Document:

passco_s11-ex1003.htm

    
      
        

      
Exhibit 10.3

    

    

    

    

    AMENDED
AND RESTATED

    LIMITED
PARTNERSHIP AGREEMENT

    

    OF

    

    PASSCO
APARTMENT REIT OPERATING PARTNERSHIP, LP

    A
DELAWARE LIMITED PARTNERSHIP

    

    

    
 

    

    October
1, 2009

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    TABLE OF
CONTENTS

     

    
      
        	 	 	Page
	 	 	 
	SECTION
      1 	DEFINED
      TERMS  	1
	 	 	 
	SECTION
      2 	PARTNERSHIP
      FORMATION AND IDENTIFICATION  	8
	2.1	Formation 
      	8
	2.2	Name, Office and
      Registered Agent 	8
	2.3	Partners	8
	2.4	Term and
      Dissolution	8
	2.5	Filing of
      Certificate and Perfection of Limited Partnership 	9
	 	 	 
	SECTION 3 	BUSINESS OF THE
      PARTNERSHIP 	9
	 	 	 
	SECTION 4 	CAPITAL
      CONTRIBUTIONS AND ACCOUNTS  	9
	4.1	Capital
      Contributions 	9
	4.2	Additional Capital
      Contributions and Issuances of Additional Partnership Interests	9
	4.3	Additional
      Funding	11
	4.4	Capital
      Accounts 	11
	4.5	Percentage
      Interests	11
	4.6	No Interest on
      Contributions	11
	4.7	Return of Capital
      Contributions	12
	4.8	No Third Party
      Beneficiary  	12
	 	 	 
	SECTION 5	PROFITS AND LOSSES;
      DISTRIBUTIONS 	12
	5.1	Allocation of Profit
      and Loss	12
	5.2	Distribution of
      Cash	14
	5.3	REIT Distribution
      Requirements	15
	5.4	No Right to
      Distributions in Kind 	15
	5.5	Limitations on
      Return of Capital Contributions  	15
	5.6	Distributions Upon
      Liquidation	16
	5.7	Substantial Economic
      Effect 	16
	 	 	 
	SECTION 6 	RIGHTS, OBLIGATIONS
      AND POWERS OF THE GENERAL PARTNER   	16
	6.1	Management of the
      Partnership	16
	6.2	Delegation of
      Authority	19
	6.3	Indemnification and
      Exculpation of Indemnitees	19
	6.4	Liability of the
      General Partner	20
	6.5	Reimbursement of
      General Partner	21
	6.6	Outside
      Activities	22
	6.7	Employment or
      Retention of Affiliates	22
	6.8	General Partner
      Participation  	22
	6.9	Title to Partnership
      Assets 	23
	6.10	Miscellaneous 	23
	6.11	No Duplication of
      Fees or Expenses 	23
	 	 	 
	SECTION 7 	CHANGES IN GENERAL
      PARTNER   	23
	7.1	Transfer of the
      General Partner’s Partnership Interest	23
	7.2	Admission of a
      Substitute or Additional General Partner	25
	7.3	Effect of
      Bankruptcy, Withdrawal, Death or Dissolution of a General
Partner	25

         

        
          
            
            

          

          
            (i)

            
              

            

          

          
            
            

          

        

         

        
          	7.4	Removal of a General
      Partner	26
	 	 	 
	SECTION 8 	
                  RIGHTS AND OBLIGATIONS OF THE LIMITED
      PARTNERS  

                	26
	8.1	Management of the
      Partnership	26
	8.2	Power of
      Attorney 	27
	8.3	Limitation on
      Liability of Limited Partners	27
	8.4	Ownership by Limited
      Partner of Corporate General Partner or Affiliate	27
	8.5	Redemption of
      Special Partnership Units	27
	 	 	 
	SECTION 9 	TRANSFERS OF LIMITED
      PARTNERSHIP INTERESTS 	28
	9.1	Purchase for
      Investment 	28
	9.2	Restrictions on
      Transfer of Limited Partnership Interests	28
	9.3	Admission of
      Substitute Limited Partner	29
	9.4	Rights of Assignees
      of Partnership Interests	30
	9.5	Effect of
      Bankruptcy, Death, Incompetence or Termination of a Limited Partner 
      	30
	9.6	Joint Ownership of
      Interests 	30
	 	 	 
	SECTION 10 	BOOKS AND RECORDS;
      ACCOUNTING; TAX MATTERS 	31
	10.1	Books and
      Records	31
	10.2	Custody of
      Partnership Funds; Bank Accounts	31
	10.3	Fiscal and Taxable
      Year 	31
	10.4	Annual Tax
      Information and Report 	31
	10.5	Tax Matters Partner;
      Tax Elections; Special Basis Adjustments	31
	10.6	Reports to Limited
      Partners	32
	 	 	 
	SECTION 11 	AMENDMENT OF
      AGREEMENT; MERGER 	32
	 	 	 
	SECTION 12 	GENERAL
      PROVISIONS 	33
	12.1	Notices	33
	12.2	Survival of
      Rights  	33
	12.3	Additional
      Documents 	33
	12.4	Severability 
      	33
	12.5	Entire
      Agreement  	33
	12.6	Pronouns and
      Plurals  	33
	12.7	Headings 	33
	12.8	Counterparts 
      	33
	12.9	Governing
    Law	33

        

      

    

    
       

    

    EXHIBIT

    

    EXHIBIT A
— Partners, Capital Contributions and Percentage Interests or Special Percentage
Interests

     

    
      
        
        

      

      
        (ii)

        
          

        

      

      
        
        

      

    

    
AMENDED
AND RESTATED

    LIMITED
PARTNERSHIP AGREEMENT OF

    PASSCO
APARTMENT REIT OPERATING PARTNERSHIP, LP

     

    RECITALS

    

    This
Amended and Restated Limited Partnership Agreement (this “Agreement”) is entered
into as of October 1, 2009 between Passco Apartment REIT, Inc., a Maryland
corporation (the “General Partner”) and the Original Limited Partner set forth
on Exhibit A.  Capitalized terms used herein but not otherwise
defined shall have the meanings given them in Section 1.

     

    AGREEMENT

    

    WHEREAS,
the parties wish to amend and restate the original Limited Partnership Agreement
dated June 8, 2009;

     

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

     

    SECTION 1

    DEFINED
TERMS

     

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

     

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

     

    “Additional
Funds” has the meaning set forth in Section 4.3.

     

    “Additional
Securities” means any additional REIT Shares (other than REIT Shares issued
pursuant to a dividend reinvestment plan of the General Partner) or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase REIT Shares, as set forth in
Section 4.2(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, 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 (other than this Partnership)
that are owned by the General Partner directly.

     

    “Advisor”
means the Person (or Persons), if any, appointed, employed or contracted with by
the General Partner and responsible for directing or performing the day-to-day
business affairs of the General Partner, including any Person to whom the
Advisor subcontracts all or substantially all of such functions.

     

    
      
        
        

      

      
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    “Advisory
Agreement” means the agreement between the General Partner, the Partnership and
the Advisor pursuant to which the Advisor will direct or perform the day-to-day
business affairs of the General Partner.

     

    “Affiliate”
means, with respect to any Person, (i) any Person directly or indirectly,
owning, controlling or holding with the power to vote 10% of 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.

     

    “Agreement”
means this Limited Partnership Agreement, as amended or restated from time to
time, as the context requires.

     

    “Appraised
Value” means the fair market value of the assets (excluding any assets which may
be readily marked to market) of the Partnership as determined by an appraisal
made by an independent appraiser.

     

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

     

    “Capital
Account” has the meaning provided in Section 4.4.

     

    “Capital
Contribution” means the total amount of cash contributed to the Partnership by
each Partner pursuant to the terms of this 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.

     

    “Carrying
Value” means, with respect to any asset of the Partnership, the asset’s adjusted
net basis for federal income tax purposes or, in the case of any asset
contributed to the Partnership, the fair market value of such asset at the time
of contribution, reduced by any amounts attributable to the inclusion of
liabilities in basis pursuant to Section 752 of the Code, except that the
Carrying Values of all assets may, at the discretion of the General Partner, be
adjusted to equal their respective fair market values (as determined by the
General Partner), in accordance with the rules set forth in Regulations
Section 1.704-1(b)(2)(iv)(f), as provided for in
Section 4.4.  In the case of any asset of the Partnership that
has a Carrying Value that differs from its adjusted tax basis, the Carrying
Value shall be adjusted by the amount of depreciation, depletion and
amortization calculated for purposes of the definition of Profit and Loss rather
than the amount of depreciation, depletion and amortization determined for
federal income tax purposes.

     

    “Certificate”
means any instrument or document that is required under the laws of the State of
Delaware, or any other jurisdiction in which the Partnership conducts business,
to be signed 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 8.2) and filed for recording in the appropriate public offices
within the State of Delaware or such other jurisdiction to perfect or maintain
the Partnership as a limited partnership, to effect the admission, withdrawal,
or substitution of any Partner of the Partnership, or to protect the limited
liability of the Limited Partners as limited partners under the laws of the
State of Delaware 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 United States Securities and Exchange Commission.

     

    
      
        
        

      

      
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    “Conversion
Factor” means 1.0, provided that in the event that the General Partner
(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 General
Partner shall become General Partner pursuant to any merger, consolidation or
combination of the General Partner 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.

     

    “Director”
shall have the meaning set forth in the Articles of
Incorporation.

     

    “Event of
Bankruptcy” as to any Person means 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); insolvency or bankruptcy of
such Person as finally determined by a court proceeding; 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;
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.

     

    “General
Partner” means Passco Apartment REIT, Inc., a Maryland corporation, and any
Person who becomes a substitute or additional General Partner as provided
herein, and any successor General Partner.

     

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

     

    “Indemnitee”
means (i) any Person made a party to a proceeding by reason of its status
as the General Partner or a director, officer or employee of the General Partner
or the Partnership, (ii) the Advisor or a director, officer, employee of
the Advisor or another agent of the Advisor if such agent is an affiliate of the
Advisor, and (iii) 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
Directors” shall have the meaning set forth in the Articles of
Incorporation.

     

    “Joint
Venture” means any joint venture or partnership (including a limited liability
company) arrangement in which the Partnership is a co-venturer or partner (or
member or manager) which is established to acquire Property.

     

    
      
        
        

      

      
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    “Limited
Partner” means the Original Limited Partner and any Person named as a Limited
Partner on Exhibit A, as such Exhibit may be amended from time to
time, and any Person who becomes a Substitute 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.

     

    “Listing”
means the listing of the shares of the General Partner’s stock on (i) the
New York Stock Exchange, the American Stock Exchange, or the Global Market
and the Global Select Market of the Nasdaq Stock Market (or any successor to
such entities) or (ii) a national securities exchange (or tier or segment
thereof) that has listing standards that the Commission has determined by rule
are substantially similar to the listing standards applicable to securities
described in Section 18(b)(1)(A) of the Securities Act.

     

    “Loss”
has the meaning provided in Section 5.1(g).

     

    “Mortgages”
means, in connection with any mortgage financing provided, invested in,
participated in or purchased by the Partnership, all of the notes, deeds of
trust, mortgages, security interests or other evidences of indebtedness or
obligations, which are secured by or, collateralized by, or applicable to any
Real Estate Related Assets owned by the borrowers under such notes, deeds of
trust, mortgages, security interests or other evidences of indebtedness or
obligations.

     

    “Net
Sales Proceeds” means (i) in the case of a transaction described in clause
(A)(i) of the definition of Sale, the proceeds of any such transaction less
the amount of selling expenses incurred by or on behalf of the Partnership,
including all real estate commissions, closing costs and legal fees and
expenses; (ii) in the case of a transaction described in clause
(A)(ii) of the definition of Sale, the proceeds of any such transaction
less the amount of selling expenses incurred by or on behalf of the Partnership,
including any legal fees and expenses and other selling expenses incurred in
connection with such transaction; (iii) in the case of a transaction
described in clause (A)(iii) of the definition of Sale, the proceeds of any
such transaction actually distributed to the Partnership from the Joint Venture
or Subsidiary less the amount of any selling expenses (including legal fees)
incurred by or on behalf of the Partnership (other than those paid by the Joint
Venture or Subsidiary); (iv) in the case of a transaction described in
clause (A)(iv) of the definition of Sale, the proceeds of any such
transaction (including the aggregate of all payments under a Mortgage on or in
satisfaction thereof other than regularly schedule interest payments) less the
amount of selling expenses incurred by or on behalf of the Partnership,
including all commissions, closing costs and legal fees and expenses;
(v) in the case of a transaction described in clause (A)(v) of the
definition of Sale, the proceeds of any such transaction less the amount of
selling expenses incurred by or on behalf of the Partnership, including any
legal fees and expenses and other selling expenses incurred in connection with
such transaction; and (vi) in the case of a transaction described in clause
(B) of the definition of Sale, the proceeds of such transaction or series
of transactions less all amounts generated thereby which are reinvested in one
or more assets as described in clause (B) of the definition of Sale within
180 days thereafter and less the amount of any real estate commissions, closing
costs, and legal fees and expenses and other selling expenses incurred by or
allocated to the Partnership in connection with such transaction or series of
transactions.  Net Sale Proceeds shall also include any amounts that
the General Partner determines, in its discretion, to be economically equivalent
to the proceeds of a Sale.  Net Sales Proceeds shall not include any
reserves established by the Partnership in its sole discretion.

