Document:

OPTION AGREEMENT

This OPTION AGREEMENT (this “Agreement”) is made and entered into this ___ day of _______,
2003, by and between Pope Resources, a Delaware limited partnership, and OPG Properties LLC, a Washington
limited liability company (collectively, “Optionor”), and Kitsap County, a Public Entity
(“Optionee”), with respect to the following real property (the “Real Property”):

PARCEL A:

The Southeast quarter of the southeast quarter of Section 33, Township 27 north, Range 2 east; the
south half of the southwest quarter of Section 34, Township 27 north, Range 2 east; the north half
of the northeast quarter, the southeast quarter of the northeast quarter and the east half of the
southeast quarter of Section 4, Township 26 north, Range 2 east; the northwest quarter of Section
3, Township 26 north, Range 2 east, W.M., Kitsap County, Washington, subject to all agreements, conditions,
covenants, declarations, easements, restrictions, and other matters of record.

PARCEL B:

The south half of the southeast quarter and that part of the north half of the southeast quarter of
Section 34, Township 27 north, Range 2 east west of the extension of Norman Road; the northeast quarter
of Section 3, Township 26 north, Range 2 east, W.M., Kitsap County, Washington, subject to all agreements,
conditions, covenants, declarations, easements, restrictions, and other matters of record.

RECITALS 

A.            The addresses, telephone numbers,
and facsimile numbers of the parties to this Agreement are as follows.

	 	 	 
	OPTIONOR: 	 	OPTIONEE:
	Pope Resources	 	Kitsap County
	19245 Tenth Avenue N.E. 	 	1200 NW Fairgrounds Rd.
	Poulsbo, WA 98370-7456	 	Bremerton, WA 98311
	Attn: David L. Nunes	 	Attn: Rick Fackler
	Tel: 360.697.6626 	 	Tel: 360.337.5358
	Fax: 360-697.1156	 	Fax:
	 	 	 
	OPG Properties LLC 
	 	 
	19245 Tenth Avenue	 	 
	N.E. Poulsbo, WA 98370-7456	 	 
	Attn: Jon Rose	 	 
	Tel: 360.697.6626 	 	 
	Fax: 360.697.1156	 	 

	 
	B.            Copies of all correspondence, notices and agreements should also be sent to:
	 

	Marco de Sa e Silva 	 	Kitsap County
	Davis Wright Tremaine LLP 	 	614 Division St., MS-35A
	2600 Century Square	 	Port Orchard, WA 98366
	1501 Fourth Avenue	 	Att: Jon Walker
	Seattle, WA 98101	 	Tel: 360.337.7245
	Tel: 206.628.7766 	 	Fax: 360.337.7083
	Fax: 206.628.7699	 	 

	

	
C.            Optionor is the record owner of
the Real Property.

D.            The Real Property, together with
any and all improvements, fixtures, timber, water and minerals located thereon and any and all rights
appurtenant thereto including but not limited to timber rights, water rights, access rights (including
an easement for access off Miller Bay Road) and mineral rights, shall be referred to in this Agreement
as the “Subject Property.”

E.             Optionee wishes to obtain
an exclusive option to purchase the Subject Property and Optionor agrees to grant said exclusive
option to purchase the Subject Property, in accordance with the terms and conditions specified below.

F.             It is the mutual intention
of the parties that, if Optionee shall complete the purchase of the Subject Property, to the extent
feasible, the Subject Property be preserved for its unique wildlife

habitat value, and that appropriate portions of Subject Property be developed and used for outdoor
recreational purposes. However this intention shall not be construed as a covenant or condition to
this Agreement.

AGREEMENT

Now therefore, for and in consideration of the sum of One dollar ($1.00) and other valuable consideration,
receipt and sufficiency of which is hereby acknowledged, Optionor grants to Optionee an exclusive
Option to purchase the Subject Property (the “Option”) in accordance with the following
terms and conditions:

	 

		1.	Option Term. Optionee shall have the right, but not the obligation, to exercise the Option and to purchase
the Subject Property, in accordance with this Agreement, at any time during the Option Term. The
Option Term shall commence on date of the last signature on this Agreement and expire one hundred
fifty (150) days thereafter for Phase I (as defined in Section 2 below) and five (5) years thereafter
for Phase 2 and Phase 3 (as defined in Section 2 below). Notwithstanding the foregoing, Optionee
may extend the Option Term for Phase I only for one (1) additional term of sixty (60) days, upon
written notice to Optionor. Optionee shall have no right to close the purchase of the Subject Property
after the expiration of the Option Term, regardless whether Optionee has delivered the Option Notice
prior to the expiration of the Option Term. If Optionee either does not complete the purchase of
Phase I under this Agreement on or before February 29, 2004, or does not complete the purchase of
Phase 2 and Phase 3 under this Agreement on or before July 1, 2008, then this Agreement shall terminate
automatically and neither party shall have any further rights or obligations under this Agreement
except those obligations intended to survive the expiration or termination of this Agreement. In
no event shall the term of this Agreement extend beyond July 1, 2008, which shall be the Termination
Date of this Agreement. 
			 

	 	2.	Option Phasing. The Option shall be exercised and the Subject Property acquired by Optionee in no more
than three (3) phases, comprising Phase 1, Phase 2, and Phase 3. Phase 1 shall comprise at Optionee’s
option either all of Parcel A or such portion of the Subject Property as is proposed by Optionee
in its Option Notice (as defined in Section 4 below) and approved by Optionor in its sole discretion.
Phase 1 shall comprise a minimum of 300 acres. Phase 2 shall comprise either all of Parcel B or such
portion of the Subject Property as is proposed by Optionee in its Option Notice and approved by Optionor
in its sole discretion. Phase 3 shall comprise the remainder of the Subject Property. Optionee must
close the purchase of Phase 1 prior to or concurrent with closing the purchase of Phase 2 and must
close the purchase of Phase 2 prior to closing the purchase of Phase 3.

	

	 	3.	Trail Easement. If Optionee completes the purchase of the entirety of Parcel A under this Agreement,
then contemporaneous with the Optionor’s conveyance of Parcel A to Optionee, Optionor shall
convey to Optionee subject to matters of record a perpetual nonexclusive public pedestrian trail
easement (the “Trail Easement”) within such portion of Parcel B as may be mutually acceptable
to Optionor and Optionee (the “Trail Easement Area”), on such terms and conditions as may
be mutually acceptable to Optionor and Optionee, and subject to a perpetual right of relocation by
Optionor and future owners of Parcel B.
			 
	 	4.	Option Notice. In the event Optionee wishes to exercise the Option, then Optionee shall do so by notifying
Optionor in writing (the “Option Notice”) within the Option Term specified in Section 1
above. It is contemplated that there will be as many as three (3) Option Notices under this Agreement.
The Option Notice shall include (a) a legal description of that portion of the Subject Property that
is subject to the exercise of the Option, (b) a survey of said portion if it does not comprise the
entirety of either Parcel A or Parcel B, (c) a complete and accurate copy of the Phase 1 Appraisal,
Phase 2 Appraisal, or Phase 3 Appraisal (as defined in Section 5 below), as applicable, and (d) a
statement of the purchase price payable at closing for that portion of the Subject Property that
is subject to the exercise of the Option. Prior to delivery of any Option Notice, Optionee shall
cause a licensed land surveyor to mark the corners and boundaries of the portion of the Subject Property
described in the Option Notice. Notwithstanding the foregoing, if the description of the Subject
Property contained in the Option Notice comprises less than the entirety of either Parcel A in Phase
1 or Parcel B in Phase 2, then the Option Notice shall be null and void unless, within fifteen (15)
days after Optionor’s receipt of the Option Notice, Optionor delivers to Optionee written notice
that Optionor approves the description of the Subject Property contained in the Option Notice.
			 
