in the management or control of
Partnership business nor shall they transact any business for or on behalf of
the Partnership, nor shall they have the power to sign for or bind the
Partnership, such powers being vested solely and exclusively in the General
Partner.

8.02        Power of Attorney.  Each
Limited Partner hereby irrevocably appoints the General Partner its true and
lawful attorney-in-fact, who may act for each Limited Partner and in its name,
place and stead, and for its use and benefit, sign, acknowledge, swear to,
deliver, file or record, at the appropriate public offices, any and all
documents, certificates, and instruments as may be deemed necessary or
desirable by the General Partner to carry out fully the provisions of this
Agreement and the Act in accordance with their terms, which power of attorney
is coupled with an interest and shall survive the death, dissolution or legal
incapacity of the Limited Partner, or the transfer by the Limited Partner of
any part or all of its Partnership Interest.

8.03        Limitation on Liability of Limited
Partners.  No Limited Partner shall be
liable for any debts, liabilities, contracts or obligations of the
Partnership.  A Limited Partner shall be
liable to the Partnership only to make payments of its Capital Contribution, if
any, as and when due hereunder.  After
its Capital Contribution is fully paid, no Limited Partner shall, except as
otherwise required by the Act, be required to make any further Capital
Contributions or other payments or lend any funds to the Partnership.

8.04        Ownership by Limited Partner of
Corporate General Partner or Affiliate.  No
Limited Partner shall at any time, either directly or indirectly, own any stock
or other interest in the General Partner or in any Affiliate thereof, if such
ownership by itself or in conjunction with other stock or other interests owned
by other Limited Partners would, in the opinion of counsel for the Partnership,
jeopardize the classification of the Partnership as a partnership for federal
income tax purposes.  The General Partner
shall be entitled to make such reasonable inquiry of the Limited Partners as is
required to establish compliance by the Limited Partners with the provisions of
this Section 8.04.

8.05        Exchange Right.

(a)           Subject
to Sections 8.05(b), 8.05(c), 8.05(d) and 8.05(e) hereof, and subject to the
potential modification of any rights or obligations provided for herein by
agreement(s) between the Partnership and any one or more Limited Partners with
respect to Partnership Units held by them, each Limited Partner shall have the
right (the “Exchange Right”) to require the 

 38
 

 

Partnership to redeem on a Specified Exchange Date all
or a portion of the Partnership Units held by such Limited Partner at an
exchange price equal to and in the form of the Cash Amount to be paid by the
Partnership; provided, that such Partnership Units shall have been outstanding
for at least one year.  The Exchange
Right shall be exercised pursuant to the delivery of an Exchange Notice to the
Partnership (with a copy to the Company) by the Limited Partner who is
exercising the Exchange Right (the “Exchanging Partner”);
provided, however, that the Partnership shall not be obligated to satisfy such
Exchange Right if the Company elects to purchase the Partnership Units subject
to the Exchange Notice pursuant to Section 8.05(b); and provided further, that
no Limited Partner may deliver more than two Exchange Notices during each
calendar year.  A Limited Partner may not
exercise the Exchange Right for less than 1,000 Partnership Units or, if such
Limited Partner holds less than 1,000 Partnership Units, all of the Partnership
Units held by such Partner.  The
Exchanging Partner shall have no right, with respect to any Partnership Units
so exchanged, to receive any distribution paid with respect to such Partnership
Units if the record date for such distribution is on or after the Specified
Exchange Date.

(b)           Notwithstanding
the provisions of Section 8.05(a), a Limited Partner that exercises the
Exchange Right shall be deemed to have also offered to sell the Partnership
Units described in the Exchange Notice to the Company, and the Company may, in
its sole and absolute discretion, elect to purchase directly and acquire such
Partnership Units by paying to the Exchanging Partner either the Cash Amount or
the REIT Shares Amount, as elected by the Company (in its sole and absolute
discretion), on the Specified Exchange Date, whereupon the Company shall
acquire the Partnership Units offered for exchange by the Exchanging Partner
and shall be treated for all purposes of this Agreement as the owner of such Partnership
Units.  If the Company shall elect to
exercise its right to purchase Partnership Units under this Section 8.05(b)
with respect to an Exchange Notice, it shall so notify the Exchanging Partner
within five business days after the receipt by the Company of such Exchange
Notice.  Unless the Company (in its sole
and absolute discretion) shall exercise its right to purchase Partnership Units
from the Exchanging Partner pursuant to this Section 8.05(b), the Company shall
have no obligation to the Exchanging Partner or the Partnership with respect to
the Exchanging Partner’s exercise of an Exchange Right.  In the event the Company shall exercise its
right to purchase Partnership Units with respect to the exercise of an Exchange
Right in the manner described in the first sentence of this Section 8.05(b),
the Partnership shall have no obligation to pay any amount to the Exchanging
Partner with respect to such Exchanging Partner’s exercise of such Exchange
Right, and each of the Exchanging Partner and the Company shall treat the
transaction between the Company and the Exchanging Partner for federal income
tax purposes as a sale of the Exchanging Partner’s Partnership Units to the
Company.  Each Exchanging Partner agrees
to execute such documents as the Company may reasonably require in connection
with the issuance of REIT Shares to such Exchanging Partner upon exercise of
its Exchange Right.

(c)           Notwithstanding
the provisions of Sections 8.05(a) and 8.05(b), a Limited Partner shall not be
entitled to exercise the Exchange Right if the delivery of REIT Shares to such
Partner on the Specified Exchange Date by the Company pursuant to Section
8.05(b) (regardless of whether or not the Company would in fact exercise its
rights under Section 8.05(b)) would (i) result in such Partner or any other
person owning, directly or indirectly, REIT Shares in excess of the ownership
limitations described in the Articles of Incorporation and calculated in
accordance therewith, (ii) result in REIT Shares being owned by fewer than 100
persons 

 39

 

(determined without reference to any rules of
attribution), except as provided in the Articles of Incorporation, (iii) result
in the Company being “closely held” within the meaning of Section 856(h) of the
Code, (iv) cause the Company to own, directly or constructively, 10% or more of
the ownership interests in a tenant of the Company’s, the Partnership’s, or a
Subsidiary Partnership’s real property within the meaning of Section
856(d)(2)(B) of the Code, or (v) cause the acquisition of REIT Shares by such Partner
to be “integrated” with any other distribution of REIT Shares for purposes of
complying with the registration provisions of the Securities Act, provided,
that if such Partner delivers an opinion of counsel that is reasonably
satisfactory to the Company providing that the acquisition of REIT Shares by
such Partner will not be “integrated” with any other distribution of REIT
Shares for purposes of complying with the Securities Act, then the General
Partner may not prevent such Partner from exercising the Exchange Right by
virtue of this clause (v).  The General
Partner, in its sole and absolute discretion, may, with the consent of the
Company, waive any of the restrictions on exchange set forth in this Section
8.05(c); provided, however, that in the event any such restriction is waived,
the Exchanging Partner shall be paid the Cash Amount.

(d)           Any
Cash Amount to be paid to an Exchanging Partner pursuant to this Section 8.05
shall be paid on the Specified Exchange Date; provided, however, that the
General Partner may elect to cause the Specified Exchange Date to be delayed
for up to 180 days to the extent required for the General Partner to cause
additional REIT Shares to be issued to provide financing to be used to make
such payment of the Cash Amount.  Notwithstanding
the foregoing, the General Partner agrees to use its best efforts to cause the
closing of the acquisition of exchanged Partnership Units hereunder to occur as
quickly as reasonably possible.

(e)           Notwithstanding
any other provision of this Agreement, the General Partner shall place
appropriate restrictions on the ability of the Limited Partners to exercise
their Exchange Rights as and if deemed necessary to ensure that the Partnership
does not constitute a “publicly traded partnership” under Section 7704 of the
Code.  If and when the General Partner
determines that imposing such restrictions is necessary, the General Partner
shall give prompt written notice thereof (a “Restriction
Notice”) to each of the Limited Partners, which notice shall be accompanied
by a copy of an opinion of counsel to the Partnership which states that, in the
opinion of such counsel, restrictions are necessary in order to avoid the
Partnership being treated as a “publicly traded partnership” under Section 7704
of the Code.

8.06        Call Right.

(a)           Subject
to Section 8.06(c) below, and subject to the modification of any rights or
obligations provided for herein by agreement(s) between the Company and any one
or more Limited Partners with respect to the Partnership Units held by them, at
any time after the expiration of the Holding Period for the Partnership Units
in question, the Company shall have the right (the “Call Right”)
to purchase all of the Partnership Units held by a Limited Partner at a price
equal to the Cash Amount; provided, however, that the Company (or any of its
Affiliates) may, in the Company’s sole and absolute discretion, elect to
purchase such Partnership Units by paying to the Partner in question the REIT
Shares Amount in lieu of the Cash Amount. 
The Call Right shall be exercised pursuant to a Call Notice delivered by
the Company to any such Limited Partner. 
The Company may not exercise the Call Right for less than the entire
interest of a Limited Partner in the Partnership.  A Limited Partner receiving the Call Notice
described above 

 40
 

 

shall have no rights with respect to any interest in
the Partnership other than the right to receive payment for its interest in the
Partnership in cash or REIT Shares in accordance with this Section 8.06.  An assignee of a Limited Partner shall be
bound by and subject to the Call Right of the Company pursuant to this Section
8.06.  In connection with any exercise of
such Call Right by the Company with respect to an assignee, the Cash Amount (or
REIT Shares Amount) shall be paid by the Company directly to such assignee and
not to the Limited Partner from which such assignee acquired its Partnership
Units.  The Company shall be unable to
exercise the Call Right and the Call Right shall lapse upon the occurrence of a
Liquidating Event unless and until the Partners shall continue the business of
the Partnership under Section 7.03 hereof.

(b)           (i)            Within 30 days after the delivery of
the Call Notice by the Company to a Limited Partner under this Section 8.06,
the Company (subject to the limitations set forth in Section 8.06(c)) shall
transfer and deliver the Cash Amount (or the REIT Shares Amount) to such
Limited Partner or, as applicable, its assignee, whereupon the Company (or its
designee) shall acquire the Partnership Units of such Limited Partner or, as
applicable, its assignee, and shall be treated for all purposes of this
Agreement as the owner of such Partnership Units (and as a Limited Partner with
respect to such Partnership Units).

(ii)           In
the event that the Company elects to pay such Limited Partner in the form of
the REIT Shares Amount and such REIT Shares Amount is not a whole number of
REIT Shares, the Limited Partner shall be paid (A) the number of REIT Shares
which equals the nearest whole number less than such amount plus (B) an amount
of cash which the Company determines, in its reasonable discretion, to
represent the fair value of the remaining fractional REIT Share which would
otherwise be payable to the Limited Partner.

(iii)          Each
Limited Partner agrees to deliver to the Company the Partnership Unit
Certificate(s) representing its Limited Partnership Interest and to execute
such documents as the Company may reasonably require in connection with the
issuance of REIT Shares upon exercise of the Call Right (including without
limitation an assignment of Partnership Units pursuant to the terms of which
such Limited Partner (A) represents, warrants and certifies that it has
marketable and unencumbered title to its Partnership Units, free and clear of
the rights of or interest of any other person or entity, that it has the full
right, power and authority to transfer and surrender its Partnership Units, and
that it has obtained the consent or approval of all persons or entities, if
any, having the right to consent to or approve of such transfer and surrender,
and (B) agrees to indemnify and hold the Company harmless from and against any
and all liabilities, charges, costs and expenses relating to such Limited
Partner’s Partnership Units which are subject to the Call Right or the exercise
of the Call Right).