     

    “Nonrecourse
Liability” shall have the meaning set forth in Regulations
Section 1.704-2(b)(3).

     

    “Offer”
has the meaning set forth in Section 7.1(b)(ii).

     

    
      
        
        

      

      
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    “OP
Unitholders” means all holders of Partnership Interests other than the Special
OP Unitholders.

     

    “Original
Limited Partner” means the Limited Partner designated as “Original Limited
Partner” on Exhibit A.

     

    “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).

     

    “Partnership”
means Passco Apartment REIT Operating Partnership, LP, a Delaware 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 and shall be determined as set forth in
Regulations Section 1.704-2(d).   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 5.2, 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, excluding the Partnership Interests represented by
Special Partnership Units.  The allocation of Partnership Units among
the Partners shall be as set forth on Exhibit A, as such Exhibit may
be amended from time to time.

     

    “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 total number of Partnership Units.  The Percentage
Interest of each Partner shall be as set forth on Exhibit A, as such
Exhibit may be amended from time to time.

     

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

     

    “Profit”
has the meaning provided in Section 5.1(g).

     

    “Property”
means any Real Estate Related Asset, or other investment in which the
Partnership holds an ownership interest.

     

    “Real
Estate Related Assets” means unimproved and improved Real Estate, real estate –
related assets and any direct or indirect interest therein, including, without
limitation, fee or leasehold interests, options, leases, partnership and joint
venture interests, equity and debt securities of entities that own real estate,
first or second mortgages on Real Estate, mezzanine loans secured by junior
liens on Real Estate, preferred equity interests secured by a property owner’s
interest in Real Estate and other contractual rights in real
estate.

     

    
      
        
        

      

      
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    “Real
Estate” means (i) the real properties, including the buildings located
thereon, or (ii) the real properties only, or (iii) the buildings
only, which are acquired by the Partnership, either directly or through joint
venture arrangements or other partnerships.

     

    “Regulations”
means the Federal income tax regulations promulgated 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.

     

    “Regulatory
Allocations” has the meaning set forth in Section 5.1(h).

     

    “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 General Partner and any
Subsidiaries thereof (which Subsidiaries shall, for purposes of this Agreement,
be included within the definition of General Partner), including taxes, fees and
assessments associated therewith, any and all costs, expenses or fees payable to
any director, officer, or employee of the General Partner, (ii) costs and
expenses relating to any public offering and registration of securities by the
General Partner and all statements, reports, fees and expenses 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 General Partner,
(iv) costs and expenses associated with the preparation and filing of any
periodic or other reports and communications by the General Partner under
federal, state or local laws or regulations, including filings with the
Commission, (v) costs and expenses associated with compliance by the
General Partner 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
General Partner, (vii) costs and expenses incurred by the General Partner
relating to any issuance or redemption of REIT Shares, and (viii) all other
operating or administrative costs of the General Partner 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 General Partner (or successor
entity, as the case may be).

     

    “Sale”
means (A) any transaction or series of transactions whereby: (i) the
Partnership directly or indirectly (except as described in other subsections of
this definition) sells, grants, transfers, conveys, or relinquishes its
ownership of any Property or portion thereof, including the lease of any
Property consisting of the 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 of the
interest of the Partnership in any Joint Venture or Subsidiary; (iii) any
Joint Venture or Subsidiary, directly or indirectly (except as described in
other subsections of this definition) in which the Partnership is a co-venturer,
partner, owner, member or stockholder, 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 any other subsections
of this definition) sells, grants, transfers, conveys, or relinquishes its
ownership of any other Property, Mortgage or other investment owned by the
Partnership, directly or indirectly through one or more of its Affiliates, and
any other investment made, directly or indirectly through one of more of its
Affiliates, not previously described in this definition of any portion thereof,
but (B) not including any transaction or series of transactions specified
in clause (A) (i) through (v) above in which the proceeds of such
transaction or series of transactions are reinvested by the Partnership in one
or more such assets within 180 days thereafter.

     

    
      
        
        

      

      
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    “Securities
Act” means the Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder.

     

    “Special
OP Unitholder” means the holder of the Special Partnership Units.

     

    “Special
Partnership Unit” means a unit of a series of Partnership Interests, designated
as Special Partnership Units, issued pursuant to
Section 4.1.  The number of Special Partnership Units outstanding
and the Special Percentage Interests in the Partnership represented by such
Special Partnership Units are set forth on Exhibit A, as such
Exhibit may be amended from time to time.  A holder of a Special
Partnership Unit shall have the same rights and preferences as a holder of a
Partnership Unit under this Agreement that is a Limited Partner except as set
forth in Sections 5.2(b) and 7.1(b).

     

    “Special
Percentage Interest” shall mean the percentage ownership interest in the
Partnership of each Special OP Unitholder, as determined by dividing the Special
Partnership Units owned by each Special OP Unitholder by the total number of
Special Partnership Units then outstanding.  The Special Percentage
Interest of each Partner shall be as set forth on Exhibit A, as such
Exhibit may be amended from time to time.

     

    “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) of which
the partnership interests therein are owned by the General Partner or a direct
or indirect Subsidiary of the General Partner.

     

    “Substitute
Limited Partner” means any Person admitted to the Partnership as a Limited
Partner pursuant to Section 9.3.

     

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

     

    “Surviving
General Partner” has the meaning set forth in Section 7.1(c).

     

    “Tax
Matters Partner” has the meaning described in Section 10.5(a).

     

    “Termination
Event” means the termination or nonrenewal of the Advisory Agreement (i) in
connection with a merger, sale of assets or transaction involving the General
Partner pursuant to which a majority of the directors of the General Partner
then in office are replaced or removed, (ii) by the Advisor for “good
reason” (as defined in the Advisory Agreement) or (iii) by the General
Partner other than for “cause” (as defined in the Advisory
Agreement).

     

    “Transaction”
has the meaning set forth in Section 7.1(b).

     

    “Transfer”
has the meaning set forth in Section 9.2(a).

     

    
      
        
        

      

      
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    SECTION 2

    PARTNERSHIP
FORMATION AND IDENTIFICATION

     

    2.1   Formation.  The
Partnership was formed as a limited partnership pursuant to the Act and all
other pertinent laws of the State of Delaware, for the purposes and upon the
terms and conditions set forth in this Agreement.

     

    2.2   Name, Office and Registered
Agent.  The
name of the Partnership is Passco Apartment REIT Operating Partnership,
LP  The specified office and place of business of the Partnership
shall be 96 Corporate Park, Suite 200, Irvine, California
92606.  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 Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, Delaware 19808.  The sole duty of the registered agent as
such is to forward to the Partnership any notice that is served on him as
registered agent.

     

    2.3   Partners.

     

    (a)   The
General Partner of the Partnership is Passco Apartment REIT, Inc., a Maryland
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 on
Exhibit A hereto, as amended from time to time.

     

    2.4   Term and
Dissolution.

     

    (a)   The term
of the Partnership shall continue in full force and effect until
December 31, 2099, except that the Partnership shall be dissolved earlier
upon the first to occur of any of the following 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 7.3(b); provided that if a
General 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, 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);
or

     

    (iii)   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 7.3(b)), the General Partner (or its trustee,
receiver, successor or legal representative) shall amend or cancel any
Certificate(s) and liquidate the Partnership’s assets and apply and
distribute the proceeds thereof in accordance with
Section 5.6.  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.

     

    
      
        
        

      

      
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    2.5   Filing of Certificate and
Perfection of Limited Partnership.  The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, any and all amendments to the Certificate(s) 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.

     

    SECTION 3

    BUSINESS
OF THE PARTNERSHIP

     

    The
purpose and nature of the business to be conducted by the Partnership is
(i) 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, and in a manner such that the General
Partner will not be subject to any taxes under Section 857 or 4981 of the Code,
unless the General Partner otherwise ceases to qualify as a REIT, (ii) 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 (iii) to do anything necessary or incidental to
the foregoing.  In connection with the foregoing, and without limiting
the General Partner’s right in its sole and absolute discretion to qualify or
cease qualifying as a REIT, the Partners acknowledge that the General Partner
intends to qualify as a REIT for federal income tax purposes and that upon such
qualification, the avoidance of income and excise taxes on the General Partner
inures to the benefit of all the Partners and not solely to the General
Partner.  Notwithstanding the foregoing, the Limited Partners agree
that the General Partner may terminate its status as a REIT under the Code at
any time to the full extent permitted under the Articles of
Incorporation.  The General Partner shall also 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.

     

    SECTION 4

    CAPITAL
CONTRIBUTIONS AND ACCOUNTS

     

    4.1   Capital
Contributions.  The
General Partner and the Original Limited Partner have made capital contributions
to the Partnership in exchange for the Partnership Interests set forth opposite
their names on Exhibit A, as such Exhibit may be amended from time to
time.  The General Partners shall have the power and authority to
amend Exhibit A to reflect the issuance, redemption, exchange or other
change in any Partnership Interest.

     

    4.2   Additional Capital
Contributions and Issuances of Additional Partnership
Interests.  Except
as provided in this Section 4.2 or in Section 4.3, the Partners shall
have no right 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 in this
Section 4.2.

     

    (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 to the General
Partner in its sole discretion; provided, however, that no additional
Partnership Interests shall be issued to the General Partner
unless:

     

    
      
        
        

      

      
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    (1)   (A) the
additional Partnership Interests are issued in connection with an issuance of
REIT Shares or other interests in the General Partner, 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 by
the Partnership in accordance with this Section 4.2 and (B) the
General Partner shall make a Capital Contribution to the Partnership in an
amount equal to the proceeds raised in connection with the issuance of such
shares of stock of or other interests in the General Partner; or

     

    (2)   the
additional Partnership Interests are issued in exchange for property owned by
the General Partner with a fair market value, as determined by the General
Partner, in good faith, equal to the value of the Partnership
Interests.

     

    Notwithstanding
the above, no amendment to the allocations, distributions and other rights of
the Special Partnership Unit shall be made without the consent of the Special OP
Unitholder and the Independent Directors.

     

    In the
event that the Partnership issues Partnership Interests pursuant to this
Section 4.2, the General Partner shall make such revisions to this
Agreement (without any requirement of receiving approval of the Limited
Partners) as it deems necessary to reflect the issuance of such additional
Partnership Interests and any special rights, powers, and duties associated
therewith.

     

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

     

    (ii)   Upon Issuance of Additional
Securities.  The General Partner shall not issue any Additional
Securities other than to all holders of REIT Shares, unless (A) the General
Partner shall cause the Partnership to issue to the General Partner, 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
General Partner contributes the net proceeds from the issuance of such
Additional Securities and from any exercise of rights contained in such
Additional Securities, directly and through the General Partner, to the
Partnership; provided, however, that the General Partner is allowed to issue
Additional Securities in connection with an acquisition of Property 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 General Partner and the Partnership by a majority of the
Independent Directors.  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
corresponding Partnership Interests, so long as (x) the General Partner
concludes in good faith that such issuance is in the best interests of the
General Partner 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 (y) the General Partner
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 General Partner shall make Capital
Contributions to the Partnership of the proceeds therefrom, provided that if the
proceeds actually received and contributed by the General Partner 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 (or as
a result of sales net of commission or volume discounts), then the General
Partner 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 6.5 and in connection with the required issuance of additional
Partnership Units to the General Partner for such Capital Contributions pursuant
to Section 4.2(a).