	 	5.	Appraisals. Prior to exercising the Option, Optionee shall obtain a professional appraisal of that
portion of the Subject Property for which Optionee intends to exercise the Option. All appraisals
shall be prepared by an independent MAI certified appraiser selected by Optionee and approved by
Optionor, which approval shall not be unreasonably withheld. The parties shall mutually agree upon
the factual assumptions, property use assumptions, approach, and method used by the appraiser. The
parties acknowledge that the Subject Property is subject to a vested application for master plan
approval of the establishment of 765 residential dwelling units, that a portion of the Subject Property
is subject to vested applications for preliminary plat and planned unit development approvals, and
that the fair market value of the Subject Property is enhanced by these applications. All appraisals
shall include the additional value conferred upon the Subject Property by these applications unless
Optionor either relinquishes or withdraws the applications in writing or expressly waives such enhanced
value in writing. All appraisals shall be paid for by Optionee. All appraisals shall be complete
appraisals in accordance with the Appraisal Institute in their Uniform Standards of Professional
Appraisal Practice and shall establish a fair market value of either Phase 1, Phase 2, or Phase 3,
including any and all improvements, fixtures, timber, water and minerals located thereon and any
and all rights appurtenant thereto including but not limited to timber rights, water rights, access
rights, and mineral rights appurtenant thereto. All appraisals shall be subject to review in a review
appraisal, which shall be a desk review of the prior appraisal in accordance with Uniform Standards
of Professional Appraisal Practice. The initial appraisal of Phase 1, together with the review appraisal
thereof, is referred to herein as the “Phase 1 Appraisal.” The appraisal of Phase 2, together
with the review appraisal thereof, is referred to herein as the “Phase 2 Appraisal.” The
appraisal of Phase 3, together with the review appraisal thereof, is referred to herein as the “Phase
3 Appraisal.” Optionee shall cause the Phase 1 Appraisal, Phase 2 Appraisal, and Phase 3 Appraisal
to be completed no more than ninety (90) days prior to the date of closing on the phase to which they relate.

	

	 	6.	Purchase Price. The purchase price of Phase I shall be the fair market value of the Phase 1 portion
of the Subject Property as set forth in the Phase 1 Appraisal, provided, however, that the Phase
1 Appraisal shall determine the fair market value of Phase 1 as of a date no more than ninety (90)
days prior to the date of closing on Phase 1. The purchase price of Phase 2 shall be the fair market
value of the Phase 2 portion of the Subject Property as set forth in the Phase 2 Appraisal, provided,
however, that the Phase 2 Appraisal shall determine the fair market value of Phase 2 as of a date
no more than ninety (90) days prior to the date of closing on Phase 2. The purchase price of Phase
3 shall be the fair market value of the Phase 3 portion of the Subject Property as set forth in the
Phase 3 Appraisal, provided, however, that the Phase 3 Appraisal shall determine the fair market
value of Phase 3 as of a date no more than ninety (90) days prior to the date of closing on Phase
3. The purchase price is subject to Optionor’s approval as set forth in Section 19 below.
			 
	 	7.	Escrow and Closing. The parties hereby appoint Pacific Northwest Title Company of Washington, Inc.,
Silverdale, Washington, to serve as the escrow holder (the “Escrow Holder”), for the purpose
of closing the purchase and sale of the Subject Property. Escrow shall close within thirty (30) days
of the date of delivery of the Option Notice. Upon receipt of any appraisal, Optionee shall notify
Escrow Holder of the purchase price as set forth in such appraisal.
			 

		8.	Title. Upon closing, Optionor shall convey to Optionee or to Optionee’s permitted assignee or
designee that portion of the Subject Property that is subject to Optionee’s exercise of the
Option by a Statutory Warranty Deed (the “Deed”) subject to (a) all agreements, conditions,
covenants, declarations, easements, restrictions, and other matters of record, except any mortgage,
deed of trust, or other financial encumbrance arising by or through Optionor, (b) matters that a
complete inspection of the Subject Property would disclose, (c) matters that an accurate ALTA survey
of the Subject Property would disclose, and (d) the reservation of a perpetual nonexclusive easement
sixty (60) feet in width for motor vehicle access, emergency vehicle access, and utility services
within that portion of the Subject Property, as may be mutually acceptable to Optionor and Optionee,
on such terms and conditions as may be mutually acceptable to Optionor and Optionee, and subject
to a perpetual right of relocation by the owner or future owners of the Subject Property through
which the easement passes, for the benefit of all lands owned by Optionor, its affiliates, parents,
and subsidiaries, their successors and assigns (collectively, the “Permitted Exceptions”).Title
Insurance. Upon closing any conveyance, Optionor shall provide Optionee with an ALTA standard coverage
owner’s policy of title insurance issued by Pacific Northwest Title Company of Washington, Inc.,
Silverdale, Washington (“Title Company”), consistent with the preliminary title commitment
dated May 16, 2003, Order No. 32073487 (the “Title Commitment”), in form and substance
acceptable to Optionee, in the amount of the Purchase Price, insuring that title to the portion of
the Subject Property conveyed by Optionor was vested in Optionee upon close of escrow subject only
to the exceptions noted and agreed to in writing by Optionee.
			 

	 	10.	Optionor’s Pre-closing Covenants. Optionor shall not, without the prior written consent of Optionee,
which consent shall not be unreasonably withheld, (a) make, extend or permit any leases, contracts,
mortgages or other liens or encumbrances affecting the Subject Property which will not be removed,
released or terminated at closing, or (b) take or permit any action that could reduce the value of
the Subject Property.

	

	 	11.	Optionee’s Acknowledgments and Covenants. Optionee acknowledges and agrees that Optionor has no
legal or other obligation to enter into this Agreement and that Optionor has not requested any material
consideration from Optionee in exchange for the making of this Agreement. Optionee covenants that
this Agreement and Optionor’s actions and decisions taken under this Agreement, shall not in
any way affect or influence to the detriment of Optionor the conditions, timeliness, or substance
of the land use, subdivision, Growth Management Act planning, and other actions and decisions to
be taken by Optionee with respect to the Subject Property or other real property owned by Optionor
in Kitsap County, Washington. Optionee shall process land use, subdivision, Growth Management Act
planning, and other actions and decisions requested by Optionor regarding the Subject Property and
other real property owned by Optionor in Kitsap County, Washington in the usual and customary manner
in accordance with all state and county requirements.
	 	 	 
	 	12. 	Optionor’s Representations. Optionor makes the following representations and warranties:

	 

		a.	Optionor has full power and authority to enter into this Agreement and to transfer and convey all right,
title and interest in and to the Subject Property in accordance with this Agreement, subject to satisfaction
of the board approval condition precedent described in Section 19 below.
			 
		b.	Within the knowledge of Jon Rose, President of OPG Properties LLC, and David L. Nunes, President and
CEO of Pope Resources, there is no suit, action, arbitration, legal, administrative or other proceeding
or inquiry pending or threatened against the Subject Property, or any portion thereof, or pending
or threatened against Optionor which could affect Optionor’s title to the Subject Property,
or any portion thereof, affect the value of the Subject Property, or any portion thereof, or subject
an owner of the Subject Property, or any portion thereof, to liability.
			 
		c.	Within the knowledge of Jon Rose, President of OPG Properties LLC, and David L. Nunes, President and
CEO of Pope Resources, there are no intended public improvements or private rights which will result
in the creation of any liens upon the Subject Property or any portion thereof which affects the Subject
Property or any portion thereof which will not be removed at closing.
			 
		d.	Within the knowledge of Jon Rose, President of OPG Properties LLC, and David L. Nunes, President and
CEO of Pope Resources, there are no toxic or hazardous materials on or under the Subject Property.
			 

	 	Each of the above representations and warranties is material and is relied upon by Optionee. Each of
the above representations and warranties shall be deemed to have been made as of the close of escrow
and shall survive the close of escrow for a period of two (2) years, after which they shall expire
automatically and have no further force or effect, with the exception of an action by Optionee for
contribution relating to a claim brought against Optionee by a third party under the Model Toxics
Control Act, Chapter 70.105D RCW and Chapter 173 WAC. No claim for breach of any representation or
warranty of Optionor under this Agreement shall be actionable or payable if the breach in question
results from or is based upon a condition, fact, or other matter known to Optionee prior to closing. 
		 
	 	If, before the close of escrow, Optionor discovers any information or facts that would materially change
the foregoing representations and warranties, Optionor shall as soon as reasonably possible give
notice to Optionee of those facts and information. If any of the foregoing representations and warranties
ceases to be true before the close of escrow, Optionor shall have the option to remedy the problem
before the close of escrow. If the problem is not remedied before close of escrow, Optionee may elect
to terminate this Agreement, in which case neither party shall have any further rights or obligations
under this Agreement except those obligations intended to survive the expiration or termination of
this Agreement. Optionee’s election in this regard shall not constitute a waiver of Optionee’s
rights in regard to any loss or liability suffered as a result of a representation or warranty not being true.