(c)           Notwithstanding
the provisions of Sections 8.06(a) and 8.06(b) above, the Company shall not be
entitled to exercise the Call Right if (i) a Liquidating Event has occurred
with regard to the Partnership and the Partnership has not been continued under
Section 7.03 hereof; or (ii) the delivery of REIT Shares to the Limited Partner
(A) would be prohibited under the Articles of Incorporation, (B) would
adversely affect the ability of the Company to continue to qualify as a REIT or
subject the Company to any additional taxes under Section 857 or Section 4981
of the Code, or (C) would be prohibited under applicable federal or state
securities laws or regulations.

 41
 

 

(d)           Each
Limited Partner covenants and agrees with the Company that all Partnership
Units delivered in connection with the Call Right shall be delivered to the
Company free and clear of all liens and encumbrances and, notwithstanding
anything contained herein to the contrary, the General Partner shall not be
under any obligation to acquire a Limited Partner’s Partnership Units (i) to
the extent that any such Partnership Units are subject to any such liens or
encumbrances or (ii) in the event that the Limited Partner shall fail to give
the Company adequate assurances that such Partnership Units are not subject to
any such liens or encumbrances or shall fail to agree to fully indemnify the
Company from any such liens or encumbrances as well as the liabilities,
charges, costs and expenses referenced in the last section of Section
8.06(b)(iii).  Each Limited Partner
further agrees that, in the event any state or local transfer tax is payable as
a result of the transfer of its Partnership Units to the Company, such Limited
Partner shall assume and pay such transfer tax.

8.07        Duties and Conflicts.  The
General Partner recognizes that the Limited Partners and their Affiliates have
or may have other business interests, activities and investments, some of which
may be in conflict or competition with the business of the Partnership, and
that such Persons are entitled to carry on such other business interests,
activities and investments.  The Limited
Partners and their Affiliates may engage in or possess an interest in any other
business or venture of any kind, independently or with others, on their own
behalf or on behalf of other entities with which they are affiliated or
associated, and such Persons may engage in any activities, whether or not
competitive with the Partnership, without any obligation to offer any interest
in such activities to the Partnership or to any Partner.  Neither the Partnership nor any Partner shall
have any right, by virtue of this Agreement, in or to such activities, or the
income or profits derived therefrom, and the pursuit of such activities, even
if competitive with the business of the Partnership, and such activities shall
not be deemed wrongful or improper.

ARTICLE
IX

TRANSFERS
OF LIMITED PARTNERSHIP INTERESTS

9.01        Purchase for Investment.

(a)           Each
Limited Partner hereby represents and warrants to the General Partner and to
the Partnership that the acquisition of its Partnership Interest is made as a
principal for its account for investment purposes only and not with a view to
the resale or distribution of such Partnership Interest.

(b)           Each
Limited Partner agrees that it will not sell, assign or otherwise transfer its
Partnership Interest or any fraction thereof, whether voluntarily or by
operation of law or at judicial sale or otherwise, to any Person who does not
make the representations and warranties to the General Partner set forth in
Section 9.01(a) above.

9.02        Restrictions on Transfer of Limited
Partnership Interests.

(a)           Subject
to the provisions of Sections 9.02(b), 9.02(c) and 9.02(d), no Limited Partner
may offer, sell, assign, hypothecate, pledge or otherwise transfer all or any
portion of its Limited Partnership Interest, or any of such Limited Partner’s
economic rights as a Limited 

 42
 

 

Partner, whether voluntarily or by operation of law or
at judicial sale or otherwise (collectively, a “Transfer”),
without the consent of the General Partner, which consent may be granted or
withheld in its sole and absolute discretion. 
Any such purported transfer undertaken without such consent shall be
considered to be null and void ab initio and shall not be given effect.  The Original Limited Partners acknowledge
that the General Partner may or may not grant its consent with respect to any
Transfer by the Original Limited Partners prior to the Transfer Restriction
Date; provided, that the Original Limited Partners shall not be prohibited from
a Transfer of its Partnership Interest pursuant to the exercise of its right to
exchange its Partnership Interest for REIT Shares pursuant to Section 8.05
above, in which case the Original Limited Partners acknowledge that the General
Partner also may or may not grant its consent with respect to any Transfer of
said REIT Shares prior to the Transfer Restriction Date.  The General Partner may require, as a
condition of any Transfer to which it consents, that the transferor assume all
costs incurred by the Partnership in connection therewith.

(b)           No
Limited Partner may withdraw from the Partnership other than as a result of:
(i) a permitted Transfer (i.e., a Transfer consented to as contemplated by
paragraph (a) above or paragraph (c) below or a Transfer made pursuant to
Section 9.05 below) of all of its Partnership Units pursuant to this Article IX
pursuant to an exchange of all of its Partnership Units pursuant to Section
8.05 above; or (ii) a Transfer made pursuant to the sale of all its Partnership
Units pursuant to Section 8.06 above. 
Upon the permitted Transfer or redemption of all of a Limited Partner’s
Partnership Units, such Limited Partner shall cease to be a Limited Partner.

(c)           Subject
to Sections 9.02(d), 9.02(e) and 9.02(f), a Limited Partner may Transfer, with
the consent of the General Partner, all or a portion of its Partnership Units
to (i) a parent or parent’s spouse, natural or adopted descendants, a spouse of
any such descendant, a brother or sister, or a trust created by such Limited
Partner for the benefit of such Limited Partner and/or any such person(s), for
which trust such Limited Partner or any such person(s) is a trustee, (ii) a
corporation controlled by a Person or Persons named in (i) above, or (iii) if
the Limited Partner is an entity, its beneficial owners.

(d)           No
Limited Partner may effect a Transfer of its Limited Partnership Interest, in
whole or in part, if, in the opinion of legal counsel for the Partnership, such
proposed Transfer would require the registration of the Limited Partnership
Interest under the Securities Act, or would otherwise violate any applicable
federal or state securities or blue sky law (including investment suitability
standards).

(e)           No
Transfer by a Limited Partner of its Partnership Units, in whole or in part,
may be made to any Person if (i) in the opinion of legal counsel for the
Partnership, the transfer would result in the Partnership’s being treated as an
association taxable as a corporation (other than a qualified REIT subsidiary
within the meaning of Section 856(i) of the Code), (ii) in the opinion of legal
counsel for the Company, it would adversely affect the ability of the Company
to continue to qualify as a REIT or subject the Company to any additional taxes
under Section 857 or Section 4981 of the Code, or (iii) such transfer is
effectuated through an “established securities market” or a “secondary market”
(or the substantial equivalent thereof) within the meaning of Section 7704 of
the Code.

 43
 

 

(f)            No
transfer of any Partnership Units may be made to a lender to the Partnership or
any Person who is related (within the meaning of Regulations Section
1.752-4(b)) to any lender to the Partnership whose loan constitutes a
nonrecourse liability (within the meaning of Regulations Section
1.752-1(a)(2)), without the consent of the General Partner, which may be
withheld in its sole and absolute discretion; provided, that as a condition to
such consent the lender will be required to enter into an arrangement with the
Partnership and the Company to exchange or redeem for the Cash Amount any
Partnership Units in which a security interest is held simultaneously with the
time at which such lender would be deemed to be a partner in the Partnership
for purposes of allocating liabilities to such lender under Section 752 of the
Code.

(g)           Any
Transfer in contravention of any of the provisions of this Article IX shall be
void and ineffectual and shall not be binding upon, or recognized by, the
Partnership.

(h)           Prior
to the consummation of any Transfer under this Article IX, the transferor
and/or the transferee shall deliver to the General Partner such opinions,
certificates and other documents as the General Partner shall request in
connection with such Transfer.

9.03        Admission of Substitute Limited Partner.

(a)           Subject
to the other provisions of this Article IX, an assignee of the Limited
Partnership Interest of a Limited Partner (which shall be understood to include
any purchaser, transferee, donee or other recipient of any disposition of such
Limited Partnership Interest) shall be deemed admitted as a Limited Partner of
the Partnership only with the consent of the General Partner and upon the
satisfactory completion of the following:

(i)            the assignee shall have accepted and
agreed to be bound by the terms and provisions of this Agreement by executing a
counterpart or an amendment thereof, including a revised Exhibit A, and
such other documents or instruments as the General Partner may require in order
to effect the admission of such Person as a Limited Partner;

(ii)           to the extent required, an amended
Certificate evidencing the admission of such Person as a Limited Partner shall
have been signed, acknowledged and filed for record in accordance with the Act;

(iii)          the assignee shall have delivered a
letter containing the representation set forth in Section 9.01(a) hereof and
the agreement set forth in Section 9.01(b) hereof;

(iv)          if the assignee is a corporation,
partnership or trust, the assignee shall have provided the General Partner with
evidence satisfactory to counsel for the Partnership of the assignee’s
authority to become a Limited Partner under the terms and provisions of this
Agreement;

(v)           the assignee shall have executed a
power of attorney containing the terms and provisions set forth in Section 8.02
hereof;

(vi)          the assignee shall have paid all legal
fees and other expenses of the Partnership and the General Partner and filing
and publication costs in connection with its substitution as a Limited Partner;
and

 44
 

 

(vii)         the assignee shall have obtained the
prior written consent of the General Partner to its admission as a Substitute
Limited Partner, which consent may be given or denied in the exercise of the
General Partner’s sole and absolute discretion.

(b)           For
the purpose of allocating Profit and Loss and distributing cash received by the
Partnership, a Substitute Limited Partner shall be treated as having become,
and appearing in the records of the Partnership as, a Partner upon the filing
of the Certificate described in Section 9.03(a)(ii) hereof or, if no such
filing is required, the later of the date specified in the transfer documents
or the date on which the General Partner has received all necessary instruments
of transfer and substitution.

(c)           The
General Partner shall cooperate with the Person seeking to become a Substitute
Limited Partner by preparing the documentation required by this Section 9.03
and making all official filings and publications.  The Partnership shall take all such action as
promptly as practicable after the satisfaction of the conditions in this
Article IX to the admission of such Person as a Limited Partner of the
Partnership.

9.04        Rights of Assignees of Partnership
Interests.

(a)           Subject
to the provisions of Sections 9.01 and 9.02 hereof, except as required by
operation of law, the Partnership shall not be obligated for any purposes
whatsoever to recognize the assignment by any Limited Partner of its
Partnership Interest until the Partnership has received notice thereof.

(b)           Any
Person who is the assignee of all or any portion of a Limited Partner’s Limited
Partnership Interest, but who does not become a Substitute Limited Partner and
desires to make a further assignment of such Limited Partnership Interest,
shall be subject to all the provisions of this Article IX to the same extent
and in the same manner as any Limited Partner desiring to make an assignment of
its Limited Partnership Interest.

9.05        Effect of Bankruptcy, Death,
Incompetence or Termination of a Limited Partner.

The occurrence of an Event of Bankruptcy as to a
Limited Partner, the death of a Limited Partner or a final adjudication that a
Limited Partner is incompetent (which term shall include, but not be limited
to, insanity) shall not cause the termination or dissolution of the Partnership,
and the business of the Partnership shall continue if an order for relief in a
bankruptcy proceeding is entered against a Limited Partner, the trustee or
receiver of his estate or, if he dies, his executor, administrator or trustee,
or, if he is finally adjudicated incompetent, his committee, guardian or
conservator, and any such Person shall have the rights of such Limited Partner
for the purpose of settling or managing his estate property and such power as
the bankrupt, deceased or incompetent Limited Partner possessed to assign all
or any part of his Partnership Interest and to join with the assignee in
satisfying conditions precedent to the admission of the assignee as a
Substitute Limited Partner.