     

    
      
        
        

      

      
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    4.3   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 (i) cause the Partnership
to obtain such funds from outside borrowings, or (ii) elect to have the
General Partner or any of its Affiliates provide such Additional Funds to the
Partnership through loans or otherwise, provided, however, that the Partnership
may not borrow money from its Affiliates, unless a majority of the Directors of
the General Partner (including a majority of Independent Directors) not
otherwise interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and no less favorable to the
Partnership than loans between unaffiliated parties under the same
circumstances.

     

    4.4   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 (i) a new or existing Partner
acquires an additional Partnership Interest in exchange for more than a de
minimis Capital Contribution, (ii) the Partnership distributes to a Partner
more than a de minimis amount of Partnership property or money  as consideration for
the redemption of a Partnership Interest, or (iii) 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 1.704-1(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 5.1 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.

     

    4.5   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 effective 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 4.4.  If the Partners’ Percentage Interests are adjusted
pursuant to this Section 4.5, the Profit and Loss for the taxable year in
which the adjustment occurs shall be allocated between the part of the year
ending on the day when the Partner’s Partnership Interest is adjusted by the
General Partner and the part of the year beginning on the following day either
(i) as if the taxable year had ended on the date of the adjustment or
(ii) based on the number of days in each part.  The General
Partner, in its sole and absolute discretion, shall determine which method shall
be used to allocate Profit and Loss for the taxable year in which an adjustment
occurs.  The allocation of Profits and Losses for the earlier part of
the year shall be based on the Percentage Interests before adjustment, and the
allocation of Profits and Losses for the later part shall be based on the
adjusted Percentage Interests.

     

    4.6   No Interest on
Contributions.  No
Partner shall be entitled to interest on its Capital Contribution.

     

    
      
        
        

      

      
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    4.7   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.

     

    4.8   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.

     

    SECTION 5

    PROFITS
AND LOSSES; DISTRIBUTIONS

     

    5.1   Allocation of Profit and
Loss.

     

    (a)   General.  Subject
to any special allocation made pursuant to this Section 5, Profit and Loss
(or items thereof) of the Partnership for each fiscal year or other applicable
period of the Partnership shall be allocated among the OP Unitholders in
accordance with their Percentage Interests.

     

    (b)   Special Allocation with
Respect to Sales.  The items of Profit and Loss of the
Partnership for each fiscal year or other applicable period from Sales shall be
allocated among the Partners in a manner that will, as nearly as possible (after
giving effect to the allocations under Section 5.1(a), 5.1(c) and
5.1(d), cause the Capital Account balance of each Partner at the end of such
fiscal year or other applicable period to equal (i) the amount of the
hypothetical distribution that such Partner would receive if the Partnership
were liquidated on the last day of such period and all assets of the
Partnership, including cash, were sold for cash equal to their Carrying Value,
taking into account any adjustments thereto for such period, all liabilities of
the Partnership were satisfied in full in cash according to their terms (limited
with respect to each Nonrecourse Liability to the Carrying Value of the assets
securing such liability) and Net Sales Proceeds (after satisfaction of such
liabilities) were distributed in full pursuant to Section 5.2(b)(i), minus
(ii) the sum of such Partner’s share of Partnership Minimum Gain and
Partner Nonrecourse Debt Minimum Gain and the amount, if any and without
duplication, that the Partner would be obligated to contribute to the capital of
the Partnership, all computed as of the date of the hypothetical sale of
assets.

     

    
      
        
        

      

      
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    (c)   Nonrecourse Deductions;
Minimum Gain Chargeback.  Notwithstanding any provision to the
contrary in this Agreement, (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” with respect to the liability to which
such deductions are attributable 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 excess nonrecourse liabilities of the Partnership within the
meaning of Regulations Section 1.752-3(a)(3) shall be such Partner’s
Percentage Interest.

     

    (d)   Qualified Income
Offset.  If a Partner unexpectedly 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 balance as quickly as possible as provided in Regulations
Section 1.704-1(b)(2)(ii)(d).  This Section 5.1(d) is
intended to constitute a “qualified income offset” under Regulations
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.  After the occurrence of an allocation of income or gain to
a Partner in accordance with this Section 5.1(d), 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 5.1(d).

     

    (e)   Capital Account
Deficits.  Loss (or items of Loss) shall not be allocated to a
Limited Partner to the extent that such allocation would cause or increase a
deficit in such Partner’s Capital Account at the end of any fiscal year (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 5.1(e), 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 5.1(e).

     

    (f)   Allocations Between
Transferor and Transferee.  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.

     

    (g)   Definition of Profit and
Loss.  “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 1.704-1(b)(2)(iv), except that Profit and Loss shall not include
items of income, gain and expense that are specially allocated pursuant to
Sections 5.1(b), 5.1(c), 5.1(d), or 5.1(e).  All allocations of
income, Profit, gain, Loss and expenses (and all items contained therein) for
federal income tax purposes shall be identical to all allocations of such items
set forth in this Section 5.1, except as otherwise required by
Section 704(c) of the Code and Regulations
Section 1.704-1(b)(4).  The General Partner shall have the
authority, in its sole discretion, to elect the method or methods to be used by
the Partnership for allocating items of income, gain, expense and deductions as
required by Section 704(c) of the Code including the election of a
method that may result in one or more Partners receiving or being allocated a
disproportionately larger share of items of the Partnership income, gain,
expense or deduction and any such election shall be binding on all
Partners.

     

    
      
        
        

      

      
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    (h)   Curative
Allocations.  The allocations set forth in Section 5.1(c),
(d) and (e) of this Agreement (the “Regulatory Allocations”) are
intended to comply with certain requirements of the Regulations.  The
General Partner is authorized to offset all Regulatory Allocations either with
other Regulatory Allocations or with special allocations of other items of
Partnership income, gain, loss or deduction pursuant to this
Section 5.1(h).  Therefore, notwithstanding any other provision
of this Section 5.1 (other than the Regulatory Allocations), the General
Partner shall make such offsetting special allocations of Partnership income,
gain, loss or deduction in whatever manner it deems appropriate so that, after
such offsetting allocations are made, each Partner’s Capital Account is, to the
extent possible, equal to the Capital Account balance such Partner would have
had if the Regulatory Allocations were not part of this Agreement and all
Partnership items were allocated pursuant to Section 5.1(a), (b) and
(f).

     

    (i)   Special
Allocation.  Notwithstanding the other provisions in this
Section (but subject to Section 5.7), in the year of the sale of the
last Property, Profit and Loss from all sources (or gross income or gross
expense) shall be allocated, to the greatest extent possible, so that the
positive capital account balance of each Partner shall be equal to the
distributions to be made to the Partners.

     

    5.2   Distribution 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 accordance with Section 5.2(b); 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.

     

    (b)   Except
for distributions pursuant to Section 5.6 of this Agreement in connection
with the dissolution and liquidation of the Partnership and subject to the
provisions of Section 5.2(c), 5.3 and 5.5 of this Agreement, distributions
shall be made in accordance with the following provisions:

     

    (i)   all
distributions of Net Sales Proceeds shall be made: (A) first, 100% to the
OP Unitholders in accordance with their respective Percentage Interests on the
Partnership Record Date until the OP Unitholders have received cumulative
distributions under this Section 5.2(b) equal to the aggregate Capital
Contributions made by the OP Unitholders to the Partnership, less any amounts
received in redemption of their Partnership Units, plus a cumulative,
noncompounded pre-tax rate of return thereon of 8% per annum, determined by
taking into account the dates on which all such Capital Contributions,
redemptions, and distributions were made and (B) second, (1) 85% to
the OP Unitholders, in accordance with their respective Percentage Interests on
the Partnership Record Date and (2) 15% to the Special OP Unitholders in
accordance with their respective Special Percentage Interests on the Partnership
Record Date; and

     

    
      
        
        

      

      
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    (ii)   all
distributions of cash other than Net Sales Proceeds shall be made to the OP
Unitholders in accordance with their respective Percentage Interests on the
Partnership Record Date.

     

    (c)   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 any Partner or assignee (including by reason of
Section 1446 of the Code), either (i) if the actual amount to be
distributed to the Partner 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 actual
amount shall be treated as a distribution of cash in the amount of such
withholding and the additional 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 5.2(c) shall bear interest at the lesser of (i) 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 (ii) the maximum
lawful rate of interest on such 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.

     

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

     

    5.4   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.

     

    5.5   Limitations on Return of
Capital Contributions.  Notwithstanding
any of the provisions of this Section 5, 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.

     

    
      
        
        

      

      
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    5.6   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 in
accordance with Section 5.2(b) which is intended to be in accordance with
the positive balance of the Capital Account of each Partner.  For
purposes of the preceding sentence, the Capital Account of each Partner shall be
determined after all adjustments have been made in accordance with Sections 4.4,
5.1 and 5.2 resulting from Partnership operations and from all sales and
dispositions of all or any part of the Partnership’s
assets..  Notwithstanding any other provision of this Agreement, the
amount by which the value, as determined in good faith by the General Partner,
of any property other than cash to be distributed in kind to the Partners
exceeds or is less than the Carrying Value of such property shall, to the extent
not otherwise recognized by the Partnership, be taken into account in computing
Profit and Loss of the Partnership for purposes of crediting or charging the
Capital Accounts of, and distributing proceeds to, the Partners, pursuant to
this Agreement.  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.

     

    5.7   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.  Section 5 and other relevant
provisions of this Agreement shall be interpreted in a manner consistent with
such intent.  If the Partnership is advised by the Partnership’s legal
counsel that the allocations provided in this Agreement are unlikely to be
respected for federal income tax purposes, the General Partner is hereby granted
the power to amend the allocation provisions of this Agreement to the minimum
extent necessary to comply with Section 704(b) of the Code and effect
the plan of allocations and distributions provided for in this
Agreement.

     

    SECTION 6

    RIGHTS,
OBLIGATIONS AND

    POWERS
OF THE GENERAL PARTNER

     

    6.1   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 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 Property and any other
property or assets including, but not limited to notes and mortgages and other
Real Estate Related Assets or interests 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;

     

    
      
        
        

      

      
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    (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 change
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 General
Partner or its Affiliates as set forth in this Agreement;

     

    (vi)   to
guarantee or become a co-maker of indebtedness of the General Partner 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;

     

    (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 General Partner, the Partnership or any
Subsidiary of either, to third parties or to 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 therefor such remuneration as the
General Partner may deem reasonable and proper;

     

    
      
        
        

      

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

     

    (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;

     

    (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, corporations
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 General Partner at all
times to qualify as a REIT unless the General Partner 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 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 Advisor or a Director or any Affiliate thereof,
shall require approval by a majority of the Independent Directors not otherwise
interested in such transaction as being fair and reasonable to the General
Partner and the Partnership on terms and conditions not less favorable to the
General Partner or the Partnership, as applicable, than those available from
unaffiliated third parties.

     

    
      
        
        

      

      
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    6.2   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
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.

     

    6.3   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, unless it is
established that: (i) the act or omission of the Indemnitee was material to
the matter giving rise to the proceeding and either was committed in bad faith
or was the result of active and deliberate dishonesty; (ii) the Indemnitee
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the Indemnitee had
reasonable cause to believe that the act or omission was
unlawful.  Any indemnification pursuant to this Section 6.3 shall
be made only out of the assets of the Partnership.

     

    (b)   The
Partnership shall reimburse an Indemnitee for reasonable expenses incurred by an
Indemnitee who is a party to a proceeding in advance of the final disposition of
the proceeding upon receipt by the Partnership of (i) a written affirmation
by the Indemnitee of the Indemnitee’s good faith belief that the standard of
conduct necessary for indemnification by the Partnership as authorized in this
Section 6.3 has been met, and (ii) a written undertaking by or on
behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.

     

    (c)   The
indemnification provided by this Section 6.3 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.

     

    (d)   The
Partnership may purchase and maintain insurance, on behalf of 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.

     

    (e)   For
purposes of this Section 6.3, the Partnership shall be deemed to have
requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; 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 6.3; and 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.

     

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

     

    (g)   An
Indemnitee shall not be denied indemnification in whole or in part under this
Section 6.3 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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    (h)   The
provisions of this Section 6.3 are for the benefit of the Indemnitees,
their heirs, successors, assigns and administrators and shall not be deemed to
create any rights for the benefit of any other Persons.