	

	 	13.	Engineering Studies and Inspection. Optionor acknowledges that Optionee may conduct soil, survey, environmental,
hydrology and engineering studies to determine whether the Subject Property is suitable for Optionee’s
intended purpose. Accordingly, at any time during the Option Term specified in Section 1 above, Optionee
may inspect, or cause to have inspected, the Subject Property. Optionor hereby grants permission
to Optionee and/or his representatives and assigns to go upon the Subject Property and collect information
pursuant to the foregoing. Optionee shall deliver notice to Optionor at least forty-eight (48) hours
in advance of any entry onto the Subject Property, which notice shall specify the dates of entry,
the persons entering, and the scope of their investigations, tests, or other work. Optionee shall
indemnify, defend and hold Optionor harmless from any claims, demands and causes of action for personal
injury, property damage, mechanics liens, violation of laws or breach of contract or lease that arise
out of or are related to Optionee’s activities on the Real Property prior to Closing, including
without limitation Optionor’s costs, expenses and attorney’s fees, except to the extent such claims, demands or causes of action arise out of Optionor’s negligence, misconduct, breach of lease or contract or violation of law. Without expanding Optionee’s obligations set forth above, it is understood that Optionee shall not liable for or in connection with the discovery and reporting as required by law of any hazardous or environmental condition on the Property. Notwithstanding anything to the contrary herein, this indemnity shall survive termination of this Agreement. Optionee’s entry shall be at reasonable times and in compliance with all laws, leases, and other agreements of Optionor. Unless Optionor has given its prior written consent, (i) no improvements shall be constructed upon the Real Property, no materials, vehicles or equipment shall be placed or stored on the Real Property except for the purposes of testing, and no construction activity shall be conducted upon the Real Property, and (ii) no grading, filling, excavation, or other disturbance of the soils shall be permitted. Optionee’s activities shall not violate any law, regulation, ordinance or permit. Optionee shall provide to Optionor and shall cause its consultants to provide to Optionor within thirty (30) days after receipt by Optionee complete copies of any work product Optionee and its consultants have produced on behalf of Optionee, including without limitation appraisals, environmental reports and studies, and surveys.
			 
	 	14.	Closing Costs. The parties shall equally share the Closing Agent’s escrow fee and the cost of
recording of the Deed. Optionor shall pay the real estate excise tax.
			 
	 	15.	Compensating Taxes. Optionor has disclosed to Optionee that portions of the Subject Property are currently
classified or designated as current use or forest land for tax purposes under RCW Ch. 84.33 or RCW
Ch. 84.34. Conversion of the Subject Property to another use will require the payment of compensating
tax. At Closing, Optionee either shall continue the current classification or designation or pay
the compensating tax, and in any event Optionee shall bear sole responsibility for, and shall indemnify
and hold Optionor harmless against, all such compensating tax. The provisions of this section shall
survive Closing. In any suit, action, or appeal therefrom to enforce this section, the prevailing
party shall be entitled to its costs incurred therein, including reasonable attorneys’ fees
and costs of litigation.
			 
	 	16.	Right to Assign or Direct Deed. At Optionee’s sole discretion, Optionee may assign this Agreement
or direct Optionor to convey the Deed, in accordance with the terms and conditions of this Agreement,
to any of Optionee’s assignees or designees, provided that such assignee or designee is either
a government agency or a nonprofit corporation whose primary business is the preservation of real
property.

	

	 	17.	Right to Record Memorandum of Option. Optionee upon its sole signature may record a memorandum of this Agreement with the Kitsap County Auditor. Optionor may record a memorandum or notice of termination of this Agreement signed by Optionee at any time after the expiration or termination of this Agreement.
	 	 	 
	 	18.	Remedies Upon Default. In the event that Optionor shall default in the performance of its obligations under this Agreement, Optionee’s sole remedy shall be an action for money damages to the extent of appraisal and other actual third party consultant costs and fees paid by Optionee in connection with the review of the Subject Property incurred between the making of this Agreement and the default by Optionor, in an aggregate amount not to exceed Fifty Thousand Dollars ($50,000.00).
	 	 	 
	 	19.	Optionor’s Conditions Precedent. Optionor’s obligations under this Agreement are expressly conditioned upon and subject to Optionor’s satisfaction or written waiver of the following conditions precedent: (a) The approval of this Agreement and the transactions described herein by the Board of Directors of Pope Resources within thirty (30) days after the date of mutual acceptance of this Agreement, in its sole discretion, (b) The approval of the Phase 1 Appraisal, Phase 2 Appraisal, and Phase 3 Appraisal by Optionor within thirty (30) days after Optionor’s receipt of either such appraisal, in Optionor’s sole discretion, and (c) The partial release of any mortgage, deed of trust, or other financial encumbrance relating to the Subject Property on or before the date of closing. If Optionor fails to deliver written notice to Optionee of the satisfaction or waiver of the foregoing conditions precedent within the applicable time periods, then such conditions precedent shall be deemed not satisfied or waived, in which event this Agreement shall terminate and neither party shall have any further rights or obligations hereunder except those indemnity and other obligations intended to survive the expiration or termination of this Agreement.
	 	 	 
	 	20.	Property Condition. Optionee agrees that it has the opportunity to inspect and become thoroughly familiar with the Property and to investigate each and every aspect of the Property, either independently or through agents of Optionee’s choosing, including, without limitation: (i) all matters relating to the title to the Property, (ii) all governmental and other legal requirements, such as taxes, assessments, zoning, and permit requirements; (ii) the physical condition of the Property, including, without limitation, the infrastructure available or unavailable to the Property (as the case may be), access to the Property, all other physical and functional aspects of the Property, including any grading issues, whether or not the import or export of soil will be necessary for Optionee’s use of the Property, and the presence or absence of hazardous or toxic materials, substances or wastes of any kind, and (iii) all other matters of any significance affecting the Property whether physical in nature or intangible in nature. Optionee acknowledges that Optionor has provided Optionee the opportunity to review documents in Optionor’s possession relating to the condition of the Property except property valuation information. Optionee is acquiring the Property in its “AS IS” condition. Except as expressly set forth otherwise in Section 12 above, SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE PROPERTY INCLUDING, WITHOUT LIMITATION: ANY REPRESENTATION OR WARRANTY WITH RESPECT TO (A) THE QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, ACCESS, SOILS, TIMBER, GEOLOGY AND ANY GROUND WATER; (B) THE EXISTENCE, QUALITY, NATURE, ADEQUACY, AND PHYSICAL CONDITION OF UTILITIES SERVING THE PROPERTY; (C) THE PROPERTY’S USE, HABITABILITY, MERCHANTABILITY, OR FITNESS, SUITABILITY, VALUE OR ADEQUACY OF THE PROPERTY FOR ANY PARTICULAR PURPOSE; (D) THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY OR ANY OTHER PUBLIC OR PRIVATE

	

	 	 	 RESTRICTIONS ON USE OF THE PROPERTY; (E) THE COMPLIANCE OF THE PROPERTY OR THE PROPERTY’S
OPERATION WITH ANY APPLICABLE CODES, LAWS, REGULATIONS, STATUTES, ORDINANCES, OF ANY GOVERNMENTAL
OR QUASI-GOVERNMENTAL ENTITY, OR ANY COVENANTS, CONDITIONS OR RESTRICTIONS APPLICABLE TO THE PROPERTY;
(F) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PROPERTY OR THE ADJOINING
OR NEIGHBORING PROPERTY; (G) THE QUALITY OF ANY LABOR AND MATERIALS USED IN ANY IMPROVEMENTS ON OR
BENEFITING THE PROPERTY; (H) THE CONDITION OF TITLE TO THE PROPERTY; (I) THE ECONOMICS OF THE PRESENT
OR FUTURE OPERATION OF THE PROPERTY; OR (J) THE ACREAGE OF THE PROPERTY. OPTIONEE ASSUMES THE RESPONSIBILITY
AND RISKS OF ALL DEFECTS TO AND CONDITIONS IN THE PROPERTY, INCLUDING DEFECTS AND CONDITIONS, IF
ANY, THAT CANNOT BE OBSERVED BY INSPECTION. OPTIONOR SHALL NOT BE LIABLE FOR ANY LATENT OR PATENT
DEFECTS IN THE PROPERTY. OPTIONOR SHALL HAVE NO OBLIGATION TO REPAIR OR MAKE ANY IMPROVEMENTS TO
THE CONDITION OF THE PROPERTY PRIOR TO CLOSING. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
OPTIONOR EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY, AS WELL AS ANY WARRANTY WHATSOEVER
WITH RESPECT TO THE MARKETABILITY, HARVESTABILITY, AGE, SPECIES MIX, SITE CLASSIFICATION, OR BOUNDARIES
OF ANY TIMBER ON THE PROPERTY, OR THE QUANTITIES, GRADES, OR QUALITY OF ANY TIMBER ON THE PROPERTY,
OR THE AVAILABILITY OR ADEQUACY OF ACCESS TO THE PROPERTY. Optionee further acknowledges that any
information whatsoever, whether written or oral, or in the form of maps, surveys, data, inventory
information, plats, soil reports, engineering studies, environmental studies, inspection reports,
plans, specifications, or any other form, pertaining to the Property and the timber thereon, including
the condition, suitability, integrity, marketability, compliance with law, or other attributes or
aspects of the Property and the timber thereon, is furnished to Optionee solely as a courtesy, and
neither Optionor nor its representatives have verified, nor do they warrant, the accuracy of any
statements or other information therein contained nor the qualifications of the persons preparing
such information. Neither Optionor nor its representatives warrant the accuracy of any information
contained therein in any way. Optionee is responsible for determining access to the Property. This
includes contacting any responsible government agencies regarding access permits, restrictions or
existing hazards. Mineral rights will not be included in the sale unless currently owned by Optionor. Optionee is also responsible for evaluating any and all environmental, land use, regulatory and other constraints relating to the use of the Property.
	 	 	 