9.06        Joint Ownership of Interests.  A
Partnership Interest may be acquired by two individuals as joint tenants with
right of survivorship, provided, that such individuals either are married or
are related and share the same personal residence.  The written consent or vote of both owners of
any such jointly-held Partnership Interest shall be required to constitute the
action of 

 45
 

 

the owners of
such Partnership Interest; provided, however, that the written consent of only
one joint owner will be required if the Partnership has been provided with
evidence satisfactory to the counsel for the Partnership that the actions of a
single joint owner can bind both owners under the applicable laws of the state
of residence of such joint owners.  Upon
the death of one owner of a Partnership Interest held in a joint tenancy with a
right of survivorship, the Partnership Interest shall become owned solely by
the survivor as a Limited Partner and not as an assignee.  The Partnership need not recognize the death
of one of the owners of a jointly held Partnership Interest until it shall have
received notice of such death.  Upon
notice to the General Partner from either owner, the General Partner shall
cause the Partnership Interest to be divided into two equal Partnership
Interests, which shall thereafter be owned separately by each of the former
joint owners.

ARTICLE X

BOOKS AND
RECORDS; ACCOUNTING; TAX MATTERS

10.01      Books and Records.  At
all times during the continuance of the Partnership, the Partners shall keep or
cause to be kept at the Partnership’s specified office true and complete books
of account maintained in accordance with generally accepted accounting
principles, including (a) a current list of the full name and last-known
business address of each Partner; (b) a copy of the Certificate of Limited
Partnership and all certificates of amendment thereto; (c) copies of the
Partnership’s federal, state and local income tax returns and reports; (d)
copies of the Agreement and any financial statements of the Partnership for the
three most recent years; and (e) all documents and information required under
the Act.  Any Partner or its duly
authorized representative, and any stockholder of the Company, upon paying the
costs of collection, duplication and mailing, shall be entitled to inspect or
copy such records during ordinary business hours.

10.02      Custody of Partnership Funds; Bank
Accounts.

(a)           All
funds of the Partnership not otherwise invested shall be deposited in one or
more accounts maintained in such banking or brokerage institutions as the
General Partner shall determine, and withdrawals shall be made only on such
signature or signatures as the General Partner may, from time to time,
determine.

(b)           All
deposits and other funds not needed in the operation of the business of the
Partnership may be invested by the General Partner in investment grade
instruments (or investment companies whose portfolio consists primarily
thereof, government obligations, certificates of deposit, bankers’ acceptances
and municipal notes and bonds.  The funds
of the Partnership shall not be commingled with the funds of any other Person
except for such commingling as may necessarily result from an investment in
those investment companies permitted by this Section 10.02(b).

 46
 

 

10.03      Fiscal and Taxable Year.  The
fiscal and taxable year of the Partnership shall be the calendar year.

10.04      Annual Tax Information and Report.  The
General Partner will use its best efforts to supply within 75 days after the
end of each fiscal year of the Partnership to each person who was a Limited
Partner at any time during such year the tax information necessary to file such
Limited Partner’s individual tax returns as shall be reasonably required by
law, and in all events the General Partner shall furnish such information
within the time required by applicable law.

10.05      Tax Matters Partner; Tax Elections;
Special Basis Adjustments.

(a)           The
General Partner shall be the Tax Matters Partner of the Partnership within the
meaning of Section 6231(a)(7) of the Code. 
As Tax Matters Partner, the General Partner shall have the right and
obligation to take all actions authorized and required, respectively, by the
Code for the Tax Matters Partner.  The
General Partner shall have the right to retain professional assistance in
respect of any audit of the Partnership by the Service and all out-of-pocket
expenses and fees incurred by the General Partner on behalf of the Partnership
as Tax Matters Partner shall constitute Partnership expenses.  In the event the General Partner receives
notice of a final Partnership adjustment under Section 6223(a)(2) of the Code,
the General Partner shall either (i) file a court petition for judicial review
of such final adjustment within the period provided under Section 6226(a) of
the Code, a copy of which petition shall be mailed to all Limited Partners on the
date such petition is filed, or (ii) mail a written notice to all Limited
Partners, within such period, that describes the General Partner’s reasons for
determining not to file such a petition.

(b)           All
elections required or permitted to be made by the Partnership under the Code or
any applicable state or local tax law shall be made by the General Partner in
its sole and absolute discretion.

(c)           In
the event of a transfer of all or any part of the Partnership Interest of any
Partner, the Partnership, at the option and in the sole and absolute discretion
of the General Partner, may elect pursuant to Section 754 of the Code to adjust
the basis of the Properties. 
Notwithstanding anything contained in Article V of this Agreement, any
adjustments made pursuant to Section 754 shall affect only the
successor-in-interest to the transferring Partner and in no event shall be
taken into account in establishing, maintaining or computing Capital Accounts
for the other Partners for any purpose under this Agreement.  Each Partner will furnish the Partnership
with all information necessary to give effect to such election.

10.06      Reports to Limited Partners.

(a)           As
soon as practicable after the close of each fiscal quarter (other than the last
quarter of the fiscal year), the General Partner shall cause to be mailed to
each Limited Partner a quarterly report containing financial statements of the
Partnership, or of the Company if such statements are prepared solely on a
consolidated basis with the Company, for such fiscal quarter presented in
accordance with generally accepted accounting principles.  As soon as practicable after the close of
each fiscal year, the General Partner shall cause to be mailed to each Limited
Partner an annual report containing financial statements of the Partnership, or
of the Company if such statements are prepared solely on a consolidated basis
with the Company, for such fiscal 

 47

 

year, presented in accordance with generally accepted
accounting principles.  The annual
financial statements shall be audited by accountants selected by the General
Partner.

(b)           Any
Partner shall further have the right to a private audit of the books and records
of the Partnership, provided such audit is made for Partnership purposes and at
the expense of the Partner desiring it, and it is made during normal business
hours.

ARTICLE
XI

AMENDMENT
OF AGREEMENT; MEETINGS

11.01      Amendment.  The
General Partner’s consent shall be required for any amendment to this
Agreement.  The General Partner, without
the consent of the Limited Partners, may amend this Agreement in any respect;
provided, however, that the following amendments shall require the consent of
Limited Partners holding more than 50% of the Percentage Interests of the
Limited Partners:

(a)           any
amendment affecting the operation of the Conversion Factor or the Exchange
Right (except as provided in Sections 8.05(d) or 7.01(d) hereof) in a manner
adverse to the Limited Partners;

(b)           any
amendment that would adversely affect the rights of the Limited Partners to
receive the distributions payable to them hereunder, other than with respect to
the issuance of additional Partnership Units pursuant to Section 4.02 hereof;

(c)           any
amendment that would alter the Partnership’s allocations of Profit and Loss to
the Limited Partners, other than with respect to the issuance of additional
Partnership Units pursuant to Section 4.02 hereof; or

(d)           any
amendment that would impose on the Limited Partners any obligation to make
additional Capital Contributions to the Partnership.

The foregoing notwithstanding, the approval of any
amendment to this Agreement that shall be part of a plan of merger, plan of
exchange or plan of conversion involving the Partnership or the Partnership
Interests shall be governed by Article XII.

11.02      Meetings of Partners.

(a)           The
Partners may but shall not be required to hold any annual, periodic or other
formal meetings.  Meetings of the Partners may be called by the
General Partner or by any Limited Partner or Limited Partners holding at least
10% of the Partnership Units in the Partnership.

(b)           The
Partner or Partners calling the meeting may designate any place within the
State of Texas as the place of meeting for any meeting of the Partners; and
Partners holding at least a majority of the Partnership Units in the
Partnership may designate any place outside the State of Texas as the place of
meeting for any meeting of the Partners. 
If no designation is made, 

 48
 

 

or if a special meeting is called, the place of
meeting shall be the principal place of business of the Partnership.

(c)           Except
as provided in Section 11.02(d), written notice stating the place, day and hour
of the meeting and the purpose or purposes for which the meeting is called shall be
delivered not less than ten (10) nor more than ninety (90) days before the date
of the meeting, either personally or by mail, by or at the direction of the
Partner or Partners calling the meeting, to each Partner entitled to vote at
such meeting and to each Partner not entitled to vote who is entitled to notice
of the meeting.

(d)           Anything
in this Agreement to the contrary notwithstanding, with respect to any meeting
of the Partners, any Partner who in person or by proxy shall have waived in
writing notice of the meeting, either before or after such meeting, or who
shall attend the meeting in person or by proxy, shall be deemed to have waived notice of such meeting
unless such Partner attends for the express purpose of objecting, at the
beginning of the meeting, and does so object to the transaction of any business
because the meeting is not lawfully called or convened.

(e)           If
all of the Partners shall meet at any time and place, either within or outside
of the State of Texas, in person or by proxy, and consent to the holding of a
meeting at such time and place, such meeting shall be valid without call or notice, and at such
meeting lawful action may be taken.

(f)            For
the purpose of determining Partners entitled to notice of or to vote at any
meeting of Partners or any adjournment thereof, the date on which notice of the meeting is
mailed shall be the record date. When a determination of Partners entitled to
vote at any meeting of Partners has been made as provided in this Section, such
determination shall apply to any adjournment thereof.

(g)           Partners
holding at least a majority of the Partnership Units entitled to vote at a
meeting, represented in person or by proxy, shall constitute a quorum at any
meeting of Partners. In the absence of a quorum at any such meeting, Partners
holding at least a majority of Partnership Units so represented may adjourn the
meeting to another time and place.  Any
business which might have been transacted at the original meeting may be
transacted at any adjourned meeting at which a quorum is present.  No notice of an adjourned meeting need be
given if the time and place are announced at the meeting at which the
adjournment is taken unless the adjournment is for more than 120 days.  The Partners present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding
the withdrawal during such meeting of that number Partnership Units whose
absence would cause less than a quorum to be present.

(h)           If
a quorum is present, the affirmative vote of Partners holding a majority of the
Partnership Units entitled to vote, present in person or represented by proxy,
shall be binding on all Partners, unless the vote of a greater or lesser
proportion or number of Partnership Units or Partners is otherwise required by
applicable law or by this Agreement. 
Unless otherwise expressly provided herein or required under applicable
law, Partners who have an interest (economic or otherwise) in the outcome of
any particular matter upon which the Partners’ vote or consent is required may
vote or consent upon any such matter and their Partnership Units, vote 

 49
 

 

or consent, as the case may be, shall be counted in
the determination of whether the requisite matter was approved by the Partners.

(i)            At
all meetings of Partners, a Partner may vote in person or by proxy executed in
writing by the Partner or by the Partner’s duly authorized attorney-in-fact.
Such proxy shall be filed with the General Partner before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.

(j)            Action
required or permitted to be taken at a meeting of Partners may be taken without
a meeting if the action is evidenced by one or more written consents or
approvals describing the action taken and signed by sufficient Partners or
Partners holding sufficient Partnership Units, as the case may be, to approve such action had such
action been properly voted on at a duly called meeting of the Partners.  Action taken under this Section 11.02(j) is
effective when the requisite Partners or Partners with the requisite
Partnership Units, as the case may be, have signed the consent or approval,
unless the consent specifies a different effective date.