     

    (i)   Notwithstanding
the foregoing, the Partnership may not indemnify or hold harmless an Indemnitee
for any liability or loss unless all of the following conditions are met:
(i) the Indemnitee has determined, in good faith, that the course of
conduct that caused the loss or liability was in the best interests of the
Partnership; (ii) the Indemnitee was acting on behalf of or performing
services for the Partnership; (iii) the liability or loss was not the
result of (A) negligence or misconduct, in the case that the Indemnitee is
a director of the General Partner (other than an Independent Director), the
Advisor or an Affiliate of the Advisor or (B) gross negligence or willful
misconduct, in the case that the Indemnitee is an Independent Director; and
(iv) the indemnification or agreement to hold harmless is recoverable only
out of net assets of the Partnership.  In addition, 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 such
party 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
material securities law violations as to the Indemnitee; (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the Indemnitee; or (iii) a court of competent
jurisdiction approves a settlement of the claims against the 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 Commission and of the published position of any state
securities regulatory authority in which securities were offered or sold as to
indemnification for violations of securities laws.

     

    6.4   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 of 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 Delaware, 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 enetered 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 6.4(a), nor the adoption or amendment of any other
provision of this Agreement inconsistent with this Section 6.4(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 Delaware 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.

     

    
      
        
        

      

      
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    (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 Partner shall be resolved in favor of the
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 6.1,
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 General Partner to continue to qualify as a
REIT or (ii) prevent the General Partner 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 6.4 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 6.4 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.

     

    6.5   Reimbursement of General
Partner.

     

    (a)   Except as
provided in this Section 6.5 and elsewhere in this Agreement (including the
provisions of Sections 5 and 6 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 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.

     

    
      
        
        

      

      
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    6.6   Outside
Activities.  Subject
to Section 6.8, 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, employee, agent, trustee, Affiliate or
stockholder of the General Partner, the General Partner 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 the General Partner shall have no 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.

     

    6.7   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, a buyer,
lessor, lessee, manager, property manager, 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.

     

    (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, applicable law
and the REIT status of the General Partner.

     

    (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, in the General Partner’s sole discretion, on terms that
are fair and reasonable to the Partnership.

     

    6.8   General Partner
Participation.  The
General Partner agrees that all business activities of the General Partner,
including activities pertaining to the acquisition, development or ownership of
any Property shall be conducted through the Partnership, a Subsidiary, a
Subsidiary Partnership or a taxable REIT Subsidiary (within the meaning of
Section 856 (l) of the Code); provided, however, that the General
Partner is allowed to make a direct acquisition, but if and only if, such
acquisition is made in connection with the issuance of Additional Securities,
which direct acquisition and issuance have been approved and determined to be in
the best interests of the General Partner and the Partnership by a majority of
the Independent Directors.

     

    
      
        
        

      

      
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    6.9   Title to Partnership
Assets.  Title
to 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.  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 the General Partner for the use and benefit of the
Partnership in accordance with the provisions of this Agreement; provided,
however, that the General Partner shall use its best efforts to cause beneficial
and record 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 General Partner redeems any REIT Shares, then the General Partner
shall cause the Partnership to purchase from the General Partner a number of
Partnership Units as determined based on the application of the Conversion
Factor on the same terms that the General Partner redeemed such REIT
Shares.  Moreover, if the General Partner makes a cash tender offer or
other offer to acquire REIT Shares, then the General Partner shall cause the
Partnership to make a corresponding offer to the General Partner to acquire an
equal number of Partnership Units held by the General Partner.  In the
event any REIT Shares are redeemed by the General Partner pursuant to such
offer, the Partnership shall redeem an equivalent number of the General
Partner’s Partnership Units for an equivalent purchase price based on the
application of the Conversion Factor.

     

    6.11   No Duplication of Fees or
Expenses.  The
Partnership may not incur or be responsible for any fee or expense (in
connection with any offering or securities or otherwise) that would be
duplicative of fees and expenses paid by the General Partner.

     

    SECTION 7

    CHANGES
IN GENERAL PARTNER

     

    7.1   Transfer of the General
Partner’s Partnership Interest.

     

    (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, Section 7.1(b), (c) or
(d).

     

    (b)   Except as
otherwise provided in Section 7.1(c) and (d), the General Partner shall not
engage in any merger, consolidation or other combination with or into another
Person or the sale of all or substantially all of its assets, (other than in
connection with a change in the General Partner’s state of incorporation or
organizational form) in each case which results in a change of control of the
General Partner (a “Transaction”), unless:

     

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

     

    
      
        
        

      

      
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    (ii)   as a
result of such Transaction all Limited Partners are provided the right to
receive (A) 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 holding Partnership
Units would have received had it (1) exercised its Redemption Right and
(2) sold, tendered or exchanged pursuant to the Offer the REIT Shares
received upon exercise of the Redemption Right immediately prior to the
expiration of the Offer and (B) for each Special Partnership Unit an amount
of cash, securities or other property (as applicable based upon the type of
consideration and the proportions thereof paid to holders of REIT Shares in the
Transaction) equal to the fair market value of such Special Partnership Unit at
such time as determined in good faith by the General Partner by reference to the
value paid for the REIT Shares; or

     

    (iii)   the
General Partner is the surviving entity in the Transaction and either
(A) the holders of REIT Shares 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 (1) in exchange for their
Partnership Units, 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 Transaction by any holder of REIT
Shares and (2) in exchange for their Special Partnership Units, an amount
of cash, securities or other property (as applicable based upon the type of
consideration and the proportions thereof paid to holders of REIT Shares in the
Transaction) equal to the fair market value of such Special Partnership Units at
such time as determined in good faith by the General Partner by reference to the
value paid for the REIT Shares.

     

    (c)   Notwithstanding
Section 7.1(b), 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 “Surviving General Partner”), 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
Surviving General Partner in good faith and (ii) the Surviving General
Partner expressly agrees to assume all obligations of the General Partner, as
appropriate, hereunder.  Upon such contribution and assumption, the
Surviving General Partner shall have the right and duty to amend this Agreement
as set forth in this Section 7.1(c).  The Surviving General
Partner shall in good faith arrive at a new method for the calculation of the
Conversion Factor 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.  Such amendment to
this Agreement shall provide for adjustment 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 Surviving
General Partner also shall in good faith modify the definition of REIT Shares
and make such amendments to Section 8.5 so as to approximate the existing
rights and obligations set forth in Sections 8.5 as closely as reasonably
possible.  The above provisions of this Section 7.1(c) shall
similarly apply to successive mergers or consolidations permitted
hereunder.

     

    (d)   Notwithstanding
Section 7.1(b),

     

    (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 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.

     

    
      
        
        

      

      
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    7.2   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 thereof 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, and 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 2.5 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 as may be necessary) that (x) the admission of the
Person to be admitted as a substitute or additional General Partner is in
conformity with the Act and (y) 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.

     

    7.3   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 7.4(a)) 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), the
Partnership shall be dissolved and terminated unless the Partnership is
continued pursuant to Section 7.3(b).  The merger of the General
Partner with or into any entity that is admitted as a substitute or successor
General Partner pursuant to Section 7.2 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 7.4(a)) 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 of, 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), 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 2.4 by selecting, subject to Section 7.2 and any other
provisions of this Agreement, a substitute General Partner by 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.

     

    
      
        
        

      

      
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    7.4   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 or dissolution of, 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.  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 7.4 and the
Partnership is continued pursuant to Section 7.3, such General Partner
shall promptly transfer and assign its General Partnership Interest in the
Partnership to the substitute General Partner approved by Limited Partners
holding more than 50% of the Percentage Interests in accordance with
Section 7.3(b) and otherwise be admitted to the Partnership in
accordance with Section 7.2.  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 as a result of the event that caused the
removal.  Such fair market value shall be determined by an appraiser
mutually agreed upon by the General Partner and the Limited Partners holding
more than 50% of the Percentage Interests within ten (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 a majority in
interest of the Limited Partners each shall 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
default until transfer under Section 7.4(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 would have been entitled to receive in its
capacity as General Partner, until the transfer is effective pursuant to
Section 7.4(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,
desirable and sufficient to effect all the foregoing provisions of this
Section.

     

    SECTION 8

    RIGHTS
AND OBLIGATIONS OF THE LIMITED PARTNERS

     

    8.1   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.

     

    
      
        
        

      

      
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    8.2   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, to 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.

     

    8.3   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.

     

    8.4   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.

     

    8.5   Redemption of Special
Partnership Units.  Upon
the earliest to occur of (a) the termination or nonrenewal of the Advisory
Agreement for “cause” (as defined in the Advisory Agreement), (b) a
Termination Event, or (c) the Listing, the Special Partnership Units will
be redeemed.

     

    (a)   Redemption of Special
Partnership Units Upon Termination or Nonrenewal of the Advisory Agreement for
Cause.  If the Advisory Agreement is terminated or not renewed
by the General Partner for “cause” (as defined in the Advisory Agreement), all
of the Special Partnership Units shall be redeemed by the Partnership for $1
within 30 days after the termination or nonrenewal of the Advisory
Agreement.

     

    (b)   Redemption of Special
Partnership Units upon a Termination Event or the
Listing.  Upon the occurrence of a Termination Event or the
Listing, the Special Partnership Units shall be redeemed for an aggregate amount
equal to the Net Sales Proceeds that would have been distributed to the Special
OP Unitholders under Section 5.2(b)(i)(B)(2) if all assets of the
Partnership had been sold for their Appraised Value and all liabilities of the
Partnership had been satisfied in full according to their terms.  Such
redemption shall occur no later than thirty (30) days after the date of a
Termination Event and no later than 240 days after the Listing.  In
determining the fair market value of the assets of the Partnership, (i) in
connection with a Termination Event, the General Partner shall obtain an
appraisal of the assets of the Partnership (excluding any assets which may be
readily marked to market) and (ii) in connection with the Listing, the
General Partner shall make such determination (a) taking into account, in
the event of a Listing on a national securities exchange only, the market value
of the General Partner’s listed shares based upon the average closing price, or
average of bid and asked prices, as the case may be, during a period of thirty
(30) days during which such shares are traded beginning one hundred and twenty
(120) days after the Listing or (b) taking into account the value of the
General Partner’s shares based upon the initial public
offering.  Payment to Special OP Unitholders upon a Termination Event
or a Listing shall be paid, at the Advisor’s discretion, in the form of
(a) shares of the General Partner’s common stock; (b) a promissory
note with market terms, payable solely from the proceeds of asset sales, due and
payable no later than three years from the date of issuance of such note; or
(c) any combination thereof.  In the event the promissory note
has not been paid out of the proceeds of the General Partner’s sale of assets
following the three year term of the promissory note, the outstanding balance of
such note may, at the Advisor’s option, be convertible into shares of the
General Partner’s common stock.  In the event the Advisor elects to
receive shares of the General Partner’s common stock or the promissory note
converts into shares of the General Partner’s common stock and the General
Partner’s shares are 

     

    
      
        
        

      

      
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    not
listed on a national securities exchange, at the option of the Advisor, the
Advisor and the General Partner shall enter into an agreement whereby the
General Partner shall register such shares of common stock with the
Commission.  However, any such payments, whether in the form of shares
or under a promissory note may not be made in connection with a Termination
Event until either (a) the closing of asset sales that result in aggregate,
cumulative distributions to the OP Unitholders of the Partnership from operating
income, sales proceeds and other sources in an amount equal to their Capital
Contributions to the Partnership (less any amounts received in redemption of
their Capital Partnership Interest) plus an 8.0% cumulative non-compounded
annual pre-tax return thereon, or (b) a Listing (each a “Subsequent
Liquidity Event.”)  In addition, the amount of shares for the
promissory note issued in connection with a Termination Event will be subject to
reduction as of the date of the Subsequent Liquidity Event by an amount that
will ensure that, in connection with the Subsequent Liquidity Event, the Special
OP Unitholder does not receive in excess of 15.0% of the distributions that are
made or are deemed to be made by the Partnership after the OP Unitholders have
received or are deemed to have received aggregate, cumulative distributions
equal to their Capital Contributions to the Partnership (less any amounts
received in redemption of their Partnership Interests) plus an 8.0% cumulative
noncompounded annual pre-tax return thereon.

     

    SECTION 9

    TRANSFERS
OF LIMITED PARTNERSHIP INTERESTS

     

    9.1   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 9.1(a) above and similarly agree not to sell, assign or
transfer such Partnership Interest or fraction thereof to any Person who does
not similarly represent, warrant and agree.