	 	21.	No Brokers. Optionee and Optionor each agree that if any claims should be made for commissions allegedly
arising from the execution of this Agreement or any sale of the Subject Property to Optionee by any
broker by reason of any acts of Optionee or Optionor, as the case may be, then the party whose acts
provide the basis for the claims shall indemnify, defend, and hold the other harmless from and against
any and all loss, liabilities, and expenses in connection therewith. The provisions of this indemnity
shall survive the closing and any expiration or termination of this Agreement.
			 
	 	22.	Section 1031 Exchange. Optionee and Optionor will cooperate with each other in connection with the
form and structure of this transaction in order to limit tax liabilities and preserve tax benefits
to themselves to the extent permitted by law. Either Optionee or Optionor may elect to close this
transaction as a part of a tax-deferred exchange under Section 1031 of the Internal Revenue Code,
in which case the other party will sign all documents necessary for such exchange and otherwise cooperate
therewith, provided only that the other party will not be required to incur any additional expense
or liability or acquire title to any property except as provided otherwise in this Agreement. Each
party electing to close as part of a tax-deferred exchange will indemnify, defend, and hold the other
party harmless from any loss, liability, claim, or expense that is asserted against or incurred by
the other party in connection with their cooperation with any tax deferred exchange.

	

	 	23.	Notices. All notices pertaining to this Agreement shall be in writing and delivered to the parties
hereto by facsimile transmission, personally by hand, courier service or Express Mail, or by certified
United States mail, postage prepaid, return receipt requested, at the addresses and facsimile numbers
set forth above.

	 	 	 
	 	24.	
Time of the Essence. Time is of the
essence of this Agreement.

	 	 	 

	 	25.	Binding on Successors. This Agreement shall be binding not only upon the parties, but also upon their
respective heirs, personal representatives, assigns, and other successors in interest.
			 
	 	26.	Additional Documents. Optionor and Optionee agree to execute such additional documents, including escrow
instructions, as may be reasonable and necessary to carry out the provisions of this Agreement.
			 
	 	27.	Entire Agreement; Modification. This Agreement constitutes the entire agreement between Optionor and
Optionee pertaining to the subject matter contained in it and supersedes all prior and contemporaneous
agreements, representations, and understandings. No supplement, modification, or amendment of this
Agreement shall be binding and no waiver of any provision in this Agreement effective, unless executed
in writing by all the parties.
			 

	 	28.	Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the
State of Washington.

	

	
IN WITNESS of the foregoing provisions the parties have signed this Agreement below: 

OPTIONOR

	 

	POPE RESOURCES, a Delaware limited partnership
	By POPE MGP, INC., a Delaware corporation 
	Its Managing General Partner
	 
	 
	__________________________Date 8/14/03
	 
	By David L. Nunes
	Its President and Chief Executive Officer
	 
	OLYMPIC PROPERTY GROUP LLC, a Washington limited liability company
	 
	___________________________Date 8/14/03
	 
	By Jon Rose
	Its President
	 
	OPTIONEE
	KITSAP COUNTY BOARD OF COMMISSIONERS
	 
	_________________________________Date________
	Jan Angel, Chair
	 
	_________________________________Date________
	Chris Endresen, Commissioner
	 
	_________________________________Date________
	Patty Lent, Commissioner

	

	
Addendum
To The North Kitsap Heritage Park Option Agreement (KC-407-03)

Assessor’s Property Tax Parcel Numbers

“Parcel A”

332702-4-006-2000 042602-1-001-2002 042602-4-001-2001 032602-2-004-2003 032602-2-005-2002 342702-3-007-2000

“Parcel B”

342702-4-002-2003 342702-4-005-2000 032602-1-006-2003 032602-1-002-2007 032602-1-001-2008LOAN AGREEMENT

This Agreement dated as of October 26, 2004, is between Bank of America, N.A. (the “Bank”)
and Pope Resources, A Delaware Limited Partnership (the “Borrower”). 

	 

	1.	FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
	 	 
	1.1	Line of Credit Amount.
	 	 
	(a)	During the availability period described below, the Bank will provide a line of credit to the Borrower.
The amount of the line of credit (the “Facility No. 1 Commitment”) is Ten Million and 00/100
Dollars ($10,000,000.00).
		 
	(b)	This is a revolving line of credit. During the availability period, the Borrower may repay principal
amounts and reborrow them.
		 
	(c)	The Borrower agrees not to permit the principal balance outstanding to exceed the Facility No. 1 Commitment.
If the Borrower exceeds this limit, the Borrower will immediately pay the excess to the Bank upon
the Bank’s demand.
	 	 
	1.2	Availability Period.  The line of credit is available between the date of this Agreement and
	October 31, 2005, or such earlier date as the availability may terminate as provided in this Agreement (the “Facility No. 1 Expiration Date”). 
	 
	1.3	Repayment Terms.
	 

	(a)	The Borrower will pay interest on November 30, 2004, and then on the same day of each month thereafter
until payment in full of any principal outstanding under this facility. 
		 
	(b)	The Borrower will repay in full any principal, interest or other charges outstanding under this facility
no later than the Facility No. 1 Expiration Date. Any interest period for an optional interest rate
(as described below) shall expire no later than the Facility No. 1 Expiration Date. 
	 	 
	1.4 	Interest Rate.
	 	 
	(a)	The interest rate is a rate per year equal to the Bank’s Prime Rate.
	 	 

	(b)  	The Prime Rate is the rate of interest publicly announced from time to time by the Bank as its Prime
Rate. The Prime Rate is set by the Bank based on various factors, including the Bank’s costs
and desired return, general economic conditions and other factors, and is used as a reference point
for pricing some loans. The Bank may price loans to its customers at, above, or below the Prime Rate.
Any change in the Prime Rate shall take effect at the opening of business on the day specified in
the public announcement of a change in the Bank’s Prime Rate.
	 	 
	1.5	Optional Interest Rates.  Instead of the interest rate based on the rate stated in the paragraph
	entitled “Interest Rate” above, the Borrower may elect the optional interest rates listed below for this Facility No. 1 during interest periods agreed to by the Bank and the Borrower. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a “Portion.” The following optional interest rates are available:
	 
	(a)     	The LIBOR Rate plus 1.25 percentage point(s).
	 	 
	1.6          	Reduction or Termination of Commitment.  Upon five business days notice to the Bank, the Borrower
	may at any time and from time to time, without premium or penalty, permanently and irrevocably reduce the Facility No. 1 Commitment in the minimum amount of $1,000,000 and in multiples of $1,000,000 to an amount not less than the current amount outstanding at such time or may terminate the Facility No. 1 Commitment. Any reduction or termination of the Facility No. 1 Commitment pursuant to this Section 1.6 shall be accompanied by payment of all accrued and unpaid fees with respect to the portion of the Facility No. 1 Commitment being reduced or terminated.

	

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	2.          	OPTIONAL INTEREST RATES
	 	 
	2.1	Optional Rates. Each optional interest rate is a rate per year. Interest will be paid on November  30,
	 2004, and then on the same day of each month thereafter until payment in full of any principal outstanding under this facility. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. At the end of each interest period, the interest rate will revert to the rate stated in the paragraph(s) entitled “Interest Rate” above, unless the Borrower has designated another optional interest rate for the Portion. 
	 	 
	2.2 	LIBOR Rate. The election of LIBOR Rates shall be subject to the following terms and requirements:
	 	 
	(a)	The interest period during which the LIBOR Rate will be in effect will be one month, two months, three
months or six months. The first day of the interest period must be a day other than a Saturday or
a Sunday on which the Bank is open for business in New York and London and dealing in offshore dollars
(a “LIBOR Banking Day”). The last day of the interest period and the actual number of days
during the interest period will be determined by the Bank using the practices of the London inter-bank
market.
		 