ARTICLE
XII

MERGER,
EXCHANGE OR CONVERSION

12.01      Merger, Exchange or Conversion of
Partnership.  (a) The Partnership may (i) adopt a plan of merger and may merge with or
into one or more domestic or foreign limited partnerships or other entities with
the resulting entity being one or more surviving entities, (ii) adopt a plan of
exchange by which a domestic or foreign limited partnership or other entity is
to acquire all of the outstanding Partnership Interests of the Partnership in
exchange for cash, securities or other property of the acquiring domestic or
foreign limited partnership or other entity or (iii) adopt a plan of conversion
and convert to a foreign limited partnership or other entity.  Any such plan of merger, plan of exchange, or
plan of conversion shall otherwise comply with the requirements of this
Agreement and the Act.

(b)           Any
merger pursuant to a plan of merger described in Section 12.01(a)(i) hereof
shall be conditioned upon the merger being permitted by the laws under which
each other entity that is a party to the merger is incorporated or organized or
by the constituent documents of such other entity that are not inconsistent
with such laws.  Any exchange pursuant to
a plan of exchange described in Section 12.01(a)(ii) hereof shall be
conditioned upon the issuance of 

shares or other interests
of the acquiring foreign limited partnership or other entity being permitted by
the laws under which such foreign limited partnership or other entity is
incorporated or organized or is not inconsistent with such laws.  Any conversion pursuant to a plan of
conversion described in Section 12.01(a)(iii) hereof shall be conditioned upon
such conversion being permitted by, or not inconsistent with, the laws of the
jurisdiction in which the converted entity is to be incorporated, formed or
organized and the incorporation, formation or organization of the converted
entity is effected in compliance with such laws.

(c)           The
Partnership may adopt a plan of merger, plan of exchange or plan of conversion
if the General Partner acts upon and the Limited Partners (if required by
Section 

 50
 

 

12.02 below) approve the plan of merger, plan of
exchange or plan of conversion in the manner prescribed in Section 12.02 below.

12.02      Approval of Plan of Merger, Exchange or
Conversion.

(a)           Except
as provided by Section 12.02(g) below, after acting on a plan of merger, plan
of exchange or plan of conversion in the manner prescribed by Section
12.02(b)(i), the General Partner shall submit the plan of merger, plan of
exchange or plan of conversion for approval by the Limited Partners.

(b)           Except
as provided by Section 12.02(f) below, for a plan of merger, plan of exchange
or plan of conversion to be approved:

(i)            the General Partner shall adopt a
resolution recommending that the plan of merger, plan of exchange or plan of
conversion be approved by the Limited Partners, unless the General Partner
determines that for any reason it should not make that recommendation, in which
case the General Partner shall adopt a resolution directing that the plan of
merger, plan of exchange or plan of conversion be submitted to the Limited
Partners for approval without recommendation; and

(ii)           the
Limited Partners entitled to vote on the plan of merger, plan of exchange or
plan of conversion must approve the plan.

(c)           The
General Partner may condition its submission to the Limited Partners of a plan
of merger, plan of exchange or plan of conversion, and the effectiveness of
such plan, on any basis, including without limitation that a specified percentage
of the Percentage Interests of the Limited Partners in excess of a majority of
the Percentage Interests of the Limited Partners be required for the approval
of the plan of merger, plan of exchange or plan of conversion.

(d)           The
General Partner shall notify each Limited Partner, whether or not entitled to
vote, of the meeting of the Limited Partners at which the plan of merger, plan
of exchange or plan of conversion is to be submitted for approval in accordance
with this Section 12.02 and applicable law. 
The notice shall be given at least twenty (20) days before the meeting
and shall state that the purpose, or one of the purposes, of the meeting is to
consider the plan of merger, plan of exchange or plan of conversion and shall
contain or be accompanied by a copy or summary of the plan.  Any such approval may be by written consent
of the requisite Limited Partners as would be required to approve the plan at
any meeting where all the Limited Partners are present.

(e)           Unless
the General Partner (acting pursuant to Section 12.02(c)) requires a greater
vote, the vote of the Limited Partners required for approval of a plan of
merger, plan of exchange or plan of conversion shall be the affirmative vote of
the holders of more than 50% of the Percentage Interests of the Limited
Partners entitled to vote thereon.

(f)            Unless
applicable law otherwise requires (in which case the approval of the Limited
Partners shall continue to be required and the foregoing provisions of this
Section 12.02 shall continue to apply), (1) approval by the Limited Partners on
a plan of exchange shall not be required, and the foregoing provisions of this
Section 12.02 do not apply, if the Partnership is the 

 51
 

 

acquiring entity in the plan of exchange, and (2)
approval by the Limited Partners on a plan of merger or a plan of conversion
shall not be required and the foregoing provisions of this Section 12.02 do not
apply, if:

(i)            a
limited partnership is the sole surviving or resulting entity;

(ii)           the partnership agreement of the
surviving or resulting limited partnership will not materially differ from this
Agreement before the merger or conversion in any manner other than as to
applicable law or other insignificant conforming differences;

(iii)          Limited
Partners who held Limited Partnership Interests immediately before the
effective date of the merger or conversion will hold interests in the surviving
or resulting entity in the same proportions, immediately after the effective
date of the merger or conversion; and

(iv)          the
General Partner adopts a resolution approving the plan of merger or plan of
conversion.

(g)           After
a plan of merger, plan of exchange or plan of conversion is approved, and at
any time before the merger, exchange or conversion has become effective, the
plan of merger, plan of exchange or plan of conversion may be abandoned
(subject to any contractual rights by any of the entities that are a party
thereto), without action by the Limited Partners, in accordance with the
procedures set forth in the plan of merger, plan of exchange or plan of
conversion or, if no such procedures are set forth in the plan, in the manner
determined by the General Partner.

12.03      Rights of Dissenting Limited Partners.

(a)           In
the absence of fraud in the transaction, the remedy provided by this Section 12.03
to a Limited Partner voting against any merger, exchange or conversion or
objecting to a merger, exchange or conversion approved by the written consent
of Limited Partners (a “Dissenting Limited
Partner”) is the exclusive remedy for the recovery of the value of
his Limited Partnership interests or money damages with respect to the
transaction.  If the existing, surviving,
or new corporation or limited partnership (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Section
12.03, any Dissenting Limited Partner who fails to comply with the requirements
of this Section 12.03 shall not be entitled to bring suit for the recovery of
the value of his Limited Partnership interests or money damages with respect to
the transaction.  A “Dissenting Limited
Partner” in respect of any merger, exchange or conversion shall expressly
exclude any Limited Partner who votes in favor of the related plan of merger,
plan of exchange or plan of conversion or who abstains or fails to timely vote
therefor.  In the event of a plan of
merger, plan of exchange or plan of conversion approved by written consent, a “Dissenting
Limited Partner” in respect of any related merger, exchange or conversion shall
expressly exclude Limited Partners who provide such written consent and Limited
Partners who fail to object to the merger, exchange or conversion and demands
payment for such Limited Partner’s Limited Partnership Interest in writing to
the General Partner within twenty (20) days after notice to the Limited
Partners of the receipt by the Partnership of written consents sufficient to
approve such merger, exchange or conversion. 
All such Limited Partners who are not included within the definition of
Dissenting Limited Partner in respect of any 

 52
 

 

merger, exchange or conversion shall participate in
the merger, exchange or conversion according to the approved plan of merger,
plan of exchange or plan of conversion.

(b)           Any
Dissenting Limited Partner who has opted for payment for his Limited Partnership
interests shall not thereafter be entitled to vote or exercise any other rights
of a Limited Partner except the right to receive payment for his Limited
Partnership interests and the right to maintain an appropriate action to obtain
relief on the ground that the transaction would be or was fraudulent.  Limited Partnership Interests of Dissenting
Limited Partners for which payment has been made shall not thereafter be
considered outstanding for the purposes of any subsequent vote of the Limited
Partners.

(c)           Within
twenty (20) days after a Dissenting Limited Partner votes against any plan of
merger, plan of exchange or plan of conversion which is approved by a vote of
the Limited Partners, or in connection with a Limited Partner’s objection to
any plan of merger, plan of exchange or plan of conversion approved by the
written consent of the Limited Partners, the Dissenting Limited Partner may
demand by written notice to the General Partner that payment for his Limited
Partnership Interest be made.  Upon receipt
of such a payment demand, the General Partner shall (i) make a notation on the
records of the Partnership that such demand has been made and (ii) within a
reasonable period of time after the later of the receipt of a payment demand or
the consummation of the merger, exchange or conversion, cause the Partnership
to pay to the Dissenting Limited Partner the fair value of such Dissenting
Limited Partner’s Partnership Interest without interest.  The fair value of a Dissenting Limited
Partner’s Partnership Interest shall be an amount equal to the Dissenting
Limited Partner’s pro rata share (as would be determined under Section 5.06
hereof if the Partnership were liquidating) of the appraised value of the net
assets of the Partnership based on an appraisal of all assets of the
Partnership from a Competent Independent Expert.  The assets of the Partnership shall be
appraised on a consistent basis.  The
appraisal shall be based on an evaluation of all relevant information and shall
include the current value of the Partnership’s assets as of the date
immediately prior to the proposed merger, exchange or conversion.  The appraisal shall assume an orderly
liquidation of the Partnership’s assets over a twelve (12) month period, shall
consider other balance sheet items, and shall be net of the assumed cost of
sale.  The terms of the engagement of the
appraiser shall clearly state that the engagement is for the benefit of the
Partnership and its Limited Partners.  A
summary of the independent appraisal, including all material assumptions
underlying the appraisal, shall be provided to Dissenting Limited Partners in
connection with the payment of the fair value of their Limited Partnership
Interests.

(d)           If
a Dissenting Limited Partner shall fail to make a payment demand within the
period provided in Section 12.03(c) hereof or, in respect of a plan of merger,
plan of exchange or plan of conversion approved by written consent of the
Limited Partners, shall fail to provide notice of dissent within the period set
forth in Section 12.03(a) hereof, such Dissenting Limited Partner and all
persons claiming under him shall be conclusively presumed to have approved and
ratified the merger, conversion or exchange and shall be bound thereby, the
right of such Dissenting Limited Partner to be paid the fair value of his
Limited Partnership Interest shall cease, and his status as a Limited Partner
shall be restored without prejudice to any proceedings which may have been
taken during the interim, and such Dissenting Limited Partner shall be entitled
to receive any distributions made to Limited Partners in the interim.

 53
 

 

12.04      Roll-Up Transactions.

If the Partnership adopts any plan of merger, plan of
exchange or plan of conversion which, if effected, would result in a “Roll-Up
Transaction”, as defined in the Articles of Incorporation, then any such
transaction shall be subject to and effected strictly in compliance with the
provisions applicable to Roll-Up Transactions set forth in Section 13.3 of the
Articles of Incorporation.

ARTICLE
XIII

GENERAL
PROVISIONS

13.01      Notices.  All
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been given when delivered personally or upon
deposit in the United States mail, registered, postage prepaid return receipt
requested, if to the General Partner, at 15601 Dallas Parkway, Suite 600,
Addison, Texas 75001, if to any other Partner, at such address set forth in Exhibit
A attached hereto; provided, however, that any Partner may specify a
different address by notifying the General Partner in writing of such different
address.  Notices to the Partnership
shall be delivered at or mailed to its specified office.