     

    9.2   Restrictions on Transfer of
Limited Partnership Interests.

     

    (a)   Subject
to the provisions of 9.2(b) and (c), no Limited Partner may offer, sell,
assign, hypothecate, pledge or otherwise transfer all or any portion of his
Limited Partnership Interest, or any of such Limited Partner’s economic rights
as a Limited 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.

     

    (b)   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 violate any applicable federal or state securities or
blue sky law (including investment suitability standards).

     

    (c)   No
Transfer by a Limited Partner of its Partnership Interest, in whole or in part,
may be made to any Person if (i) in the opinion of the General Partner
based on the advice of legal counsel for the Partnership, if appropriate, 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
the General Partner based on the advice of legal counsel for the Partnership, if
appropriate, it would adversely affect the ability of the General Partner to
continue to qualify as a REIT or subject the General Partner to any additional
taxes under Section 857 or Section 4981 of the Code, (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, (iv) such Transfer would cause the General
Partner to own 10% or more of the ownership interests of any tenant of a
Property held by the Partnership within the meaning of
Section 856(d)(2)(B) of the Code, or (v) such Transfer would
result in the General Partner being “closely held” within the meaning of
Section 856(h) of the Code.

     

    
      
        
        

      

      
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    (d)   No
transfer by a Limited Partner of any Partnership Interest 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, without the consent of the General Partner,
which may be withheld in its sole and absolute discretion.

     

    (e)   Any
Transfer in contravention of any of the provisions of this Section 9 shall
be void and ineffectual and shall not be binding upon, or recognized by, the
Partnership.

     

    (f)   Prior to
the consummation of any Transfer under this Section 9, 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.

     

    9.3   Admission of Substitute
Limited Partner.

     

    (a)   Subject
to the other provisions of this Section 9, 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 9.1(a) hereof and the agreement set forth in
Section 9.1(b).

     

    (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 8.2.

     

    (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.

     

    (vii)   The
assignee has 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.

     

    
      
        
        

      

      
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    (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 9.3(a)(ii) 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 9.3
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 Section 9 to the admission of such Person as a
Limited Partner of the Partnership.

     

    9.4   Rights of Assignees of
Partnership Interests.

     

    (a)   Subject
to the provisions of Sections 9.1 and 9.2, 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 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 Section 9 to the same extent and
in the same manner as any Limited Partner desiring to make an assignment of its
Limited Partnership Interest.

     

    9.5   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.

     

    9.6   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 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 owners.

     

    
      
        
        

      

      
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    SECTION 10

    BOOKS
AND RECORDS; ACCOUNTING; TAX MATTERS

     

    10.1   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 this Agreement and amendments thereto 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, upon paying the costs of collection, duplication
and mailing, shall be entitled to inspect or copy such records during ordinary
business hours.

     

    10.2   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 10.2(b).

     

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

     

    10.4   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.

     

    10.5   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.

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

    (c)   In the
event of a transfer of all or any part of the Partnership Interest of any
Partner, the Partnership, at the option of the General Partner in its sole
discretion, may elect pursuant to Section 754 of the Code to adjust the
basis of the Partnership’s assets.  Notwithstanding anything contained
in Section 5 of this Agreement, any adjustments made pursuant to
Section 754 of the Code 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.

     

    10.6   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 General Partner if such statements are prepared solely on
a consolidated basis with the General Partner, 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
General Partner if such statements are prepared solely on a consolidated basis
with the General Partner, for such fiscal 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 at the expense of such Partner, provided such audit is made
for Partnership purposes and is made during normal business hours.

     

    SECTION 11

    AMENDMENT
OF AGREEMENT; MERGER

     

    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 or merge or consolidate the
Partnership with or into any other partnership or business entity (as defined in
Section 17-211 of the Act) in a transaction pursuant to Section 7.1(c)
or (d); provided, however, that the following amendments and any other merger or
consolidation of the Partnership shall require the consent of Limited Partners
holding more than 50% of the Special Percentage Interests of the Limited
Partners:

     

    (a)   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 4.2
hereof;

     

    (b)   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 4.2 hereof; or

     

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

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    SECTION 12

    GENERAL
PROVISIONS

     

    12.1   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,
to the Partners at the addresses 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.

     

    12.2   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.

     

    12.3   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.

     

    12.4   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.

     

    12.5   Entire
Agreement.  This
Agreement and exhibits attached hereto constitute the entire Agreement of the
Partners and supersede all prior written agreements and prior and
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.

     

    12.6   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.

     

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

     

    12.8   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
same instrument binding on all parties hereto, notwithstanding that all parties
shall not have signed the same counterpart.

     

    12.9   Governing
Law.  This
Agreement shall be governed by and construed in accordance with the laws of the
State of Delaware; provided, however, that any cause of action for violation of
federal or state securities laws shall not be governed by this
Section 12.9.

     

    [SIGNATURES
ON FOLLOWING PAGE]

    

    
      
        
        

      

      
        33

        
          

        

      

      
        
        

      

    

     

    IN
WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to
this Limited Partnership Agreement, as of the 1st day
of October, 2009.

     

    
    

     

    
      	 	GENERAL
      PARTNER:
	 	 
	 	PASSCO APARTMENT
      REIT, INC., a Maryland corporation
	 	 
	 	 
	 	By:  /s/ William H.
      Winn                                       
      
	 	Name:  William
      H. Winn
	 	Title:  President
	 	 
	 	 
	 	LIMITED
      PARTNER: 
	 	 
	 	Passco Advisors,
      LLC, a California limited liability company 
	 	 
	 	 
	 	By:  /s/ William H.
      Winn                                       
	 	Name:  William
      H. Winn 
	 	Title:  President 

    

    
 

    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

    

    EXHIBIT A

    

    

    
      	
              
                Partner

              

            	 	
              
                Cash
      

                Contribution

              

            	 	
              
                Agreed
      Value of 

                Capital
      

                Contribution

              

            	 	
              
                Partnership
      

                Units

              

            	 	 	
              
                Special
      

                Partnership
      

                Units

              

            	 	 	
              
                Percentage
      

                Interest

              

            	 	 	
              
                Special
      

                Percentage
      

                Interest

              

            	 
	 
      	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 
	
              GENERAL
      PARTNER:

            	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 
	 
      	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 
	
              Passco
      Apartment REIT, Inc.

              96
      Corporate Park,

              Suite 200

              Irvine,
      CA 92606

            	 	$	201,000	 	 
      	 	 	22,333	 	 	 	 	 	 	100	%	 	 	 
	 
      	 	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              ORIGINAL
      LIMITED PARTNERS:

            	 	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
      	 	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Passco
      Advisors, LLC

              96
      Corporate Park,

              Suite 200

              Irvine,
      CA 92606

            	 	$	1,000	 	 
      	 	 	 	 	 	 	1,000	 	 	 	 	 	 	 	100	%
	 
      	 	 	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Totals

            	 	$	2,000	 	 
      	 	 	 	 	 	 	1,000	 	 	 	100	%	 	 	100	%

    

    

     

    

     

    
      
        
        

      

      
        A-1paceth_8k-ex1001.htm

    
      

    

    EXHIBIT 10.1

     

    Pacific
Ethanol, Inc.

     

    AMENDED
AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT

    for

    BRYON
MCGREGOR

     

    This
Amended and Restated Executive Employment Agreement (“Agreement”) by and between
Bryon McGregor (“Executive”) and Pacific Ethanol, Inc. (the “Company”)
(collectively, the “Parties”) is effective as of the last date signed by the
Parties.

     

    Whereas,
the Company desires to employ Executive to provide personal services to the
Company, and wishes to provide Executive with certain compensation and benefits
in return for his services;

     

    Whereas,
Executive wishes to be employed by the Company and to provide personal services
to the Company in return for certain compensation and benefits;

     

    Whereas,
the Parties entered into an Executive Employment Agreement on or about December
22, 2008, setting forth certain terms of Executive’s employment with the Company
(the “Original Employment Agreement”) and now seek to supersede and replace the
Original Employment Agreement with this Agreement;

     

    Whereas, once this Agreement
is effective, the parties agree that the Original Employment Agreement shall
have no further force or effect;

     

    Now,
Therefore, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:

     

    1.   Employment
by the Company.

     

    1.1 Position.  Subject
to terms and conditions set forth herein, the Company agrees to employ Executive
in the position of Chief Financial Officer, and Executive hereby accepts such
employment.  During the term of Executive’s employment with the
Company, Executive will devote Executive’s best efforts and substantially all of
Executive’s business time and attention to the business of the Company, except
for vacation periods as set forth herein and reasonable periods of illness or
other incapacities permitted by the Company’s general employment
policies.

     

    1.2 Duties and
Location.  Executive shall serve in an executive capacity and
shall perform such duties as are customarily associated with Executive’s then
current title, consistent with the bylaws of the Company and as required by the
Company’s Board of Directors (the “Board”) and Chief Executive
Officer.  Executive shall report to the Company’s Chief Executive
Officer.  Executive’s primary office location shall be a location
mutually acceptable to both the Executive and the Company.  The
Company reserves the right to reasonably require Executive to perform
Executive’s duties at places other than Executive’s primary office location from
time to time as agreed to by Executive, and to require reasonable business
travel.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.3 Policies and
Procedures.  The employment relationship between the parties
shall be governed by the general employment policies and practices of the
Company, except that when the terms of this Agreement differ from or are in
conflict with the Company’s general employment policies or practices, this
Agreement shall control.

     

    
      2.   Compensation.

    

     

    2.1 Salary.  For
services to be rendered hereunder, Executive shall receive an annual salary at
the rate of $240,000.00, paid bi-weekly in the amount of $9,230.77 (the “Base
Salary”), subject to standard payroll deductions and withholdings and payable in
accordance with the Company’s regular payroll schedule.  Executive’s
Base Salary shall be reviewed annually and may be increased as approved by the
Board in its sole discretion.

     

    2.2 Annual
Bonus.  Executive will be eligible for an annual discretionary
bonus of up to fifty percent (50%) of his Base Salary (the “Annual
Bonus”).  Whether any Annual Bonus will be awarded, and the amount of
the Annual Bonus awarded to Executive, shall be determined by the Board in its
sole discretion based upon its consideration of both the Company’s performance
and Executive’s performance.  Since the Annual Bonus is intended both
to reward past Company and Executive performance and to provide an incentive for
Executive to remain with the Company, Executive must remain an active employee
through the date that any such bonus is awarded to him in order to earn any such
bonus.  Executive will not earn any Annual Bonus (including a prorated
bonus) if Executive’s employment terminates for any reason before the Annual
Bonus is awarded to him.  Any Annual Bonus awarded by the Board shall
be paid within the first quarter after the end of the calendar
year.

     

    2.3 Standard Company
Benefits.  Executive shall be entitled to participate in all
employee benefit programs for which Executive is eligible under the terms and
conditions of the benefit plans which may be in effect from time to time and
provided by the Company to its employees generally; provided, however, that
Executive shall not be entitled to accrued vacation pay.

     

    2.4 Restricted Stock;
Options.  The Executive shall be eligible for grants of
restricted stock and/or stock options from time to time as shall be determined
by the Compensation Committee of the Board in its sole discretion, and shall be
subject to such vesting, exercisability, and other provisions as the Board may
determine in its discretion, after reviewing the performance of both Executive
and the Company.  Both the Restricted Stock and any stock options
shall be governed in all respects by the terms of the applicable restricted
stock purchase agreement, stock option agreement, grant notice and plan
documents.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    
      3.   Confidential
Information Obligations.

    

     

    3.1 Confidential Information
Agreement.  As a condition of employment, Executive agrees to
execute and abide by the Employee Confidential  Information and
Inventions Agreement attached hereto as Exhibit A.

     

    3.2 Third Party Agreements and
Information.  Executive represents and warrants that
Executive’s employment by the Company will not conflict with any prior
employment or consulting agreement or other agreement with any third party, and
that Executive will perform Executive’s duties to the Company without violating
any such agreement.  Executive represents and warrants that Executive
does not possess confidential information arising out of prior employment,
consulting, or other third party relationships, which would be used in
connection with Executive’s employment by the Company, except as expressly
authorized by that third party.  During Executive’s employment by the
Company, Executive will use in the performance of Executive’s duties only
information which is generally known and used by persons with training and
experience comparable to Executive’s own, common knowledge in the industry,
otherwise legally in the public domain, or obtained or developed by the Company
or by Executive in the course of Executive’s work for the Company.