	(b)	Each LIBOR Rate portion will be for an amount not less than One Hundred Thousand and 00/100 Dollars
($100,000.00).
		 
	(c)	The “LIBOR Rate” means the interest rate determined by the following formula, rounded upward
to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank
as of the first day of the interest period.)

	 	LIBOR Rate =	London Inter-Bank Offered Rate	 
	 	 	     (1.00 - Reserve Percentage)	 

	                Where,

		 	 
		(i)	“London Inter-Bank Offered Rate” means the average per annum interest rate at which U.S.
dollar deposits would be offered for the applicable interest period by major banks in the London
inter-bank market, as shown on the Telerate Page 3750 (or any successor page) at approximately 11:00
a.m. London time two (2) London Banking Days before the commencement of the interest period. If such
rate does not appear on the Telerate Page 3750 (or any successor page), the rate for that interest
period will be determined by such alternate method as reasonably selected by the Bank. A “London
Banking Day” is a day on which the Bank’s London Banking Center is open for business and
dealing in offshore dollars.
			 
		(ii)	“Reserve Percentage” means the total of the maximum reserve percentages for determining the
reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities,
as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent.
The percentage will be expressed as a decimal, and will include, but not be limited to, marginal,
emergency, supplemental, special, and other reserve percentages.
			 

	(d)	The Borrower shall irrevocably request a LIBOR Rate Portion no later than 12:00 noon Pacific time on
the LIBOR Banking Day preceding the day on which the London Inter-Bank Offered Rate will be set,
as specified above. For example, if there are no intervening holidays or weekend days in any of the
relevant locations, the request must be made at least three days before the LIBOR Rate takes effect.
		 
	(e)	The Bank will have no obligation to accept an election for a LIBOR Rate Portion if any of the following
described events has occurred and is continuing:
		 

		(i)	Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate
Portion are not available in the London inter-bank market; or
			 
		(ii)	The LIBOR Rate does not accurately reflect the cost of a LIBOR Rate Portion.

	

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	(f)	Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise,
will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee
as described below. A “prepayment” is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement.
		 
	(g)	The prepayment fee shall be in an amount sufficient to compensate the Bank for any loss, cost or expense
incurred by it as a result of the prepayment, including any loss of anticipated profits and any loss
or expense arising from the liquidation or reemployment of funds obtained by it to maintain such
Portion or from fees payable to terminate the deposits from which such funds were obtained. The Borrower
shall also pay any customary administrative fees charged by the Bank in connection with the foregoing.
For purposes of this paragraph, the Bank shall be deemed to have funded each Portion by a matching
deposit or other borrowing in the applicable interbank market, whether or not such Portion was in
fact so funded.
	 	 
	3.	FEES AND EXPENSES
	 	 

	3.1	Fees.
	 	 
	(a)	Unused Commitment Fee.  The Borrower agrees to pay a fee on any difference between the Facility No. 1 Commitment and the
amount of credit it actually uses, determined by the average of the daily amount of credit outstanding
during the specified period. The fee will be calculated at 0.25% per year. 
		 
	 	This fee is due on December 31, 2004, and on the same day of each following quarter until the expiration
of the availability period.
		 
	(b)	Waiver Fee.  If the Bank, at its discretion, agrees to waive or amend any terms of this Agreement, the Borrower
will, at the Bank’s option, pay the Bank a fee for each waiver or amendment in an amount advised
by the Bank at the time the Borrower requests the waiver or amendment. Nothing in this paragraph
shall imply that the Bank is obligated to agree to any waiver or amendment requested by the Borrower.
The Bank may impose additional requirements as a condition to any waiver or amendment.
		 
	(c)	Late Fee.  To the extent permitted by law, the Borrower agrees to pay a late fee in an amount not to exceed
four percent (4%) of any payment that is more than fifteen (15) days late. The imposition and payment
of a late fee shall not constitute a waiver of the Bank’s rights with respect to the default.

	3.2	Expenses.  The Borrower agrees to immediately repay the Bank for expenses that include, but are
	not limited to, filing, recording and search fees, appraisal fees, title report fees, and documentation fees.
	 	 
	3.3 	Reimbursement Costs.
	 	 
	(a)	The Borrower agrees to reimburse the Bank for any expenses it incurs in the preparation of this Agreement
and any agreement or instrument required by this Agreement. Expenses include, but are not limited
to, reasonable attorneys’ fees, including any allocated costs of the Bank’s in-house counsel
to the extent permitted by applicable law.
	 	 
	4.	DISBURSEMENTS, PAYMENTS AND COSTS
	 	 

	4.1	Disbursements and Payments.
	 	 
	(a)	Each payment by the Borrower will be made in U.S. Dollars and immediately available funds by direct
debit to a deposit account as specified below or, for payments not required to be made by direct
debit, by mail to the address shown on the Borrower’s statement or at one of the Bank’s
banking centers in the United States.
		 
	(b)	Each disbursement by the Bank and each payment by the Borrower will be evidenced by records kept by
the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more
promissory notes.

	

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	4.2	Telephone and Telefax Authorization.
	 	 
	(a)	The Bank may honor telephone or telefax instructions for advances or repayments or for the designation
of optional interest rates given, or purported to be given, by any one of the individuals authorized
to sign loan agreements on behalf of the Borrower, or any other individual designated by any one
of such authorized signers.
		 
	(b)	Advances will be deposited in and repayments will be withdrawn from account number 67171710 owned by
the Borrower or such other of the Borrower’s accounts with the Bank as designated in writing
by the Borrower. 
		 
	(c)	The Borrower will indemnify and hold the Bank harmless from all liability, loss, and costs in connection
with any act pursuant to the terms of this Agreement resulting from telephone or telefax instructions
the Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions.
This paragraph will survive this Agreement’s termination, and will benefit the Bank and its
officers, employees, and agents.
	 	 

	4.3 	Direct Debit (Pre-Billing).
	 	 
	(a)	The Borrower agrees that the Bank will debit deposit account number 67171710 owned by the Borrower
or such other of the Borrower’s accounts with the Bank as designated in writing by the Borrower
(the “Designated Account”) on the date each payment of principal and interest and any fees
from the Borrower becomes due (the “Due Date”).
		 
	(b)	Prior to each Due Date, the Bank will mail to the Borrower a statement of the amounts that will be
due on that Due Date (the “Billed Amount”). The bill will be mailed a specified number
of calendar days prior to the Due Date, which number of days will be mutually agreed from time to
time by the Bank and the Borrower. The calculations in the bill will be made on the assumption that
no new extensions of credit or payments will be made between the date of the billing statement and
the Due Date, and that there will be no changes in the applicable interest rate.
		 
	(c)	The Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due
on that date (the “Accrued Amount”). If the Billed Amount debited to the Designated Account
differs from the Accrued Amount, the discrepancy will be treated as follows:
		 

		(i) 	If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following Due Date
will be increased by the amount of the discrepancy. The Borrower will not be in default by reason
of any such discrepancy.
			 
		(ii) 	If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following Due Date
will be decreased by the amount of the discrepancy.
			 

	 	Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of
principal outstanding without compounding. The Bank will not pay the Borrower interest on any overpayment.
		 
	(d)	The Borrower will maintain sufficient funds in the Designated Account to cover each debit. If there
are insufficient funds in the Designated Account on the date the Bank enters any debit authorized
by this Agreement, the Bank may reverse the debit.
	 	 
	4.4 	Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a
	Saturday, Sunday or other day on which commercial banks are authorized to close, or are in fact closed, in the state where the Bank’s lending office is located, and, if such day relates to amounts bearing interest at an offshore rate (if any), means any such day on which dealings in dollar deposits are conducted among banks in the offshore dollar interbank market. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day.
	 	 
	4.5 	Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will
	be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid.
	 
	4.6	Default Rate. Upon the occurrence of any default under this Agreement, all amounts outstanding
	under this Agreement, including any interest, fees, or costs which are not paid when due, will at the option of the Bank bear interest at a rate which is 2.0 percentage point(s) higher than the rate of interest otherwise provided under this Agreement. This may result in compounding of interest. This will not constitute a waiver of any default.

	

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5.             CONDITIONS

Before the Bank is required to extend any credit to the Borrower under this Agreement, it must receive
any documents and other items it may reasonably require, in form and content acceptable to the Bank,
including any items specifically listed below.

5.1           Authorizations. If the Borrower or any guarantor is anything other than a natural person, evidence that the execution,
delivery and performance by the Borrower and/or such guarantor of this Agreement and any instrument
or agreement required under this Agreement have been duly authorized.