13.02      Survival of Rights.  Subject
to the provisions hereof limiting transfers, this Agreement shall be binding
upon and inure to the benefit of the Partners and the Partnership and their
respective legal representatives, successors, transferees and assigns.

13.03      Additional Documents.  Each
Partner agrees to perform all further acts and execute, swear to, acknowledge
and deliver all further documents which may be reasonable, necessary,
appropriate or desirable to carry out the provisions of this Agreement or the
Act.

13.04
     Severability.  If
any provision of this Agreement shall be declared illegal, invalid, or
unenforceable in any jurisdiction, then such provision shall be deemed to be
severable from this Agreement (to the extent permitted by law) and in any event
such illegality, invalidity or unenforceability shall not affect the remainder
hereof.

13.05      Entire Agreement.  This
Agreement and exhibits attached hereto constitute the entire Agreement of the
Partners and supersede all prior written agreements (including, without
limitation, the Original Agreement) and prior and contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof, except as otherwise set forth herein.

13.06      Pronouns and Plurals.  When
the context in which words are used in the Agreement indicates that such is the
intent, words in the singular number shall include the plural and the masculine
gender shall include the neuter or female gender as the context may require.

13.07      Headings.  The
Article and Section headings in this Agreement are for convenience only and
shall not be used in construing the scope of this Agreement or any particular
Article or Section hereof.

13.08      Counterparts.  This
Agreement may be executed in several counterparts, each of which shall be
deemed to be an original copy and all of which together shall constitute one and
the 

 54
 

 

same
instrument binding on all parties hereto, notwithstanding that all parties
shall not have signed the same counterpart.

13.09      Governing Law.  This
Agreement shall be governed by and construed in accordance with the laws of the
State of Texas; provided, however, that any cause of action for violation of
federal or state securities law shall not be governed by this Section 13.09.

13.10      Arbitration.  Notwithstanding
anything to the contrary contained in this Agreement, all claims, disputes and
controversies between the parties hereto (including, without limitation, any
claims, disputes and controversies between the Partnership and any one or more
of the Partners and between or among any Partners) arising out of or in
connection with this Agreement or the Partnership created hereby, or any act or
failure to act by the Company, the General Partner or any other Partner
hereunder, shall be resolved by binding arbitration in Dallas, Texas by the
American Arbitration Association (the “AAA”),
in accordance with this Section 13.10. 
Any arbitration called for by this Section 13.10 shall be conducted in
accordance with the following procedures:

(a)           Any
party hereto (the “Requesting Party”)
may demand arbitration pursuant to this Section 13.10 at any time by giving
written notice of such demand (the “Demand Notice”)
to all other Partners and (if the Requesting Party is not the Partnership) to
the Partnership which Demand Notice shall describe in reasonable detail the
nature of the claim, dispute or controversy.

(b)           Within
15 days after the giving of a Demand Notice or such additional time as required
by the AAA, the AAA shall select and designate in writing three reputable,
disinterested individuals willing to act as an arbitrator of the claim, dispute
or controversy in question.

(c)           The
presentations of the parties hereto in the arbitration proceeding shall be
commenced and completed within sixty (60) days after the selection of the
arbitration panel pursuant to subsection (b) above, and the arbitration panel
shall render its decision (and specify in reasonable detail its reasons
therefor) in writing within thirty (30) days after the completion of such
presentations.  Any decision concurred in
by any two (2) of the arbitrators shall constitute the decision of the arbitration
panel, and unanimity shall not be required.

(d)           The
arbitration panel shall include in its decision a direction that all of the
attorneys’ fees and costs of any party or parties and the costs of such
arbitration be paid by the losing party or parties in the arbitration.  On the application of a party before or after
the initial decision of the arbitration panel, and proof of its attorneys’ fees
and costs, the arbitration panel shall order the other party to make any
payments directed pursuant to the preceding sentence.

Any decision rendered by the arbitration panel in
accordance herewith shall be final and binding on the parties hereto, and
judgment thereon may be entered by any state or federal court of competent
jurisdiction.  Arbitration shall be the
exclusive method available for resolution of claims, disputes and controversies
arising between and among the parties relating to this Agreement and the
conduct of the parties hereto in relation to Partnership matters, and the
Company, the Partnership and its Partners stipulate that the provisions hereof
shall be a complete defense to any suit, action or proceeding in any court or
before any administrative or arbitration 

 55
 

 

tribunal with respect to any such claim, controversy
or dispute.  The provisions of this
Section 13.10 shall survive the dissolution of the Partnership.

Nothing contained herein shall be deemed to give the
arbitrators any authority, power or right to alter, change, amend, modify, add
to, or subtract from any of the provisions of this Agreement.

13.11      Vote of Affiliated Limited Partners.  Notwithstanding
any provision to the contrary set forth in this Agreement, in each instance in
which the consent, approval or vote of Limited Partners is required hereunder,
any Partnership Interest held as a Limited Partner by any Affiliate of the
Sponsor shall not be included for purposes of calculating whether the requisite
approval of Partners is obtained unless, as of the date of determination, there
are no Limited Partners entitled to vote or consent who are not Affiliates of
the Sponsor.

13.12      Acknowledgement as to Exculpation and
Indemnification.  THE PARTIES HERETO
ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT CONTAINS EXCULPATION AND
INDEMNIFICATION IN RESPECT OF THE ACTIONS OR OMISSIONS OF THE GENERAL PARTNER
AND DIRECTORS, OFFICERS AND AFFILIATES OF THE GENERAL PARTNER BY THE
PARTNERSHIP EVEN IF SUCH ACTIONS OR OMISSIONS CONSTITUTE NEGLIGENCE OF SUCH
PERSONS.

[Signature Pages Follow]

 56

 

IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Second Amended and Restated Agreement of Limited Partnership
of Behringer Harvard Operating Partnership I LP as of the date first above
written.

GENERAL PARTNER:

BHR, INC.

	
  By:

  	
  /s/ Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Secretary

  	
   

  	
   

  

 

ORIGINAL LIMITED PARTNERS:

BHR BUSINESS TRUST

	
  By:

  	
  BHR BT,
  Inc., a Delaware corporation, its Sole Trustee

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

	
  

  	
  By:

  	
  /s/ Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
   

  	
  Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
   

  	
  Secretary

  	
   

  	
   

  

 

BHR
PARTNERS, LLC

	
  By:

  	
  /s/ Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Executive Vice President —
  Corporate Development &

  	
   

  	
   

  
	
   

  	
  Legal and Secretary

  	
   

  	
   

  

 

COMPANY:

BEHRINGER HARVARD REIT I, INC.

	
  By:

  	
  /s/ Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Gerald J. Reihsen, III

  	
   

  	
   

  
	
   

  	
  Executive Vice President —
  Corporate Development &

  	
   

  	
   

  
	
   

  	
  Legal and Secretary

  	
   

  	
   

  

 

 

LIMITED
PARTNERS:

MCCORMICK
FAMILY TRUST 1/20/82

	
  By:

  	
  /s/ Michael R. McCormick

  	
   

  	
   

  
	
   

  	
  Michael R. McCormick

  	
   

  	
   

  
	
   

  	
  Trustee

  	
   

  	
   

  

 

GARY S. CARR

	
  By:

  	
  /s/ Gary S. Carr

  	
   

  	
   

  
	
   

  	
  Gary S. Carr

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT A

LIMITED PARTNERS AND LIMITED PARTNERS’ CAPITAL
CONTRIBUTIONS

AND PARTNERSHIP UNITS

As of January 1, 2007

	
  Partners

  	
   

  	
   

  	
   

  	
  Cash

  Contribution

  	
   

  	
  Agreed Value

  of Property

  Contribution

  	
   

  	
  Partnership

  Units

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  General Partner:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BHR, Inc.

  	
   

  	
  $

  	
  170

  	
  *

  	
  N/A

  	
   

  	
  17

  	
   

  
	
  15601 Dallas Parkway,
  Suite 600

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Addison, TX 75001

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Original Limited Partners:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BHR Business Trust

  	
   

  	
  $

  	
  1,021,958,580

  	
  *

  	
  N/A

  	
   

  	
  107,356,886.51

  	
  **

  
	
  15601 Dallas Parkway,
  Suite 600

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Addison, TX 75001

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BHR Partners, LLC

  	
   

  	
  $

  	
  139,357,988

  	
   

  	
  N/A

  	
   

  	
  14,639,575.30

  	
  **

  
	
  15601 Dallas Parkway,
  Suite 600

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Addison, TX 75001

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Limited Partners:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  McCormick Family Trust
  1/20/82

  	
   

  	
  N/A

  	
   

  	
  ***

  	
   

  	
  185,394

  	
   

  
	
  c/o McCormick
  Construction

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2507 Empire Ave.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Burbank, CA 91504

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Gary S. Carr

  	
   

  	
  N/A

  	
   

  	
  ***

  	
   

  	
  247,192

  	
   

  
	
  2560 Peninsula Road

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Channel Island Harbor, CA 93035

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

*       Amount
contributed by the predecessor in interest of the respective entity.

**    Such amount
will be automatically adjusted from time to time as provided in the definition
of “Partnership Unit” contained in Article I.

***  Each Limited
Partnership Unit issued to the respective Limited Partner was issued for value
in connection with that certain Purchase/Contribution Agreement effective as of
May 10, 2005, as amended, by an between Ryanco Partners Ltd. No. X, a
California limited partnership, and the Partnership relating to the purchase of
an office building located at 2411 West Olive Avenue, Burbank, California
commonly referred to as Buena Vista Plaza.

 

 A-1

 

EXHIBIT B

NOTICE OF EXERCISE OF EXCHANGE RIGHT

In accordance with the Second Amended and Restated Agreement of Limited
Partnership of Behringer Harvard Operating Partnership I LP, as amended (the “Agreement”), the undersigned hereby irrevocably (i) presents
for exchange ___________ Partnership Units in Behringer Harvard Operating
Partnership I LP in accordance with the terms of the Agreement and the Exchange
Right referred to therein; (ii) surrenders such Partnership Units and all
right, title and interest therein; and (iii) directs that the Cash Amount or
REIT Shares Amount (as defined in the Agreement) as determined by the General
Partner deliverable upon exercise of the Exchange Right be delivered to the
address specified below, and if REIT Shares (as defined in the Agreement) are
to be delivered, such REIT Shares be registered or placed in the name(s) and at
the address(es) specified below.

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Signature of Limited
  Partner)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Printed Name of Limited
  Partner)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Mailing Address and Phone
  No.:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (        )

  	
   

  	
   

  	
  -

  	
   

  	
   

  
									

 

	
  Signature Guaranteed by:

  	
   

  	
   

  	
   

  

 

	
  If REIT Shares are to be issued, issue to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
					

 

Mailing Address and Phone No.:

	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (       )

  	
   

  	
   

  	
  -

  	
   

  	
   

  	
   

  	
   

  
									

 

	
  Social security or other tax identification
  number:

  	
   

  	
   

  

 

 B-1

 

EXHIBIT C

CALL NOTICE

In accordance with the Second Amended and Restated Agreement of Limited
Partnership of Behringer Harvard Operating Partnership I LP, as amended (the “Agreement”), the undersigned hereby irrevocably exercises
its Call Right (as defined in the Agreement) with regard to all of the
Partnership Units owned by _______________________ in Behringer Harvard
Operating Partnership I LP. 
The undersigned shall pay the [Cash Amount/REIT Shares Amount] to
_____________________ at the notice address of provided in the Agreement upon
receipt of (i) the duly executed Partnership Unit Certificate of
______________________________ transferring all right, title and interest in
Partnership Units to the undersigned, (ii) if REIT Shares are to be delivered,
instructions as to the name, address and taxpayer identification number of the
person to whom such REIT Shares will be registered or placed, and (iii) the
representation, warranty and certification of that ___________________________
(a) has marketable and unencumbered title to such Partnership Units, free and
clear of the rights of or interests of any other person or entity; (b) has the
full right, power and authority to transfer and surrender such Partnership
Units as provided herein; and (c) has obtained the consent or approval of all
persons or entities, if any, having the right to consent to or approve of such
transfer and surrender.