     

    
      4.   Outside
Activities During Employment.

    

     

    4.1 Non-Company
Business.  Except with the prior written consent of the Chief
Executive Officer, Executive will not during the term of Executive’s employment
with the Company undertake or engage in any other employment, occupation or
business enterprise, other than ones in which Executive is a passive
investor.  Executive may engage in civic and not-for-profit activities
so long as such activities do not materially interfere with the performance
of Executive’s duties hereunder.

     

    4.2 No Adverse
Interests. Executive agrees not to acquire, assume or participate
in, directly or indirectly, any position, investment or interest known by him to
be adverse or antagonistic to the Company, its business or prospects, financial
or otherwise, except as a passive investor in mutual or exchange traded
funds.

     

    
      5.   Termination
Of Employment.

    

     

    5.1 At-Will
Relationship.  Executive’s employment relationship is
at-will.  Either Executive or the Company may terminate the employment
relationship at any time, with or without Cause or advance notice.

     

    5.2 Termination without Cause;
Resignation for Good Reason.  If, at any time, the Company
terminates Executive’s employment without Cause (as defined herein), or
Executive resigns with Good Reason (as defined herein), and Executive executes
and delivers the Separation Date Release of all claims set forth as Exhibit B
hereto and allows such release to become effective, then the Company will
provide Executive with the following severance benefits:

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (a) Cash Severance.  The
Company shall pay Executive severance in the form of continuation of Executive’s
Base Salary in effect on Executive’s last day of employment for a period of
twelve (12) months after Executive’s termination, subject to standard payroll
deductions and withholdings and payable on the Company’s regular payroll
schedule; provided,
however, that in the event the Company terminates Executive’s employment
without Cause, or Executive resigns with Good Reason, within three (3) months
before or otherwise in anticipation of, or within twelve (12) months after, a
Change in Control (as defined below), then the Company shall pay Executive
severance in the form of continuation of Executive’s Base Salary in effect on
Executive’s last day of employment for a period of eighteen (18) months after
Executive’s termination, subject to standard payroll deductions and withholdings
and payable on the Company’s regular payroll schedule.  Each payment
made pursuant to this Section 5.2(a) is intended to be a separate payment (as
defined in Treasury Regulations Section 1.409A-2(b)(2)) from any other payments
made pursuant to this Section 5.2(a) for purposes of the “short term deferral
rule” under Treasury Regulations Section 1.409A-1(b)(4).

     

    (b) Continued Health Insurance
Coverage.  To the extent provided by the federal COBRA law or,
if applicable, state insurance laws, and by the Company’s then-current group
health insurance policies, Executive may be eligible to continue Executive’s
then-current group health insurance benefits after termination of
Employment.  If eligible and if Executive timely elects continued
health insurance coverage, then the Company shall pay the Company’s portion of
any premiums necessary to provide coverage for a period of twelve (12) months
after the termination date; provided, however, that no
such premium payments shall be made following the effective date of Executive’s
coverage by a medical, dental or vision insurance plan of a subsequent
employer.  Executive shall notify the Company immediately if he
becomes covered by a medical, dental or vision insurance plan of a subsequent
employer.  Notwithstanding the foregoing, in the event the Company
terminates Executive’s employment without Cause, or Executive resigns with Good
Reason, within three (3) months before or otherwise in anticipation of, or
within twelve (12) months after, a Change in Control (as defined below), then
(if eligible and coverage elected) the Company shall pay the Company’s portion
of any premiums necessary to provide coverage for a period of eighteen (18)
months after the termination date; provided, however, that no
such premium payments shall be made following the effective date of Executive’s
coverage by a medical, dental or vision insurance plan of a subsequent employer
and Executive agrees to immediately notify the Company of any such
coverage.

     

    (c) Accelerated
Vesting.  If Executive has been employed by the Company for one
full year or longer, then the Company will accelerate the vesting of any equity
awards granted to Executive prior to Executive’s employment termination such
that twenty-five percent (25%) of all shares or options subject to such awards
which are unvested as of the employment termination date shall be accelerated
and deemed fully vested as of Executive’s last day of employment; provided, however, that in the
event, and without the requirement that Executive be employed for one full year
or longer, the Company terminates Executive’s employment without Cause, or
Executive resigns with Good Reason, within three (3) months before or otherwise
in anticipation of, or within twelve (12) months after, a Change in Control (as
defined below), then the Company will accelerate the vesting of any equity
awards granted to Executive prior to Executive’s employment termination such
that one hundred percent (100%) of all shares or options subject to such awards
which are unvested as of the employment termination date shall be accelerated
and deemed fully vested as of Executive’s last day of employment.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    5.3 Termination for Cause; Resignation
Without Good Reason.  If the Company terminates Executive’s
employment with the Company for Cause, or Executive resigns without Good Reason,
then Executive will not be entitled to any further compensation from the Company
(other than accrued salary, and accrued and unused vacation, through Executive’s
last day of employment), including severance pay, pay in lieu of notice or any
other such compensation.

     

    5.4 Termination Due to Death or
Disability.

     

    (a) Death.  This
Agreement shall terminate immediately upon Executive’s death and Executive’s
estate shall not be entitled to any further compensation from the Company (other
than accrued salary, and accrued and unused vacation, through Executive’s last
day of employment), including severance pay, pay in lieu of notice or any other
such compensation.

     

    (b) Disability.   If
Executive is prevented from performing his duties as described in Section 1.1 of
this Agreement by reason of any physical or mental incapacity that results in
Executive’s satisfaction of all requirements necessary to receive benefits under
the Company’s long-term disability plan due to a total disability, then, to the
extent permitted by law, the Company may terminate the employment of Executive
and this Agreement at or after such time.”

     

    (i) Cash Severance.  The
Company shall pay Executive severance in the form of continuation of Executive’s
Base Salary in effect on Executive’s last day of employment for a period of
twelve (12) months after Executive’s termination, subject to standard payroll
deductions and withholdings and payable on the Company’s regular payroll
schedule.

     

    (ii) Continued Health Insurance
Coverage.  To the extent provided by the federal COBRA law or,
if applicable, state insurance laws, and by the Company’s then-current group
health insurance policies, Executive may be eligible to continue Executive’s
then-current group health insurance benefits after termination of
Employment.  If eligible and if Executive timely elects continued
health insurance coverage, then the Company shall pay the Company’s portion of
any premiums necessary to provide coverage for a period of twelve (12) months
after the termination date; provided, however, that no
such premium payments shall be made following the effective date of Executive’s
coverage by a medical, dental or vision insurance plan of a subsequent
employer.  Executive shall notify the Company immediately if he
becomes covered by a medical, dental or vision insurance plan of a subsequent
employer.

     

    (iii) Accelerated
Vesting.  If Executive has been employed by the Company for one
full year or longer, then the Company will accelerate the vesting of any equity
awards granted to Executive prior to Executive’s employment termination such
that twenty-five percent (25%) of all shares or options subject to such awards
which are unvested as of the employment termination date shall be accelerated
and deemed fully vested as of Executive’s last day of employment.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    5.5 Deferred
Compensation.  Notwithstanding anything to the contrary set
forth herein, any payments and benefits provided under this Agreement (the
“Severance Benefits”) that constitute “deferred compensation” within the meaning
of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)
and the regulations and other guidance thereunder and any state law of similar
effect (collectively “Section 409A”) shall not commence in connection with
Executive’s termination of employment unless and until Executive has also
incurred a “separation from service” (as such term is defined in Treasury
Regulation Section 1.409A-1(h) (“Separation From Service”), unless the Company
reasonably determines that such amounts may be provided to Executive without
causing Executive to incur the additional 20% tax under Section
409A.

     

    It is
intended that each installment of the Severance Benefits payments provided for
in this Agreement is a separate “payment” for purposes of Treasury Regulation
Section 1.409A-2(b)(2)(i).  For the avoidance of doubt, it is intended
that payments of the Severance Benefits set forth in this Agreement satisfy, to
the greatest extent possible, the exemptions from the application of Section
409A provided under Treasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5)
and 1.409A-1(b)(9).

     

    If
Executive is a “specified employee” within the meaning of 409A(a)(2)(B)(i) of
the Code, any Severance Benefit payments that are triggered by a separation from
service shall be accelerated to the minimum extent necessary so that (a) the
lesser of (y) the total cash severance payment amount, or (z) six (6) months of
such installment payments are paid no later than March 15 of the calendar year
following such termination, and (b) all amounts paid pursuant to the foregoing
clause (a) will constitute separate payments for purposes of Section
1.409A-2(b)(2) of the Treasury Regulations and thus will be payable pursuant to
the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the
Treasury Regulations.  It is intended that if Executive is a
“specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code
at the time of such separation from service the foregoing provision shall result
in compliance with the requirements of Section 409A(a)(2)(B)(i) of the Code
since payments to Executive will either be payable pursuant to the “short-term
deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations
or will not be paid until at least 6 months after separation from
service.

     

    Notwithstanding
any other payment schedule set forth in this Agreement, none of the Severance
Benefits will be paid or otherwise delivered prior to the effective date of the
Separation Date Release of all claims set forth as Exhibit B
hereto.  On the first regular payroll pay day following the effective
date of the Separation Date Release of all claims, the Company will pay
Executive the Severance Benefits Executive would otherwise have received under
the Agreement on or prior to such date but for the delay in payment related to
the effectiveness of the release of claims, with the balance of the Severance
Benefits being paid as originally scheduled.  All amounts payable
under the Agreement will be subject to standard payroll taxes and
deductions.”

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    5.6 Limitation on
Payments.  In the event that the payments or other benefits
provided for in this Agreement or otherwise payable to Executive (i) constitute
“parachute payments” within the meaning of Section 280G of the Code, and (ii)
would be subject to the excise tax imposed by Section 4999 of the Code (the
“Excise Tax”), then Executive’s benefits under this Agreement shall be either
(a) delivered in full, or (b) delivered to such lesser extent which would result
in no portion of such benefits being subject to the Excise Tax, whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income taxes and the Excise Tax, results in the receipt by Executive on an
after-tax basis, of the greatest amount of benefits, notwithstanding that all or
some portion of such benefits may be taxable under Section 4999 of the
Code.  If a reduction in payments or benefits constituting “parachute
payments” is necessary pursuant to the foregoing provision, reduction shall
occur in the following order: reduction of cash payments; cancellation of
accelerated vesting of stock awards; reduction of employee
benefits.  If acceleration of vesting of stock award compensation is
to be reduced, such acceleration of vesting shall be cancelled in the reverse
order of the date of grant of the Executive’s stock awards.”

     

    5.7 No
Mitigation.  Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer after the date of
termination, or otherwise, except for health insurance benefits as set forth
herein.

     

    5.8 Definitions.

     

    (a) For
purposes of this Agreement, “Cause” shall mean any one or
more of the following:

     

    (i) Executive’s
indictment or conviction of any felony or of any crime involving
dishonesty;

     

    (ii) Executive’s
participation in any fraud or other act of willful misconduct against the
Company (including any material breach of Company policy that causes or
reasonably could cause harm to the Company);

     

    (iii) Executive’s
refusal to comply with any lawful directive of the Company;

     

    (iv) Executive’s
material breach of Executive’s fiduciary, statutory, contractual, or common law
duties to the Company (including any material breach of this Agreement or the
Confidential Information and Inventions Agreement); or

     

    (v) Conduct
by Executive which in the good faith and reasonable determination of the Board
demonstrates gross unfitness to serve.

     

    Provided, however, that in the
event that any of the foregoing events is reasonably capable of being cured, the
Company shall, within twenty (20) days after the discovery of such event,
provide written notice to the Executive describing the nature of such event and
Executive shall thereafter have ten (10) business days to cure such
event.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    (b) For
purposes of this Agreement, Executive shall have “Good Reason” for Executive’s
resignation if: (w) any of the following occurs without Executive’s consent; (x)
Executive notifies the Company in writing, within twenty (20) days after
the occurrence of one of the following events that Executive intends to
terminate his employment no earlier than thirty (30) days after providing such
notice; (y) the Company does not cure such condition within thirty (30)
days following its receipt of such notice or states unequivocally in writing
that it does not intend to attempt to cure such condition, and (z) the Executive
resigns from employment within thirty (30) days following the end of the period
within which the Company was entitled to remedy the condition constituting Good
Reason but failed to do so:

     

    (i) the
assignment to Executive of any duties or responsibilities which result in the
material diminution of Executive’s authority, duties or responsibility; provided, however, that the
acquisition of the Company and subsequent conversion of the Company to a
division or unit of the acquiring corporation will not by itself result in a
material diminution of Executive’s authority, duties or
responsibility;

     

    (ii) a
material reduction by the Company in Executive’s annual base salary, except to
the extent the base salaries of all other executive officers of the Company are
accordingly reduced;

     

    (iii) a
relocation of Executive’s place of work, or the Company’s principal executive
offices if Executive’s principal office is at such offices, to a location that
increases Executive’s daily one-way commute by more than thirty-five (35) miles;
or

     

    (iv) any
material breach by the Company of any material provision of this Agreement,
including but not limited to Section 7.7.