5.2           Governing Documents. If required by the Bank, a copy of the Borrower’s organizational documents.

5.3           Good Standing. Certificates of good standing for the Borrower from its state of formation and from any other state
in which the Borrower is required to qualify to conduct its business.

5.4           Insurance. Evidence of insurance coverage, as required in the “Covenants” section of this Agreement.

6.             REPRESENTATIONS AND WARRANTIES

When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the
following representations and warranties. Each request for an extension of credit constitutes a renewal
of these representations and warranties as of the date of the request:

6.1           Formation. If the Borrower is anything other than a natural person, it is duly formed and existing under the
laws of the state or other jurisdiction where organized.

6.2           Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower’s
powers, have been duly authorized, and do not conflict with any of its organizational papers.

6.3           Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower
in accordance with its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.

6.4           Good Standing. In each state in which the Borrower does business, it is properly licensed, in good standing, and,
where required, in compliance with fictitious name statutes.

6.5           No Conflicts. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower is
bound.

6.6           Financial Information. All financial and other information that has been or will be supplied to the Bank is sufficiently
complete to give the Bank accurate knowledge of the Borrower’s (and any guarantor’s)
financial condition, including all material contingent liabilities. Since the date of the most recent
financial statement provided to the Bank, there has been no material adverse change in the business
condition (financial or otherwise), operations, properties or prospects of the Borrower (or any guarantor).
If the Borrower is comprised of the trustees of a trust, the foregoing representations shall also
pertain to the trustor(s) of the trust.

6.7           Lawsuits. There is no lawsuit, tax claim or other dispute pending or threatened against the Borrower which,
if lost, would impair the Borrower’s financial condition or ability to repay the loan, except
as have been disclosed in writing to the Bank.

6.8           Permits, Franchises. The Borrower possesses all permits, memberships, franchises, contracts and licenses required and
all trademark rights, trade name rights, patent rights, copyrights and fictitious name rights necessary
to enable it to conduct the business in which it is now engaged.

	

5

	6.9	Other Obligations. The Borrower is not in default on any obligation for borrowed money, any 
	purchase money obligation or any other material lease, commitment, contract, instrument or obligation, except as have been disclosed in writing to the Bank.
	 	 
	6.10	Tax Matters. The Borrower has no knowledge of any pending assessments or adjustments of its
	 income tax for any year and all taxes due have been paid, except as have been disclosed in writing to the Bank.
	 	 
	6.11	No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a
	default under this Agreement.
	 	 
	6.12	 Insurance. The Borrower has obtained, and maintained in effect, the insurance coverage required
	 in the “Covenants” section of this Agreement.
	 	 
	7.	COVENANTS
	 	 
	The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full:
	 	 
	7.1          	Use of Proceeds. To use the proceeds of Facility No. 1 only for acquisition financing of timberland and other general
corporate purposes.

	 
	
7.2          Financial Information. To provide the following financial information and statements in form and content acceptable to the
Bank, and such additional information as requested by the Bank from time to time: 

	 

	(a)	Within ninety (90) days of the fiscal year end, the annual financial statements of the Borrower, certified
and dated by an authorized financial officer. These financial statements must be audited (with an
opinion satisfactory to the Bank) by a Certified Public Accountant acceptable to the Bank. The statements
shall be prepared on a consolidated basis. 
		 
	(b)	Within forty five (45) days of the period’s end, quarterly financial statements of the Borrower,
certified and dated by an authorized financial officer. These financial statements may be company-prepared.
The statements shall be prepared on a consolidated basis. 
		 
	(c)	Within ninety (90) days of the fiscal year end and within forty five (45) days of the end of each quarter,
a compliance certificate of the Borrower signed by an authorized financial officer, and setting forth
(i) the information and computations (in sufficient detail) to establish that the Borrower is in
compliance with all financial covenants at the end of the period covered by the financial statements
then being furnished and (ii) whether there existed as of the date of such financial statements and
whether there exists as of the date of the certificate, any default under this Agreement and, if
any such default exists, specifying the nature thereof and the action the Borrower is taking and
proposes to take with respect thereto.
	 	 
	7.3 	Profitability. To maintain on a consolidated basis a positive net income before taxes and extraordinary
	items to be measured as of the date twelve (12) months prior to the current financial statement.
	 
	7.4	Debt to Capitalization Ratio. To maintain on a consolidated basis a ratio of Total Funded Debt divided
	by the sum of Funded Debt and Market Capitalization or Partnership Capital (whichever is higher at the statement date) not exceeding 0.5:1.0. 

    “Funded Debt” means all interest bearing borrowed debt including current portion of long term debt.

    “Market Capitalization” means the partnership unit multiplied by current unit price.

    “Partnership Capital” means the book value of partnership capital on the balance sheet.

	 	 
	7.5	Debt Service Coverage Ratio. To maintain on a consolidated basis a Debt Service Coverage Ratio of
	at least 1.1:1.0. 
	 
	’’Debt Service Coverage Ratio’’ means EBITDA (Net Income plus Depreciation plus Amortization plus Depletion plus Interest plus Tax) minus unfunded CAPEX divided by sum of the interest payments and required principal payments 

    This ratio will be calculated at the end of each reporting period for which the Bank requires financial statements, using the results of the twelve-month period ending with that reporting period. The current portion of long-term liabilities will be measured as of the date twelve (12) months prior to the current financial statement.

	

6

	
7.6           Dividends and Distributions. Not to declare or pay dividends, redemptions of stock or membership interests, distributions and
withdrawals (as applicable) to its owners, except:

(a)           dividends payable in capital stock;

(b)           distributions to owners, or purchase,
redemption or acquisition of stock or membership interests or options, warrants or similar rights
with respect to stock or membership interests, up to an aggregate dollar amount of all such distributions,
purchases, redemptions and acquisitions in any fiscal year that does not exceed 50% of net income
for such fiscal year; and

(c)           distributions to pay the reasonably
estimated federal and state income tax payable by each owner of the Borrower on such owner’s
share of the taxable income of the Borrower (as calculated for federal income tax purposes as if
all owners have the same basis in the Borrower’s assets as does the Borrower itself); provided
that in no event shall the Borrower declare or make distributions in any fiscal year, regardless
of the type of or reason for such distributions, in excess of 75% of net income for such year and
or purchase, redeem or retire any outstanding membership interests in after giving effect to such
purchase, redemption or retirement, the Borrower would be in violation of any of the terms or covenants
of this Agreement.

7.7           Bank as Principal Depository. To maintain the Bank as its principal depository bank, including for the maintenance of business,
cash management, operating and administrative deposit accounts.

7.8           Other Debts.  Not to have outstanding or incur any direct or contingent liabilities or lease obligations (other
than those to the Bank), or become liable for the liabilities of others, without the Bank’s
written consent. This does not prohibit:

(a)           Acquiring goods, supplies, or merchandise on normal
trade credit.

(b)           Endorsing negotiable instruments received in the
usual course of business.

(c)           Obtaining surety bonds in the usual course of business.

	 

	(d)	Liabilities, lines of credit and leases in existence on the date of this Agreement disclosed in writing to the Bank.
	 	 
	(e)	Additional interest bearing unsecured debts and lease obligations for business purposes which do not
exceed a total principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00) outstanding
at any one time.
		 
	(f)	Direct or contingent liabilities not exceeding in the aggregate One Million Dollars ($1,000,000). 

	 
	
(g)           Indebtedness to John Hancock Life
Insurance Co. in an amount not to exceed Thirty Eight Million and 00/100 Dollars ($38,000,000.00).

7.9           Other Liens. Not to create, assume, or allow any security interest or lien (including judicial liens) on property
the Borrower now or later owns, including without limitation the Columbia Tree Farm lands and other
timberlands, except:

(a)           Liens and security interests in favor of the Bank.

(b)           Liens for taxes not yet due.

(c)           Liens outstanding on the date of this Agreement
disclosed in writing to the Bank.

	 

	(d)	Liens securing indebtedness that in the aggregate does not exceed Five Hundred Thousand and 00/100
($500,000.00) at any one time.
		 
	(e)	Deeds of Trust on the Jefferson County and Kitsap County timberland commonly referred to as “Hood
Canal Tree Farm” securing the indebtedness to John Hancock Life Insurance Co. described in Section
7.7(f) hereof.

	

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7.10         Maintenance of Assets. 

	 

	(a)	Not to sell, assign, lease, transfer or otherwise dispose of any part of the Borrower’s business
or the Borrower’s assets except in an aggregate amount not exceeding One Million and 00/100
Dollars ($1,000,000.00) in any fiscal year provided that Borrower’s subsidiaries may purchase
and sell real property in the ordinary course of business.
		 