	
  

  	
   

  	
   

  	
  BEHRINGER
  HARVARD REIT I, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 C-1EXHIBIT 4.8

FORM OF SENIOR SECURED DEBENTURE

THE ISSUANCE AND SALE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT
TO RULE 144 OR RULE 144A UNDER SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

PRB OIL
& GAS, INC.

SENIOR SECURED DEBENTURE

	
  Issuance Date: December 28, 2006

  	
   

  	
  Principal: U.S. $                      

  

 

FOR
VALUE RECEIVED, PRB Oil & Gas, Inc., a Colorado
corporation (the ”Company”), a wholly owned subsidiary of PRB Energy Inc.,
a Nevada corporation (“Parent”),
hereby promises to pay to the order of                             or registered assigns (“Holder”) the amount set out above as the
Principal (as reduced pursuant to the terms hereof pursuant to redemption or
otherwise, the “Principal”) when
due, upon the Maturity Date (as defined below), acceleration, redemption or
otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any
outstanding Principal at a rate equal to 13.00% per annum (the “Interest Rate”), from the date set out
above as the Issuance Date (the “Issuance
Date”) until the same becomes due and payable, whether upon an Interest
Date (as defined below) or, the Maturity Date, acceleration, redemption or
otherwise (in each case in accordance with the terms hereof).  This Senior Debenture (including all Senior
Debentures issued in exchange, transfer or replacement hereof, this “Debenture”) is one of an issue of Senior
Debentures issued pursuant to the Securities Purchase Agreement (as defined
below) on the Closing Date (collectively, the “Debentures”
and such other Senior Debentures, the “Other
Debentures”).  Certain
capitalized terms used herein are defined in Section 21.

(1)           PAYMENTS OF
PRINCIPAL.  On the Maturity Date, the
Company shall pay to the Holder an amount equal to the Principal, as well as
all accrued but unpaid Interest.  The “Maturity Date” shall be August 31, 2008, or (a) such earlier
date as may be accelerated by the Required Holders upon an Event of Default in
accordance with the terms hereof, or (b) such later date as may be extended at
the option of the Required Holders (i) in the event that, and for so long as,
an Event of Default (as defined in Section 3(a)) shall have occurred and be
continuing or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in an Event of Default or
(ii) through the date that is ten (10) days after the consummation of a Change
of Control in the event that a Change of Control is publicly

 

announced or a Change of
Control Notice (as defined in Section 4(b)) is delivered prior to the Maturity
Date.

(2)           INTEREST; INTEREST
RATE.  Interest on this Debenture
shall commence accruing on the Issuance Date and shall be computed on the basis
of a 365-day year and actual days elapsed and shall be payable in arrears for
each Payment Quarter on the first day of the succeeding Payment Quarter during
the period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”). Interest shall be
payable on each Interest Date, to the record holder of this Debenture on the
applicable Interest Date, in cash (“Cash Interest”).
Interest
accrues at the Interest Rate on all outstanding unpaid Principal owed under
this Debenture and all accrued Interest is payable on each Interest Date.  Upon the occurrence and during the
continuance of an Event of Default, the Interest Rate shall be increased to eighteen
percent (18.00%) the (“Default Rate”).  In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the
Interest as calculated and unpaid at such increased rate during the continuance
of such Event of Default shall continue to apply to the extent relating to the
days after the occurrence of such Event of Default through and including the
date of cure of such Event of Default.

(3)           RIGHTS
UPON EVENT OF DEFAULT.

(a)           Event of Default.  Each of the following events shall constitute
an “Event of Default”:

(i)            the Company’s failure
to pay to the Holder any amount of Principal, Interest, Late Charges or other
amounts when and as due under this Debenture (including, without limitation,
the Company’s failure to pay any redemption payments or amounts hereunder) or
any other Transaction Document (as defined in the Securities Purchase
Agreement),  if such failure continues (A)
for a period of at least five (5) Business Days in the case of a failure to pay
any amount of Principal or (B) for a period of at least three (3) Business Days
from notice by Holder in the case of a failure to pay any other amount;

(ii)           any default occurs and
is continuing under any redemption of or acceleration prior to maturity of any
Indebtedness of the Company, Parent or any of their Subsidiaries (as defined in
Section 3(a) of the Securities Purchase Agreement) in excess of $100,000 other
than with respect to any redemption of the Other Debentures in accordance with
their terms; provided, that in the event that any such acceleration of
indebtedness is rescinded by the holders thereof prior to acceleration of this
Debenture or the Other Debentures, no Event of Default shall exist as a result
of such rescinded acceleration;

(iii)          the Company, Parent or
any of their Subsidiaries, pursuant to or within the meaning of Title 11, U.S.
Code, or any similar Federal, foreign or state law for the relief of debtors
(collectively, “Bankruptcy Law”), (A) commences a voluntary
case, (B) consents to the entry of an order for relief against it in an
involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”),
(D) makes a general assignment for the benefit of its creditors or (E) admits
in writing that it is generally unable to pay its debts as they become due;

 2
 

 

(iv)          creditors of the Company,
Parent or any of their Subsidiaries file an action for relief under any
Bankruptcy Law against such entity in an involuntary case and such action is
not dismissed within thirty (30) days of such filing or a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for
relief against the Company, Parent or any of their Subsidiaries in an
involuntary case, (B) appoints a Custodian of the Company, Parent or any of their
Subsidiaries or (C) orders the liquidation of the Company, Parent or any of their
Subsidiaries;

(v)           a final judgment or
judgments for the payment of money aggregating in excess of $250,000 are
rendered against the Company, Parent or any of their Subsidiaries and which
judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty (60) days
after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $250,000 amount set forth above
so long as the Company provides the Holder a written statement from such
insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within sixty (60) days of the issuance of such judgment;

(vi)          the Company or Parent,
as applicable, materially breaches any representation or warranty, or breaches
any covenant or other term or condition of any Transaction Document, except, in
the case of a breach of a covenant or other term or condition of any
Transaction Document which is curable, only if such breach continues for a
period of at least ten (10) consecutive Business Days;

(vii)         any breach or failure in
any respect to comply with Section 8 of this Debenture which shall continue for
a period of thirty (30) days after notice of such breach or failure;

(viii)        any Event of Default (as
defined in the Other Debentures) occurs and is continuing with respect to any
Other Debentures;

(ix)           any Event of Default
(as defined in the Security Agreement) occurs and is continuing under the
Security Agreement, the repudiation by the Company, Parent or any of their
Subsidiaries of any of its obligations under the Security Documents or the
unenforceability of the Security Documents against the Company, Parent or any
of their Subsidiaries for any reason; or

(x)            the Company does not
take the post-closing actions set forth in that certain Letter Agreement
between the Company and the Holders, dated as of the date hereof.

(b)           Redemption Right.  Promptly after the occurrence of an Event of
Default with respect to this Debenture or any Other Debenture, the Company
shall deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder.  At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and

 3
 

 

the Holder becoming aware
of an Event of Default, the Required Holders may require the Company to redeem
all or any portion of the Debentures  (as
“Event of Default Redemption”) by
delivering written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of the Debentures the Required Holders
are electing to redeem; provided that upon the occurrence of any default
described in Section 3(a)(vi) and 3(a)(vii), the Debentures shall
automatically, and without any action on behalf of the Holders, be redeemed by
the Company.  Each portion of the Debentures
subject to redemption by the Company pursuant to this Section 3(b) shall be
redeemed by the Company at a price equal to 110% of the outstanding Principal
amount and accrued and unpaid Interest and accrued and unpaid Late Charges and
Interest with respect to such portion of the Debentures subject to redemption (the
“Event of Default Redemption Price”).  Redemptions required by this Section 3(b)
shall be made in accordance with the provisions of Section 7.

(4)           RIGHTS UPON
FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

(a)           Assumption.  The Company shall not enter into or be party
to a Fundamental Transaction unless the Successor Entity assumes in writing all
of the obligations of the Company under this Debenture and the other
Transaction Documents in accordance with the provisions of this Section 4(a)
pursuant to written agreements in form and substance reasonably satisfactory to
the Required Holders and approved by the Required Holders prior to such
Fundamental Transaction.  Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Debenture referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under
this Debenture with the same effect as if such Successor Entity had been named
as the Company herein. The provisions of this Section shall apply similarly and
equally to successive Fundamental Transactions and shall be applied without
regard to any limitations on the redemption of this Debenture.

(b)           Redemption Right.  No sooner than fifteen (15) days nor later
than ten (10) days prior to the consummation of a Change of Control, but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier to the
Holder (a “Change of Control Notice”).  At any time during the period beginning after
the Holder’s receipt of a Change of Control Notice and ending on the date of
the consummation of such Change of Control (or, in the event a Change of
Control Notice is not delivered at least ten (10) days prior to a Change of Control,
at any time on or after the date which is ten (10) days prior to a Change of
Control and ending ten (10) days after the consummation of such Change of
Control), the Required Holders may require the Company to redeem all or any
portion of the Debentures by delivering written notice thereof (“Change of Control Redemption Notice”) to the Company, which
Change of Control Redemption Notice shall indicate the portion of the Debentures
each Holder is electing to redeem.  The
portion of this Debenture subject to redemption pursuant to this Section 4
shall be redeemed by the Company at a price equal to 110% of the sum of the amount
being redeemed together with accrued and unpaid Interest with respect to such amount
and accrued and unpaid Late Charges with respect to such amount and Interest
(the “Change of Control Redemption Price”).

 4
 

 

Redemptions required by
this Section 4 shall be made in accordance with the provisions of Section 7 and
shall have priority to payments to stockholders in connection with a Change of
Control.

(5)           COMPANY REDEMPTION.  So long as a Registration Statement covering
all of the Registrable Securities is effective, the Company may elect to pay to
the Holder of this Debenture the Company Redemption Amount, subject to and in
accordance with the terms of this Section 5, by redeeming the Principal, in
whole but not in part, in accordance with this Section 5 (a “Company Redemption”); provided that all of the
outstanding Principal must be redeemed by the Company, subject to the
provisions of this Section 5.  On or
prior to the date which is the sixth (6th) Trading Day prior to the Company
Redemption (each, a “Company Redemption Notice
Due Date”), the Company shall deliver written notice (each, a “Company Redemption Notice”), to the Holder which Company Redemption
Notice shall state the amount which the Company elects to redeem pursuant to a
Company Redemption (the “Company Redemption Amount”),
which shall be equal to 110% of the outstanding Principal, together with
accrued and unpaid Interest with respect to such Company Redemption Amount and
accrued and unpaid Late Charges with respect to such Company Redemption Amount
and Interest. Each Company Redemption Notice shall be irrevocable.  The Company shall redeem the applicable Company
Redemption Amount of this Debenture pursuant to this Section 5 together with
the corresponding Company Redemption Amounts of the Other Debentures pursuant
to the corresponding provisions of the Other Debentures.  If the Company elects a Company Redemption, then
the Company Redemption Amount which is to be paid to the Holder on the
applicable Company Redemption Date shall be redeemed by the Company on such Company
Redemption Date, and the Company shall pay to the Holder on such Company
Redemption Date, by wire transfer of immediately available funds, an amount in
cash equal to the Company Redemption Amount.