     

    (c) For
purposes of this Agreement, “Change in Control” shall be
deemed to have occurred if, in a single transaction or series of related
transactions: (i) any person (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934 (“Exchange Act”)), or persons acting as a
group, other than a trustee or fiduciary holding securities under an employment
benefit program, is or becomes a “beneficial owner” (as defined in Rule 13-3
under the Exchange Act), directly or indirectly of securities of the Company
representing a majority (e.g., 50% plus one share) of
the combined voting power of the Company, (ii) there is a merger, consolidation
or other business combination transaction of the Company with or into another
corporation, entity or person, other than a transaction in which the holders of
at least a majority of the shares of voting capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
such shares remaining outstanding or by their being converted into shares of
voting capital stock of the surviving entity) a majority of the total voting
power represented by the shares of voting capital stock of the Company (or the
surviving entity) outstanding immediately after such transaction, or (iii) all
or substantially all of the Company’s assets are sold.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    6.   Arbitration.

     

    To ensure
the timely and economical resolution of disputes that may arise in connection
with Executive’s employment with the Company, Executive and the Company agree
that any and all disputes, claims, or causes of action arising from or relating
to the enforcement, breach, performance, negotiation, execution, or
interpretation of this Agreement, Executive’s employment, or the termination of
Executive’s employment, shall be resolved to the fullest extent permitted by law
by final, binding and confidential arbitration, by a single arbitrator, in
Sacramento, California, conducted by JAMS under the then applicable JAMS rules.
By agreeing to this arbitration
procedure, both Executive and the Company waive the right to resolve any such
dispute through a trial by jury or judge or administrative
proceeding.  The arbitrator shall:  (a) have the
authority to compel adequate discovery for the resolution of the dispute and to
award such relief as would otherwise be permitted by law; and (b) issue a
written arbitration decision, to include the arbitrator’s essential findings and
conclusions and a statement of the award.  The arbitrator shall be
authorized to award any or all remedies that Executive or the Company would be
entitled to seek in a court of law.  The Company shall pay all JAMS’
arbitration fees in excess of the amount of court fees that would be required if
the dispute were decided in a court of law.  Nothing in this Agreement
is intended to prevent either Executive or the Company from obtaining injunctive
relief in court to prevent irreparable harm pending the conclusion of any such
arbitration.

     

    7.   General
Provisions.

     

    7.1 Notices.  Any
notices provided hereunder must be in writing and shall be deemed effective upon
the earlier of personal delivery (including personal delivery by fax) or the
next day after sending by overnight carrier, to the Company at its primary
office location and to Executive at his address as listed on the Company
payroll.

     

    7.2 Severability.  Whenever
possible, each provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or any other jurisdiction,
but this Agreement will be reformed, construed and enforced in such jurisdiction
to the extent possible in keeping with the intent of the parties.

     

    7.3 Waiver.  Any waiver
of any breach of any provisions of this Agreement must be in writing to be
effective, and it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this
Agreement.

     

    7.4 Complete
Agreement.  This Agreement, including Exhibit A, constitutes
the entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to this subject
matter.  This Agreement supersedes and replaces the Original
Employment Agreement in its entirety and the Original Employment Agreement shall
have no further force or effect.  It is entered into without reliance
on any promise or representation other than those expressly contained herein,
and it cannot be modified or amended except in a writing signed by the Executive
and a duly authorized officer of the Company.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    7.5 Counterparts.  This
Agreement may be executed in separate counterparts, any one of which need not
contain signatures of more than one party, but all of which taken together will
constitute one and the same Agreement.

     

    7.6 Headings.  The
headings of the sections hereof are inserted for convenience only and shall not
be deemed to constitute a part hereof nor to affect the meaning
thereof.

     

    7.7 Successors and
Assigns.  This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective
successors, assigns, heirs, executors and administrators, except that Executive
may not assign any of his duties hereunder and he may not assign any of his
rights hereunder without the written consent of the Company, which shall not be
withheld unreasonably.  The Company shall obtain the assumption of
this Agreement by any successor or assign of the Company.

     

    7.8 Choice of Law.  All
questions concerning the construction, validity and interpretation of this
Agreement will be governed by the law of the State of California.

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    In Witness
Whereof, the parties have executed this Agreement.

    
    

     

    
      	 	Pacific Ethanol,
      Inc.
	 	 
	 	 
	 	By:  /s/ NEIL M.
      KOEHLER                              
      
	 	Neil M.
      Koehler
	 	President
      and Chief Executive Officer
	 	 
	 	Date: November 25,
      2009                                   
         

    

     

     

    Understood
and Agreed:

    

    Executive

    

    

    By:   /s/ BRYON
MCGREGOR                             

    Bryon
McGregor

    

    Date:
November 25,
2009                                     
                     

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Exhibit
A

     

     

    
      EMPLOYEE
CONFIDENTIAL INFORMATION AND INVENTIONS ASSIGNMENT AGREEMENT

       

      In
consideration of my employment or continued employment by Pacific Ethanol, Inc.
(“Company”), and the
compensation paid to me now and during my employment with the Company, I agree
to the terms of this Agreement as follows:

       

      1.   Confidential Information
Protections.

       

      1.1 Nondisclosure; Recognition of
Company’s Rights.  At all times during and after my employment,
I will hold in confidence and will not disclose, use, lecture upon, or publish
any of Company’s Confidential Information (defined below), except as may be
required in connection with my work for Company, or as expressly authorized by
the Chief Executive Officer (the “CEO”) of Company.  I
will obtain the CEO’s written approval before publishing or submitting for
publication any material (written, oral, or otherwise) that relates to my work
at Company and/or incorporates any Confidential Information.  I hereby
assign to Company any rights I may have or acquire in any and all Confidential
Information and recognize that all Confidential Information shall be the sole
and exclusive property of Company and its assigns.

       

      1.2 Confidential
Information.  The term “Confidential Information”
shall mean any and all confidential knowledge, data or information related to
Company’s business or its actual or demonstrably anticipated research or
development, including without limitation (a) trade secrets, inventions, ideas,
processes, computer source and object code, data, formulae, programs, other
works of authorship, know-how, improvements, discoveries, developments, designs,
and techniques; (b) information regarding products, services, plans for research
and development, marketing and business plans, budgets, financial statements,
contracts, prices, suppliers, and customers; (c) information regarding the
skills and compensation of Company’s employees, contractors, and any other
service providers of Company; and (d) the existence of any business discussions,
negotiations, or agreements between Company and any third party.

       

      1.3 Third Party
Information.  I understand that Company has received and in the
future will receive from third parties confidential or proprietary information
(“Third Party
Information”) subject to a duty on Company’s part to maintain the
confidentiality of such information and to use it only for certain limited
purposes.  During and after the term of my employment, I will hold
Third Party Information in strict confidence and will not disclose to anyone
(other than Company personnel who need to know such information in connection
with their work for Company) or use, Third Party Information, except in
connection with my work for Company or unless expressly authorized by an officer
of Company in writing.

       

      1.4 No Improper Use of Information of
Prior Employers and Others.  I represent that my employment by
Company does not and will not breach any agreement with any former employer,
including any noncompete agreement or any agreement to keep in confidence or
refrain from using information acquired by me prior to my employment by
Company.  I further represent that I have not entered into, and will
not enter into, any agreement, either written or oral, in conflict with my
obligations under this Agreement.  During my employment by Company, I
will not improperly make use of, or disclose, any information or trade secrets
of any former employer or other third party, nor will I bring onto the premises
of Company or use any unpublished documents or any property belonging to any
former employer or other third party, in violation of any lawful agreements with
that former employer or third party.  I will use in the performance of
my duties only information that is generally known and used by persons with
training and experience comparable to my own, is common knowledge in the
industry or otherwise legally in the public domain, or is otherwise provided or
developed by Company.

       

      
        
          
          

        

        
          A-1

          
            

          

        

        
          
          

        

      

       

      2.   Inventions.

       

      2.1 Inventions and Intellectual Property
Rights.  As used in this Agreement, the term “Invention” means any ideas,
concepts, information, materials, processes, data, programs, know-how,
improvements, discoveries, developments, designs, artwork, formulae, other
copyrightable works, and techniques and all Intellectual Property Rights in any
of the items listed above.  The term “Intellectual Property Rights”
means all trade secrets, copyrights, trademarks, mask work rights, patents and
other intellectual property rights recognized by the laws of any jurisdiction or
country.

       

      2.2 Prior Inventions.  I
have disclosed on Exhibit
A a
complete list of all Inventions that (a) I have, or I have caused to be, alone
or jointly with others, conceived, developed, or reduced to practice prior to
the commencement of my employment by Company; (b) in which I have an ownership
interest or which I have a license to use; (c) and that I wish to have excluded
from the scope of this Agreement (collectively referred to as “Prior
Inventions”).  If no Prior Inventions are listed in Exhibit A, I warrant that
there are no Prior Inventions.  I agree that I will not incorporate,
or permit to be incorporated, Prior Inventions in any Company Inventions
(defined below) without Company’s prior written consent. If, in the course of my
employment with Company, I incorporate a Prior Invention into a Company process,
machine or other work, I hereby grant Company a non-exclusive, perpetual,
fully-paid and royalty-free, irrevocable and worldwide license, with rights to
sublicense through multiple levels of sublicensees, to reproduce, make
derivative works of, distribute, publicly perform, and publicly display in any
form or medium, whether now known or later developed, make, have made, use,
sell, import, offer for sale, and exercise any and all present or future rights
in, such Prior Invention.

       

      2.3 Assignment of Company
Inventions.  Inventions assigned to the Company or to a third
party as directed by the Company pursuant to the section titled “Government or
Third Party” are referred to in this Agreement as “Company
Inventions.”  Subject to the section titled “Government or
Third Party” and except for Inventions that I can prove qualify fully under the
provisions of California Labor Code section 2870 and I have set forth in Exhibit A, I hereby assign and
agree to assign in the future (when any such Inventions or Intellectual Property
Rights are first reduced to practice or first fixed in a tangible medium, as
applicable) to Company all my right, title, and interest in and to any and all
Inventions (and all Intellectual Property Rights with respect thereto) made,
conceived, reduced to practice, or learned by me, either alone or with others,
during the period of my employment by Company.

       

      2.4 Obligation to Keep Company
Informed.  During the period of my employment and for one (1)
year after my employment ends, I will promptly and fully disclose to Company in
writing (a) all Inventions authored, conceived, or reduced to practice by me,
either alone or with others, including any that might be covered under
California Labor Code section 2870, and (b) all patent applications filed by me
or in which I am named as an inventor or co-inventor.

       

      2.5 Government or Third
Party.  I agree that, as directed by the Company, I will assign
to a third party, including without limitation the United States, all my right,
title, and interest in and to any particular Company Invention.

       

      
        
          
          

        

        
          A-2

          
            

          

        

        
          
          

        

      

       

      2.6 Enforcement of Intellectual Property
Rights and Assistance.  During and after the period of my
employment, I will assist Company in every proper way to obtain and enforce
United States and foreign Intellectual Property Rights relating to Company
Inventions in all countries.  If the Company is unable to secure my
signature on any document needed in connection with such purposes, I hereby
irrevocably designate and appoint Company and its duly authorized officers and
agents as my agent and attorney in fact, which appointment is coupled with an
interest, to act on my behalf to execute and file any such documents and to do
all other lawfully permitted acts to further such purposes with the same legal
force and effect as if executed by me.

       

      2.7 Incorporation of Software
Code.  I agree that I will not incorporate into any Company
software or otherwise deliver to Company any software code licensed under the
GNU General Public License or Lesser General Public License or any other license
that, by its terms, requires or conditions the use or distribution of such code
on the disclosure, licensing, or distribution of any source code owned or
licensed by Company.

       

      3.   Records.  I
agree to keep and maintain adequate and current records (in the form of notes,
sketches, drawings and in any other form that is required by the Company) of all
Inventions made by me during the period of my employment by the Company, which
records shall be available to, and remain the sole property of, the Company at
all times.