	(b)	Not to sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value,
or enter into any agreement to do so.
	 	 
	(c) 	Not to enter into any sale and leaseback agreement covering any of its fixed assets.
	 	 
	(d)	To maintain and preserve all rights, privileges, and franchises the Borrower now has.
	 	 
	(e)	To make any repairs, renewals, or replacements to keep the Borrower’s properties in good working condition.

	           

	
7.11         Investments. Not to have any existing, or make any new, investments in any individual or entity, or make
any capital contributions or other transfers of assets to any individual or entity, except for:

(a)           Existing investments disclosed
to the Bank in writing.

	 

	(b)	Investments in the Borrower’s current subsidiaries and a subsidiary to be created in connection
with property known as Port Gamble.

	 
	
(c)           Investments in any of the following:

	 

		(i)	certificates of deposit;
			 
		(ii)	U.S. treasury bills and other obligations of the federal government;
			 
		(iii)	readily marketable securities (including commercial paper, but excluding restricted stock and stock
subject to the provisions of Rule 144 of the Securities and Exchange Commission).
			 

	(d)	Investments that do not exceed an aggregate amount of Six Million and 00/100 Dollars ($6,000,000.00)
outstanding at any one time.

	 
	
7.12         Loans. Not to make any loans, advances or other extensions of credit to any individual or entity, except
for:

(a)           Existing extensions of credit
disclosed to the Bank in writing.

(b)           Extensions of credit to the Borrower’s
current subsidiaries.

	 

	(c)	Extensions of credit in the nature of accounts receivable or notes receivable arising from the sale
or lease of goods, services or real property in the ordinary course of business to non-affiliated
entities.

	 
	
7.13         Change of Management. Not to make any substantial change in the present executive or management personnel of the Borrower.

7.14         Change of Ownership. Not to cause, permit, or suffer any change in capital ownership such that there is a change of more
than twenty-five percent (25%) in the direct or indirect capital ownership of the Borrower.

7.15         Additional Negative Covenants. Not to, without the Bank’s written consent:

	 

	(a)	Enter into any consolidation, merger, or other combination, or become a partner in a partnership, a
member of a joint venture, or a member of a limited liability company except for the creation of
wholly-owned subsidiaries in borrower’s ordinary course of business.
		 

	(b)           Acquire or purchase a business or its assets for
a consideration, including assumption of direct or contingent debt.
	 
	(c)           Engage in any business activities substantially
different from the Borrower’s present business.

	 
	
(d)           Liquidate or dissolve the Borrower’s business.

	 

	(e)           Voluntarily suspend the Borrower’s business
for more than seven (7) days in any thirty (30) day period.

	

8

	
7.16         Notices to Bank. To promptly notify the Bank in writing of:

	 

	(a)	Any lawsuit over One Million and 00/100 Dollars ($1,000,000.00) against the Borrower (or any guarantor
or, if the Borrower is comprised of the trustees of a trust, any trustor).
		 
	(b)	Any substantial dispute between any governmental authority and the Borrower (or any guarantor or, if
the Borrower is comprised of the trustees of a trust, any trustor) that could have a material adverse
impact on the Borrower.
		 
	(c)	Any event of default under this Agreement, or any event which, with notice or lapse of time or both,
would constitute an event of default.
		 
	(d)	Any material adverse change in the Borrower’s (or any guarantor’s, or, if the Borrower is
comprised of the trustees of a trust, any trustor’s) business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit.
		 
	(e)	Any change in the Borrower’s name, legal structure, place of business, or chief executive office
if the Borrower has more than one place of business.
		 
	(f)	Any actual contingent liabilities of the Borrower (or any guarantor or, if the Borrower is comprised
of the trustees of a trust, any trustor), and any such contingent liabilities which are reasonably
foreseeable, where such liabilities are in excess of One Million and 00/100 Dollars ($1,000,000.00)
in the aggregate.

	 	 
	7.17	Insurance.
	 	 
	(a)	General Business Insurance. To maintain insurance satisfactory to the Bank as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any of the Borrower’s properties, business interruption
insurance, public liability insurance including coverage for contractual liability, product liability
and workers’ compensation, and any other insurance which is usual for the Borrower’s business.
Each policy shall provide for at least 30 days prior notice to the Bank of any cancellation thereof.

	 
	
7.18         Compliance with Laws. To comply with the laws (including any fictitious or trade name statute), regulations, and orders
of any government body with authority over the Borrower’s business.

7.19         ERISA Plans. Promptly during each year, to pay and cause any subsidiaries to pay contributions adequate to meet
at least the minimum funding standards under ERISA with respect to each and every Plan; file each
annual report required to be filed pursuant to ERISA in connection with each Plan for each year;
and notify the Bank within ten (10) days of the occurrence of any Reportable Event that might constitute
grounds for termination of any capital Plan by the Pension Benefit Guaranty Corporation or for the
appointment by the appropriate United States District Court of a trustee to administer any Plan.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time
to time. Capitalized terms in this paragraph shall have the meanings defined within ERISA.

7.20         Books and Records. To maintain adequate books and records.

7.21         Audits. To allow the Bank and its agents, upon reasonable notice, to inspect the Borrower’s properties
and examine, audit, and make copies of books and records at any reasonable time. If any of the Borrower’s
properties, books or records are in the possession of a third party, the Borrower authorizes that
third party to permit the Bank or its agents to have access to perform inspections or audits and
to respond to the Bank’s requests for information concerning such properties, books and records.

7.22         Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement.

	

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8.             DEFAULT AND REMEDIES

If any of the following events of default occurs, the Bank may do one or more of the following: declare
the Borrower in default, stop making any additional credit available to the Borrower, and require
the Borrower to repay its entire debt immediately and without prior notice. If an event which, with
notice or the passage of time, will constitute an event of default has occurred and is continuing,
the Bank has no obligation to make advances or extend additional credit under this Agreement. In
addition, if any event of default occurs, the Bank shall have all rights, powers and remedies available
under any instruments and agreements required by or executed in connection with this Agreement, as
well as all rights and remedies available at law or in equity. If an event of default occurs under
the paragraph entitled “Bankruptcy,” below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due immediately. 

8.1           Failure to Pay. The Borrower fails to make a payment under this Agreement when due.

8.2           Other Bank Agreements. Any default occurs under any other agreement the Borrower (or any Obligor) or any of the Borrower’s
related entities or affiliates has with the Bank or any affiliate of the Bank. For purposes of this
Agreement, “Obligor” shall mean any guarantor, any party pledging collateral to the Bank,
or, if the Borrower is comprised of the trustees of a trust, any trustor. If, in the Bank’s
opinion, the breach is capable of being remedied, the breach will not be considered an event of default
under this Agreement for a period of thirty (30) days after the date on which the Bank gives written
notice of the breach to the Borrower. 

8.3           Cross-default. Any default occurs under any agreement in connection with any credit the Borrower (or any Obligor)
or any of the Borrower’s related entities or affiliates has obtained from anyone else or which
the Borrower (or any Obligor) or any of the Borrower’s related entities or affiliates has guaranteed
if the default is not cured within thirty (30) days.. 

8.4           False Information. The Borrower or any Obligor has given the Bank false or misleading information or representations.

8.5           Bankruptcy. The Borrower, any Obligor, or any general partner of the Borrower or of any Obligor files a bankruptcy
petition, a bankruptcy petition is filed against any of the foregoing parties, or the Borrower, any
Obligor, or any general partner of the Borrower or of any Obligor makes a general assignment for
the benefit of creditors.

8.6           Receivers. A receiver or similar official is appointed for a substantial portion of the Borrower’s or any
Obligor’s business, or the business is terminated, or, if any Obligor is anything other than
a natural person, such Obligor is liquidated or dissolved.

8.7           Judgments. Any judgments or arbitration awards are entered against the Borrower or any Obligor, or the Borrower
or any Obligor enters into any settlement agreements with respect to any litigation or arbitration,
in an aggregate amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) or
more in excess of any insurance coverage.

8.8           Material Adverse Change. A material adverse change occurs, or is reasonably likely to occur, in the Borrower’s (or any
Obligor’s) business condition (financial or otherwise), operations, properties or prospects,
or ability to repay the credit; or the Bank determines that it is insecure for any other reason.

8.9           Government Action. Any government authority takes action that the Bank believes materially adversely affects the Borrower’s
or any Obligor’s financial condition or ability to repay.