(6)           NON-CIRCUMVENTION.  The Company and Parent hereby covenant and
agree that neither the Company nor Parent will, by amendment of its Certificate
of Incorporation, Bylaws or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Debenture, and will at
all times in good faith carry out all of the provisions of this Debenture and
take all action as may be required to protect the rights of the Holder of this
Debenture.

(7)           HOLDER’S REDEMPTIONS.

(a)           Mechanics.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within five Business Days after
the Company’s receipt of the Required Holders’ Event of Default Redemption
Notice.  If the Required Holders have
submitted a Change of Control Redemption Notice in accordance with Section 4(b),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five (5) Business Days after the Company’s receipt of such notice
otherwise.  In the event of a redemption
of less than all of the Principal of this Debenture, the Company shall promptly
cause to be issued and delivered to the

 5
 

 

Holder a new Debenture
(in accordance with Section 12(d)) representing the outstanding Principal which
has not been redeemed.

(b)           Redemption by
Holders.  Any Event of Default
Redemption Notice or Change of Control Redemption Notice for redemption or
repayment as a result of an event or occurrence substantially similar to the
events or occurrences described in Section 3(b), Section 4(b) or Section 8 is
to be delivered to the Company by the Required Holders.  If the Company receives any Event of Default Redemption
Notice or Change of Control Redemption Notice and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption
Notice, then the Company shall redeem a pro rata amount from each holder of the
Debentures (including the Holder) based on the principal amount of the
Debentures submitted for redemption pursuant to such Event of Default
Redemption Notice or Change of Control Redemption Notice received by the
Company from the Required Holders.

(8)           COVENANTS.

(a)           Rank.  All payments due under this Debenture (a)
shall rank pari passu with all Other Debentures and
(b) shall be senior in right of payment to all other Indebtedness of the
Company and its Subsidiaries except for Permitted Indebtedness that is secured
by Permitted Liens.

(b)           Incurrence of
Indebtedness.  So long as this
Debenture is outstanding, Parent and the Company shall not, and neither Parent
nor the Company shall permit any of its Subsidiaries to, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Debenture and the Other
Debentures and (ii) Permitted Indebtedness that is either unsecured or secured
by Permitted Liens.

(c)           Existence of Liens.  So long as this Debenture is outstanding, Parent
and the Company shall not, and neither Parent nor the Company shall permit any
of its Subsidiaries to, directly or indirectly, allow or suffer to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by Parent,
the Company or any of either of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

(d)           Restricted Payments.  Parent shall not, the Company shall not, and
neither Parent nor the Company shall permit any of its Subsidiaries to,
directly or indirectly,

(i)            declare or pay any
dividend or make any other payment or distribution on account of the Parent’s
Equity Interests (including, without limitation, any payment in connection with
any merger or consolidation involving the Parent) or to the direct or indirect
holders of the Parent’s Equity Interests in their capacity as such;

(ii)           purchase, redeem or
otherwise acquire or retire for value (including, without limitation, in
connection with any merger or consolidation involving the Parent) any Equity
Interests of the Parent or any direct or indirect parent of the Parent in
excess of $200,000 per calendar year; or

 6
 

 

(iii)          make any payment on or
with respect to, accelerate the maturity of, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of the Company or the
Parent, except a payment of interest, principal or other amounts due at the
stated maturity thereof and except for payments of principal, interest and
other amounts under the Other Debentures.

(e)           Asset
Sales. Parent shall not, the Company shall not, and neither Parent nor the
Company shall permit any of its Subsidiaries to, directly or indirectly,
consummate any Asset Sale.

(f)            Use of Proceeds.  The Company shall use the proceeds of sale of
the Debentures:  (i) for the fees and
expenses associated with the sale of the Debentures and Common Stock; (ii) for the
Amherst Acquisition; and (iii) for general corporate purposes.

(g)           Partnerships, Etc.
Related to Amherst Acquisition Properties. 
The Company shall obtain the written consent of the Required Holders prior
to its entering into any partnership, or any similar agreement, with respect to
the Amherst Acquisition.

(9)           VOTE TO ISSUE, OR
CHANGE THE TERMS OF, DEBENTURES.  The affirmative vote at a meeting duly called
for such purpose or the written consent without a meeting of the Required
Holders shall be required for any change or amendment to this Debenture or the
Other Debentures.

(10)         TRANSFER.  This Debenture may be offered, sold, assigned
or transferred by the Holder without the consent of the Company, subject only
to the provisions of Sections 2(f) and 2(g) of the Securities Purchase
Agreement.

(11)         REISSUANCE OF THIS DEBENTURE.

(a)           Transfer.  If this Debenture is to be transferred, the
Holder shall surrender this Debenture to the Company, whereupon the Company
will forthwith issue and deliver upon the order of the Holder a new Debenture
(in accordance with Section 12(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and, if
less then the entire outstanding Principal is being transferred, a new
Debenture (in accordance with Section 12(d)) to the Holder representing the
outstanding Principal not being transferred.

(b)           Lost, Stolen or
Mutilated Debenture.  Upon receipt by
the Company of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Debenture, and, in the case of
mutilation, upon surrender and cancellation of this Debenture, the Company
shall execute and deliver to the Holder a new Debenture (in accordance with
Section 12(d)) representing the outstanding Principal.

(c)           Debenture
Exchangeable for Different Denominations. 
This Debenture is exchangeable, upon the surrender hereof by the Holder
at the principal office of the Company, for a new Debenture or Debentures (in
accordance with Section 12(d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this

 7
 

 

Debenture, and each such
new Debenture will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

(d)           Issuance of New
Debentures.  Whenever the Company is
required to issue a new Debenture pursuant to the terms of this Debenture, such
new Debenture (i) shall be of like tenor with this Debenture, (ii) shall
represent, as indicated on the face of such new Debenture, the Principal
remaining outstanding (or in the case of a new Debenture being issued pursuant
to Section 12(a) or Section 12(c), the Principal designated by the Holder
which, when added to the principal represented by the other new Debentures
issued in connection with such issuance, does not exceed the Principal
remaining outstanding under this Debenture immediately prior to such issuance
of new Debentures), (iii) shall have an issuance date, as indicated on the face
of such new Debenture, which is the same as the Issuance Date of this
Debenture, (iv) shall have the same rights and conditions as this Debenture,
and (v) shall represent accrued Interest and Late Charges on the Principal and
Interest of this Debenture, from the Issuance Date.

(12)         REMEDIES,
CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Debenture shall
be cumulative and in addition to all other remedies available under this
Debenture and any of the other Transaction Documents at law or in equity
(including a decree of specific performance and/or other injunctive relief),
and nothing herein shall limit the Holder’s right to pursue actual and
consequential damages for any failure by the Company to comply with the terms
of this Debenture.  Amounts set forth or
provided for herein with respect to payments and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not,
except as expressly provided herein, be subject to any other obligation of the
Company (or the performance thereof). 
The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. 
The Company therefore agrees that, in the event of any such breach or
threatened breach, the Holder shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

(13)         PAYMENT OF COLLECTION,
ENFORCEMENT AND OTHER COSTS.  If (a)
this Debenture is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Debenture or to
enforce the provisions of this Debenture or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Debenture, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’
fees and disbursements.

(14)         CONSTRUCTION; HEADINGS.  This Debenture shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed
against any Person as the drafter hereof. 
The headings of this Debenture are for convenience of reference and
shall not form part of, or affect the interpretation of, this Debenture.

 8
 

 

(15)         FAILURE OR INDULGENCE
NOT WAIVER.  No failure or delay on
the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.

(16)         DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Business
Day of receipt, or deemed receipt, of the Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to
agree upon such determination or calculation within one (1) Business Day of
such disputed determination or arithmetic calculation being submitted to the
Holder, then the Company shall, within one Business Day submit via facsimile
the disputed arithmetic calculation of the Redemption Price to the Company’s
independent, outside accountant.  The
Company, at the Company’s expense, shall cause the accountant to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. 
Such accountant’s determination or calculation, as the case may be,
shall be binding upon all parties absent demonstrable error.

(17)         NOTICES; PAYMENTS.

(a)           Notices.  Whenever notice is required to be given under
this Debenture, unless otherwise provided herein, such notice shall be given in
accordance with Section 10(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Debenture,
including in reasonable detail a description of such action and the reason
therefor.

(b)           Payments.  Whenever any payment of cash is to be made by
the Company to any Person pursuant to this Debenture, such payment shall be
made in lawful money of the United States of America by a check drawn on the
account of the Company and sent via overnight courier service to such Person at
such address as previously provided to the Company in writing (which address,
in the case of each of the Purchasers, shall initially be as set forth on the
Schedule of Buyers attached to the Securities Purchase Agreement); provided
that the Holder may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Debenture is due on any day which is not a Business Day, the
same shall instead be due on the next succeeding day which is a Business Day
and, in the case of any Interest Date which is not the date on which this
Debenture is paid in full, the extension of the due date thereof shall not be
taken into account for purposes of determining the amount of Interest due on
such date.  Any amount of Principal or
other amounts due under the Transaction Documents, other than Interest, which
is not paid when due shall result in a late charge being incurred and payable
by the Company in an amount equal to interest on such amount at the rate of
eighteen percent (18.00%) per annum from the date such amount was due until the
same is paid in full (“Late Charge”).

(18)         CANCELLATION.  After all Principal, accrued Interest and
other amounts at any time owed on this Debenture have been paid in full in
cash, this Debenture shall

 9
 

 

automatically be deemed
canceled, shall be surrendered to the Company for cancellation and shall not be
reissued.

(19)         WAIVER OF NOTICE.  To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Debenture and the Securities Purchase Agreement.

(20)         GOVERNING LAW.  This Debenture shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Debenture and all disputes
arising hereunder shall be governed by, the laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of New York.

(21)         CERTAIN DEFINITIONS.  For purposes of this Debenture, the following
terms shall have the following meanings:

(a)           “Amherst Acquisition”
means the acquisition of certain natural gas wells producing in the
Niobrara formation and approximately 330,000 net acres in northeast Colorado
and southwest Nebraska pursuant to a Purchase and Sale Agreement between the
Company and Lance Oil and Gas Company, Inc. and Western Gas Resources, Inc.

(b)           “Asset Sale”
means (i) the sale, lease, conveyance or other disposition of any assets or
rights other than in the ordinary course of business, and (ii) the sale of
Equity Interests in any of the Company’s Subsidiaries; provided that the
following shall not constitute an “Asset
Sale”: (A) sales and recourse lease-backs of compressors in an amount not to
exceed $6,000,000; (B) farm-outs, partnerships and other participation
agreements or arrangements typical in the oil and gas industry and distributions
by the Company or any of its Subsidiaries of an interest in or right to an oil
and gas project, to participants, co-owners, partners, operators, interest
holders or others, that are required pursuant to the documentation governing
such oil and gas project if such agreements or arrangements are not required to
be disclosed in a Form 8-K under the Securities Exchange Act of 1934; (C) the sale of equipment that has become worn out or
obsolete; and (D) the sale of assets if the proceeds therefrom shall be used to
immediately replace such assets and be secured pursuant to the Security
Agreement and the value of such assets shall not exceed $100,000 for any one
sale or in the aggregate $300,000 in any calendar year.

(c)           “Business
Day” means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.

(d)           “Capital
Lease Obligation” means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet prepared in
accordance with GAAP.

(e)           “Capital
Stock” means:  (1)  in the case of a corporation, corporate
stock; (2) in the case of an association or business entity, any and all
shares, interests,

 10
 

 

participations, rights or
other equivalents (however designated) of corporate stock;  (3) in the case of a partnership or limited
liability company, partnership interests (whether general or limited) or
membership interests; and (4) any other interest or participation that confers
on a Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person, but excluding from all of the
foregoing any debt securities convertible into Capital Stock, whether or not
such debt securities include any right of participation with Capital Stock.

(f)            “Change of
Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the shares of Capital
Stock in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company.

(g)           “Closing
Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Debentures
pursuant to the terms of the Securities Purchase Agreement.

(h)           “Common
Stock” shall mean the common stock of the Parent, par value $0.001
per share.

(i)            “Eligible
Market” means the Principal Market, The New York Stock Exchange,
Inc., The Nasdaq National Market or The Nasdaq Capital Market.

(j)            “Equity
Interests” means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

(k)           “Fundamental
Transaction” means that the Company shall, directly or indirectly,
in one or more related transactions, (i) consolidate or merge with or into
(whether or not the Company is the surviving corporation) another Person, or
(ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of the outstanding shares of Capital
Stock (not including any shares of Capital Stock held by the Person or Persons
making or party to, or associated or affiliated with the Persons making or
party to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person whereby such other Person acquires more than the 50% of the
outstanding shares of Capital Stock (not including any shares of Capital Stock
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase
agreement or other business combination), or (v) reorganize, recapitalize or
reclassify its Capital Stock.

 11
 

 

(l)               “GAAP” means United States generally accepted accounting
principles, consistently applied.

(m)          “Hedging
Obligations” means, with respect to any specified Person, the
obligations of such Person under:

(i)            interest rate swap
agreements (whether from fixed to floating or from floating to fixed), interest
rate cap agreements and interest rate collar agreements;

(ii)           other agreements or
arrangements designed to manage interest rates or interest rate risk; and

(iii)          other agreements or
arrangements designed to protect such Person against fluctuations in currency
exchange rates or commodity prices.

(n)           “Indebtedness”
means, any indebtedness (excluding accrued expenses and trade payables),
whether or not contingent:

(i)            in respect of borrowed
money;

(ii)           evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof);

(iii)          in respect of banker’s
acceptances;

(iv)          representing Capital
Lease Obligations;

(v)           representing the
balance deferred and unpaid of the purchase price of any property or services
due more than six months after such property is acquired or such services are
completed; or

(vi)          representing any Hedging
Obligations,

if and to the
extent any of the preceding items (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of the Company prepared
in accordance with GAAP.  In addition,
the term “Indebtedness” includes all Indebtedness of others secured by a Lien
on any asset of the Company or its Subsidiaries (whether or not such
Indebtedness is assumed by the Company or such Subsidiary) and, to the extent
not otherwise included, the guarantee by the Company or any of its Subsidiaries
of any Indebtedness of any other Person.

(o)           “Mortgage”
means a Mortgage in form and substance reasonably satisfactory to the Holder,
as it may be amended, supplemented or otherwise modified from time to time.

(p)           “Parent
Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity

 12
 

 

security is quoted or
listed on an Eligible Market, or, if there is more than one such Person or
Parent Entity, the Person or Parent Entity with the largest public market
capitalization as of the date of consummation of the Fundamental Transaction.

(q)           “Payment Quarter” means each of: the period beginning
on and including January 1, 2007 and ending on and including March 31, 2007;
the period beginning on and including April 1, 2007 and ending on and including
June 30, 2007; the period beginning on and including July 1, 2007 and ending on
and including September 30, 2007; the period beginning on and including October
1, 2007 and ending on and including December 31, 2007; the period beginning on
and including January 1, 2008 and ending on and including March 31, 2008; the
period beginning on and including April 1, 2008 and ending on and including
June 30, 2008; and the period beginning on and including July 1, 2008 and
ending on and including the Maturity Date.

(r)            “Permitted Indebtedness” means (a) purchase money debt, Capital Lease Obligations or other
Indebtedness incurred in connection with the acquisition of an interest in
property, equipment, entities or other assets or otherwise in the ordinary
course of business, provided that such purchase money debt, Capital Lease
Obligations or other Indebtedness is recourse only to the interests in
property, equipment, entities or other assets so acquired and
(b) Indebtedness of the Parent, the Company or any Subsidiary outstanding
as of the Closing Date and the refinancing,
renewal or extension thereof, provided that (i) there are no additional
obligors with respect thereto (ii) there is no shortening of the maturity
thereof, (iii) principal amount thereof is not increased, and (iv) the security
interest is not changed or amended; (c) recourse leases of compressors in an
amount not to exceed $6.0 million and (d) additional Indebtedness not to exceed
$500,000 at any time which shall not be secured or shall be subordinated to the
Debentures.

(s)           “Permitted Liens”
means (i) any Lien for taxes not yet due or delinquent or being contested in
good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary
course of business by operation of law with respect to a liability that is not
yet due or delinquent, (iii) any Lien created by operation of law, such as
materialmen’s liens, mechanics’ liens and other similar liens, arising in the
ordinary course of business with respect to a liability that is not yet due or
delinquent or that are being contested in good faith by appropriate
proceedings, (iv) Liens securing the Company’s obligations under the
Debentures, (v) Liens securing Permitted Indebtedness, (vi) Liens in the
RMG Assets and Liens associated with the settlement or judgment entered in the
arbitration between Parent and Rocky Mountain Gas in the arbitration commenced
on June 22, 2006, provided, however, that any such Liens do not have a material
adverse effect on or materially impair the value of the Holders’ interests in
the Collateral (as defined in the Security Agreement), (vii) royalties, overriding royalties, reversionary
interests, production payments and similar burdens granted by Parent or any
Subsidiary with respect to the interests owned by such Person, consistent with past
practice and industry standards, if the net cumulative effect of such burdens
does not operate to deprive such Person of any material right in respect of its
assets or properties (except for rights customarily granted with respect to
such interests), if such royalties, overriding royalties, reversionary
interests, production payments and similar burdens are not required to be disclosed in a Form
8-K under the Securities Exchange Act of 1934; (viii)
easements, rights of way, servitudes,

 13
 

 

permits, surface
leases and other rights in respect to surface operations, pipelines, grazing,
logging, canals, ditches, reservoirs or the like, conditions, covenants and
other restrictions, and easements of streets, alleys, highways, pipelines,
telephone lines, power lines, railways and other easements and rights of way
on, over or in respect of Parent or any Subsidiary’s assets or properties,
consistent with past practice and industry standards and that are not required to be disclosed in a Form 8-K
under the Securities Exchange Act of 1934; (ix) all
contracts, agreements and instruments, and all defects and irregularities and
other matters affecting Parent or any Subsidiary’s assets and properties which
were in existence at the time such assets and properties were originally
acquired by such Person and all routine operational agreements entered into in
the ordinary course of business, which contracts, agreements, instruments,
defects, irregularities and other matters and routine operational agreements
are not such as to, individually or in the aggregate, interfere materially with
the operation, value or use of Parent or any Subsidiary’s assets and
properties, considered in the aggregate, consistent with past practice and
industry standards and that are not
required to be disclosed in a Form 8-K under the Securities Exchange Act of
1934; (x) Liens in connection with workmen’s compensation,
unemployment insurance or other social security, old age pension or public
liability obligations; (xi) legal or equitable encumbrances up to an aggregate
amount of $250,000 deemed to exist by reason of the existence of any litigation
or other legal proceeding or arising out of a judgment or award with respect to
which an appeal is being prosecuted in good faith; or (xii) rights reserved to
or vested in any municipality, governmental, statutory or other public
authority to control or regulate Parent or any Subsidiary’s assets and
properties in any manner, and all applicable laws, rules and orders from any
governmental authority, to the extent any such rights could not be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect (as defined in the Securities Purchase
Agreement).

(t)            “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(u)           “Principal
Market” means the American Stock Exchange.

(v)           “Property”
means any right or interest in or to property of any kind whatsoever, whether
real, personal or mixed and whether tangible or intangible, including, without
limitation, capital stock.

(w)          “Registrable
Securities” shall have the meaning set forth in the Registration
Rights Agreement.

(x)            “Registration
Rights Agreement” means that certain registration rights agreement
dated as of the Subscription Date by and among the Company and the initial
holders of the Debentures relating to, among other things, the registration of
the resale of the Common Stock.

(y)           “Registration
Statement” shall have the meaning set forth in the Registration
Rights Agreement.

 14
 

 

(z)            “Required
Holders” means the holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.

(aa)         “RMG Assets”
means the assets that are designated as RMG Assets on Annex A to the
Security Agreement.

(bb)         “SEC”
means the United States Securities and Exchange Commission.

(cc)         “Securities
Purchase Agreement” means that certain securities purchase agreement
dated as of the Subscription Date by and among the Company and the initial
holders of the Debentures pursuant to which the Company issued the Debentures.

(dd)         “Security
Agreement” means the Pledge and Security Agreement dated as of December
28, 2006 among the Parent, the Company, its Subsidiaries, the holder of this
Debenture and the holders of the Other Debentures.

(ee)         “Security
Documents” means the Security Agreement, the Mortgages, if any, and
all other instruments, documents and agreements delivered by the Company or any
of its Subsidiaries in order to grant to any holder of a Debenture or Other
Debenture, a Lien on any real, personal or mixed property of the Company or one
of its Subsidiaries as security for the obligations under the Debentures and
Other Debentures.

(ff)           “Subscription
Date” means December 28, 2006.

(gg)         “Successor
Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that
if such Person is not a publicly traded entity whose common stock or equivalent
equity security is quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.

(hh)         “Trading Day”
means any day on which the Common Stock is traded on the Principal Market, or,
if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which
the Common Stock is then traded; provided that “Trading Day”
shall not include any day on which the Common Stock is scheduled to trade on
such exchange or market for less than 4.5 hours or any day that the Common
Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).

(22)         DISCLOSURE.  Upon receipt or delivery by the Company of
any notice in accordance with the terms of this Debenture, unless the Company
has in good faith determined that the matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its
Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, nonpublic information on a
Current

 15
 

 

Report on Form 8-K or
otherwise.  In the event that the Company
believes that a notice contains material, nonpublic information relating to the
Company or its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries.

[Signature Page Follows]

 16
 

 

IN WITNESS WHEREOF, the
Company has caused this Debenture to be duly executed as of the Issuance Date
set out above.

	
   

  	
  PRB OIL & GAS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William F. Hayworth

  	
   

  
	
   

  	
  Name:  William
  F. Hayworth

  
	
   

  	
  Title: 
  President

  

 

 17
 

 

By signing below,
Parent agrees to be bound by and subject to Section 6 and Section 8 of this
Debenture.

	
   

  	
  PRB ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ William F. Hayworth

  	
   

  
	
   

  	
  Name:  William
  F. Hayworth

  
	
   

  	
  Title: 
  President & Chief Operating Officer

  

 

 18

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