8.10         Default under Related Documents. Any default occurs under any guaranty, subordination agreement, security agreement, deed of trust,
mortgage, or other document required by or delivered in connection with this Agreement or any such
document is no longer in effect, or any guarantor purports to revoke or disavow the guaranty.

8.11         ERISA Plans. Any one or more of the following events occurs with respect to a Plan of the Borrower subject to
Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of
the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower:

(a)           A reportable event shall occur
under Section 4043(c) of ERISA with respect to a Plan.

	 

	(b)	Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal
from a Plan by the Borrower or any ERISA Affiliate.

	

10

	
8.12         Other Breach Under Agreement. A default occurs under any other term or condition of this Agreement not specifically referred to
in this Article. This includes any failure or anticipated failure by the Borrower (or any other party
named in the Covenants section) to comply with the financial covenants set forth in this Agreement,
whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known
to the Borrower or the Bank. If, in the Bank’s opinion, the breach is capable of being remedied,
the breach will not be considered an event of default under this Agreement for a period of thirty
(30) days after the date on which the Bank gives written notice of the breach to the Borrower. 

9.             ENFORCING THIS AGREEMENT;
MISCELLANEOUS

9.1           GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and
all financial covenants will be made under generally accepted accounting principles, consistently
applied.

9.2           Washington Law. This Agreement is governed by Washington state law. 

9.3           Successors and Assigns. This Agreement is binding on the Borrower’s and the Bank’s successors and assignees. The
Borrower agrees that it may not assign this Agreement without the Bank’s prior consent. The
Bank may sell participations in or assign this loan, and may exchange financial information about
the Borrower with actual or potential participants or assignees. If a participation is sold or the
loan is assigned, the purchaser will have the right of set-off against the Borrower.

9.4           Arbitration and Waiver of Jury Trial

	 

	(a)	This paragraph concerns the resolution of any controversies or claims between the parties, whether
arising in contract, tort or by statute, including but not limited to controversies or claims that
arise out of or relate to: (i) this agreement (including any renewals, extensions or modifications);
or (ii) any document related to this agreement (collectively a “Claim”). For the purposes
of this arbitration provision only, the term “parties” shall include any parent corporation,
subsidiary or affiliate of the Bank involved in the servicing, management or administration of any
obligation described or evidenced by this agreement.
		 
	(b)	At the request of any party to this agreement, any Claim shall be resolved by binding arbitration in
accordance with the Federal Arbitration Act (Title 9, U. S. Code) (the “Act”). The Act
will apply even though this agreement provides that it is governed by the law of a specified state.
		 
	(c)	Arbitration proceedings will be determined in accordance with the Act, the applicable rules and procedures
for the arbitration of disputes of JAMS or any successor thereof (“JAMS”), and the terms
of this paragraph. In the event of any inconsistency, the terms of this paragraph shall control.
		 
	(d)	The arbitration shall be administered by JAMS and conducted, unless otherwise required by law, in any
U. S. state where real or tangible personal property collateral for this credit is located or if
there is no such collateral, in the state specified in the governing law section of this agreement.
All Claims shall be determined by one arbitrator; however, if Claims exceed Five Million Dollars
($5,000,000), upon the request of any party, the Claims shall be decided by three arbitrators. All
arbitration hearings shall commence within ninety (90) days of the demand for arbitration and close
within ninety (90) days of commencement and the award of the arbitrator(s) shall be issued within
thirty (30) days of the close of the hearing. However, the arbitrator(s), upon a showing of good
cause, may extend the commencement of the hearing for up to an additional sixty (60) days. The arbitrator(s)
shall provide a concise written statement of reasons for the award. The arbitration award may be
submitted to any court having jurisdiction to be confirmed and enforced.
		 
	(e)	The arbitrator(s) will have the authority to decide whether any Claim is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis. For purposes of the application of the statute
of limitations, the service on JAMS under applicable JAMS rules of a notice of Claim is the equivalent
of the filing of a lawsuit. Any dispute concerning this arbitration provision or whether a Claim
is arbitrable shall be determined by the arbitrator(s). The arbitrator(s) shall have the power to
award legal fees pursuant to the terms of this agreement.

	

11

	(f)	This paragraph does not limit the right of any party to: (i) exercise self-help remedies, such as but
not limited to, setoff; (ii) initiate judicial or non-judicial foreclosure against any real or personal
property collateral; (iii) exercise any judicial or power of sale rights, or (iv) act in a court
of law to obtain an interim remedy, such as but not limited to, injunctive relief, writ of possession
or appointment of a receiver, or additional or supplementary remedies.
		 
	(g)	The filing of a court action is not intended to constitute a waiver of the right of any party, including
the suing party, thereafter to require submittal of the Claim to arbitration.
		 
	(h)	By agreeing to binding arbitration, the parties irrevocably and voluntarily waive any right they may
have to a trial by jury in respect of any Claim. Furthermore, without intending in any way to limit
this agreement to arbitrate, to the extent any Claim is not arbitrated, the parties irrevocably and
voluntarily waive any right they may have to a trial by jury in respect of such Claim. This provision
is a material inducement for the parties entering into this agreement.

	 
	
9.5           Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The
Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be in writing.

9.6           Attorneys’ Fees. The Borrower shall reimburse the Bank for any reasonable costs and attorneys’ fees incurred
by the Bank in connection with the enforcement or preservation of any rights or remedies under this
Agreement and any other documents executed in connection with this Agreement, and in connection with
any amendment, waiver, “workout” or restructuring under this Agreement. In the event of
a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable
attorneys’ fees incurred in connection with the lawsuit or arbitration proceeding, as determined
by the court or arbitrator. In the event that any case is commenced by or against the Borrower under
the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank
is entitled to recover costs and reasonable attorneys’ fees incurred by the Bank related to
the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in
this paragraph, “attorneys’ fees” includes the allocated costs of the Bank’s in-house counsel.

9.7           Intentionally omitted.   

9.8           One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively:

	 

	(a)	represent the sum of the understandings and agreements between the Bank and the Borrower concerning
this credit;
		 
	(b)	replace any prior oral or written agreements between the Bank and the Borrower concerning this credit;
and
		 
	(c)	are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms
agreed to by them.

	 
	
In the event of any conflict between this Agreement and any other agreements required by this Agreement,
this Agreement will prevail. Any reference in any related document to a “promissory note”
or a “note” executed by the Borrower and dated as of the date of this Agreement shall be
deemed to refer to this Agreement, as now in effect or as hereafter amended, renewed, or restated.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT
OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

9.9           Indemnification. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments,
and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or
any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower
hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any
such document, or any such credit. This indemnity includes but is not limited to attorneys’
fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower’s obligations to the Bank.
All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately
without demand.

	

12

	
9.10         Notices.  Unless otherwise provided in this Agreement or in another agreement between the Bank and the Borrower,
all notices required under this Agreement shall be personally delivered or sent by first class mail,
postage prepaid, or by overnight courier, to the addresses on the signature page of this Agreement,
or sent by facsimile to the fax numbers listed on the signature page, or to such other addresses
as the Bank and the Borrower may specify from time to time in writing. Notices and other communications
shall be effective (i) if mailed, upon the earlier of receipt or five (5) days after deposit in the
U.S. mail, first class, postage prepaid, (ii) if telecopied, when transmitted, or (iii) if hand-delivered,
by courier or otherwise (including telegram, lettergram or mailgram), when delivered.

9.11         Headings.  Article and paragraph headings are for reference only and shall not affect the interpretation or
meaning of any provisions of this Agreement.

9.12         Counterparts.  This Agreement may be executed in as many counterparts as necessary or convenient, and by the different
parties on separate counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.

This Agreement is executed as of the date stated at the top of the first page.

	 

	Borrower:	 	Bank:
	 	 	 
	Pope Resources, A Delaware Limited Partnership	 	Bank of America, N.A.
	 	 	 
	By: Pope MGP, Inc., Managing General Partner	 	 
	 	 	 
	By:	 	By:
	
	 	

	Thomas M. Ringo, Vice President & CFO	 	Officer Name and Title
	 	 	 
	 	 	 
	Address where notices to the Borrower are to be sent:	 	Address where notices to the Bank are to be sent:
	 	 	 
	Pope Resources, A Delaware Limited Partnership	 	Bank of America, N.A.
	19245 10th Avenue Northeast	 	800 Fifth Avenue, Floor 13, WA1-501-13-30
	Poulsbo, WA  98370	 	Seattle, WA  98104
	Telephone: 360-394-0520	 	Telephone: 206-358-8549
	Facsimile: 360-697-1476	 	Facsimile: 206-585-5641
	
	 	

	

13

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