       

      4.   Additional
Activities.  I agree that (a)
during the term of my employment by Company, I will not, without Company’s
express written consent, engage in any employment or business activity that is
competitive with, or would otherwise conflict with my employment by, Company,
and (b) for the period of my employment by Company and for one (l) year
thereafter, I will not, either directly or indirectly, solicit or attempt to
solicit any employee, independent contractor, or consultant of Company to
terminate his, her or its relationship with Company in order to become an
employee, consultant, or independent contractor to or for any other person or
entity.

       

      5.   Return Of
Company Property. Upon termination of my employment or upon Company’s
request at any other time, I will deliver to Company all of Company’s property,
equipment, and documents, together with all copies thereof, and any other
material containing or disclosing any Inventions, Third Party Information or
Confidential Information and certify in writing that I have fully complied with
the foregoing obligation.  I agree that I will not copy, delete, or
alter any information contained upon my Company computer or Company equipment
before I return it to Company.  In addition, if I have used any
personal computer, server, or e-mail system to receive, store, review, prepare
or transmit any Company information, including but not limited to, Confidential
Information, I agree to provide the Company with a computer-useable copy of all
such Confidential Information and then permanently delete and expunge such
Confidential Information from those systems; and I agree to provide the Company
access to my system as reasonably requested to verify that the necessary copying
and/or deletion is completed.  I further agree that any property
situated on Company’s premises and owned by Company is subject to inspection by
Company’s personnel at any time with or without notice.  Prior to the
termination of my employment or promptly after termination of my employment, I
will cooperate with Company in attending an exit interview and certify in
writing that I have complied with the requirements of this section.

       

      6.   Notification
Of New Employer.  If I leave the
employ of Company, I consent to the notification of my new employer of my rights
and obligations under this Agreement, by Company providing a copy of this
Agreement or otherwise.

       

      
        
          
          

        

        
          A-3

          
            

          

        

        
          
          

        

      

       

      7.   General
Provisions.

       

      7.1 Governing Law and
Venue.  This Agreement and any action related thereto will be
governed and interpreted by and under the laws of the State of California,
without giving effect to any conflicts of laws principles that require the
application of the law of a different state. I expressly
consent to personal jurisdiction and venue in the state and federal courts for
the county in which Company’s principal place of business is located for any
lawsuit filed there against me by Company arising from or related to this
Agreement.

       

      7.2 Severability.  If
any provision of this Agreement is, for any reason, held to be invalid or
unenforceable, the other provisions of this Agreement will remain enforceable
and the invalid or unenforceable provision will be deemed modified so that it is
valid and enforceable to the maximum extent permitted by law.

       

      7.3 Survival.  This
Agreement shall survive the termination of my employment and the assignment of
this Agreement by Company to any successor or other assignee and be binding upon
my heirs and legal representatives.

       

      7.4 Employment.  I agree
and understand that nothing in this Agreement shall give me any right to
continued employment by Company, and it will not interfere in any way with my
right or Company’s right to terminate my employment at any time, with or without
cause and with or without advance notice.

       

      7.5 Notices.  Each party
must deliver all notices or other communications required or permitted under
this Agreement in writing to the other party at the address listed on the
signature page, by courier, by certified or registered mail (postage prepaid and
return receipt requested), or by a nationally-recognized express mail
service.  Notice will be effective upon receipt or refusal of
delivery.  If delivered by certified or registered mail, notice will
be considered to have been given five (5) business days after it was mailed, as
evidenced by the postmark.  If delivered by courier or express mail
service, notice will be considered to have been given on the delivery date
reflected by the courier or express mail service receipt. Each party may change
its address for receipt of notice by giving notice of the change to the other
party.

       

      7.6 Injunctive Relief. I
acknowledge that, because my services are personal and unique and because I will
have access to the Confidential Information of Company, any breach of this
Agreement by me would cause irreparable injury to Company for which monetary
damages would not be an adequate remedy and, therefore, will entitle Company to
injunctive relief (including specific performance).  The rights and
remedies provided to each party in this Agreement are cumulative and in addition
to any other rights and remedies available to such party at law or in
equity.

       

      7.7 Waiver. Any waiver or failure
to enforce any provision of this Agreement on one occasion will not be deemed a
waiver of that provision or any other provision on any other
occasion.

       

      7.8 Export.  I agree not
to export, directly or indirectly, any U.S. technical data acquired from Company
or any products utilizing such data, to countries outside the United States,
because such export could be in violation of the United States export laws or
regulations.

       

      
        
          
          

        

        
          A-4

          
            

          

        

        
          
          

        

      

       

      7.9 Entire
Agreement.  If no other agreement governs nondisclosure and
assignment of inventions during any period in which I was previously employed or
am in the future employed by Company as an independent contractor, the
obligations pursuant to sections of this Agreement titled “Confidential
Information Protections” and “Inventions” shall apply.  This Agreement
is the final, complete and exclusive agreement of the parties with respect to
the subject matter hereof and supersedes and merges all prior communications
between us with respect to such matters.  No modification of or
amendment to this Agreement, or any waiver of any rights under this Agreement,
will be effective unless in writing and signed by me and the CEO of
Company.  Any subsequent change or changes in my duties, salary or
compensation will not affect the validity or scope of this
Agreement.

       

      This
Agreement shall be effective as of the first day of my employment with
Company.

       

      
      

       

      
        	EMPLOYEE:	 	
                COMPANY:

              
	
                I have read, understand,
      and Accept this agreement and have been given the opportunity to Review it
      with independent legal counsel.

              	 	Accepted
      and agreed:
	 	 	 
	___________________________________________________ 	 	___________________________________________________ 
	(Signature)	 	(Signature)
	 	 	 
	By:
      _______________________________________________ 	 	By:
      _______________________________________________ 
	 	 	 
	Title:
      ______________________________________________ 	 	Title:
      ______________________________________________ 
	 	 	 
	Date:
      ______________________________________________ 	 	Date:
      ______________________________________________ 
	 	 	 
	
                Address:
      ___________________________________________

              	 	
                Address:
      ___________________________________________

              

      

       

       

       

      
        
          
          

        

        
          A-5

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
A

       

      INVENTIONS

       

      1.           Prior Inventions
Disclosure.  The following is a complete list of all Prior
Inventions (as provided in Section 2.2 of the attached Employee Confidential
Information and Inventions Assignment Agreement, defined herein as the
“Agreement”):

       

      o  None

       

      o  See immediately
below:

       

      ____________________________________________________________________________________________________________

       

      ____________________________________________________________________________________________________________

       

       

      2.           Limited
Exclusion Notification.

       

      This is to
notify you in accordance with Section 2872 of the California Labor Code
that the foregoing Agreement between you and Company does not require you to
assign or offer to assign to Company any Invention that you develop entirely on
your own time without using Company’s equipment, supplies, facilities or trade
secret information, except for those Inventions that either:

       

      a.           Relate
at the time of conception or reduction to practice to Company’s business, or
actual or demonstrably anticipated research or development; or

       

      b.           Result
from any work performed by you for Company.

       

      To the
extent a provision in the foregoing Agreement purports to require you to assign
an Invention otherwise excluded from the preceding paragraph, the provision is
against the public policy of this state and is unenforceable.

       

      This
limited exclusion does not apply to any patent or Invention covered by a
contract between Company and the United States or any of its agencies requiring
full title to such patent or Invention to be in the United States.

       

      
        
          
          

        

        
          A-6

          
            

          

        

        
          
          

        

      

      

      Exhibit
B

    

    

    Separation
Date Release

    

    (To
be signed on or within 21 days after the employment termination
date.)

     

    In
exchange for the severance benefits to be provided to me by Pacific Ethanol,
Inc. (the “Company”) pursuant to the terms of my Amended and Restated Executive
Employment Agreement (the “Agreement”), I hereby provide the following General
Release of Claims (the “Release”).  I understand that, on the last
date of my employment with the Company, the Company will pay me any accrued
salary to which I am entitled by law, regardless of whether I sign this Release,
but I am not entitled to any severance benefits unless I sign and return this
Release to the Company and I allow it to become effective.

     

    I hereby
generally and completely release the Company and its directors, officers,
employees, shareholders, partners, agents, attorneys, predecessors, successors,
parent and subsidiary entities, insurers, affiliates, and assigns (collectively
the “Released Parties”) of and from any and all claims, liabilities and
obligations, both known and unknown, arising out of or in any way related to
events, acts, conduct, or omissions occurring at any time prior to or at the
time that I sign this Release.

     

    This
general release includes, but is not limited to: (1) all claims arising out of
or in any way related to my employment with the Company or the termination of
that employment; (2) all claims related to my compensation or benefits from the
Company, including salary, bonuses, commissions, vacation pay, expense
reimbursements, severance pay, fringe benefits, stock, stock options, or any
other ownership or equity interests in the Company; (3) all claims for
breach of contract, wrongful termination, and breach of the implied covenant of
good faith and fair dealing (including claims based on or arising under the
Agreement); (4) all tort claims, including claims for fraud, defamation,
emotional distress, and discharge in violation of public policy; and (5) all
federal, state, and local statutory claims, including claims for discrimination,
harassment, retaliation, attorneys’ fees, or other claims arising under the
federal Civil Rights Act of 1964 (as amended), the federal Americans with
Disabilities Act of 1990, the federal Age Discrimination in Employment Act (as
amended) (“ADEA”), the federal Family and Medical Leave Act, the California
Labor Code (as amended), the California Family Rights Act, and the California
Fair Employment and Housing Act (as amended).

     

    I
understand that notwithstanding the foregoing, the following are not included in
the Released Claims (the “Excluded Claims”): (i) any rights or claims for
indemnification I may have pursuant to any written indemnification agreement to
which I am a party, the charter, bylaws, or operating agreements of any of the
Released Parties, or under applicable law; or (ii) any rights which are not
waivable as a matter of law.  In addition, I understand that nothing
in this release prevents me from filing, cooperating with, or participating in
any proceeding before the Equal Employment Opportunity Commission, the
Department of Labor, or the California Department of Fair Employment and
Housing, except that I acknowledge and agree that I shall not recover any
monetary benefits in connection with any such claim, charge or proceeding with
regard to any claim released herein.  I hereby represent and warrant
that, other than the Excluded Claims, I am not aware of any claims I have or
might have against any of the Released Parties that are not included in the
Released Claims.

     

    
      
        
        

      

      
        B-1

        
          

        

      

      
        
        

      

    

     

    I
acknowledge that I am knowingly and voluntarily waiving and releasing any rights
I may have under the ADEA, and that the consideration given for the waiver and
release in the preceding paragraph is in addition to anything of value to which
I am already entitled.  I further acknowledge that I have been advised
by this writing that:  (1) my waiver and release do not apply to any
rights or claims that may arise after the date I sign this Release; (2) I should
consult with an attorney prior to signing this Release (although I may choose
voluntarily not to do so); (3) I have twenty-one (21) days to consider this
Release (although I may choose voluntarily to sign it earlier); (4) I have seven
(7) days following the date I sign this Release to revoke it by providing
written notice of revocation to the Company’s Chief Executive Officer; and
(5) this Release will not be effective until the date upon which the
revocation period has expired, which will be the eighth calendar day after the
date I sign it provided that I do not revoke it (the “Effective
Date”).

     

    I
UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN
CLAIMS.  I acknowledge that I have read and understand Section 1542 of
the California Civil Code which reads as follows:  “A general release does not extend to
claims which the creditor does not know or suspect to exist in his or her favor
at the time of executing the release, which if known by him or her must have
materially affected his or her settlement with the debtor.” I hereby
expressly waive and relinquish all rights and benefits under that section and
any law or legal principle of similar effect in any jurisdiction with respect to
my release of claims herein, including but not limited to the release of unknown
and unsuspected claims.

     

    I hereby
represent that I have been paid all compensation owed and for all hours worked,
I have received all the leave and leave benefits and protections for which I am
eligible, pursuant to the Family and Medical Leave Act, the California Family
Rights Act, or otherwise, and I have not suffered any on-the-job injury for
which I have not already filed a workers’ compensation claim.

     

    I further
agree: (1) not to disparage the Company, its parent, or its or their officers,
directors, employees, shareholders, affiliates and agents, in any manner likely
to be harmful to its or their business,  business reputation, or
personal reputation (although I may respond accurately and fully to any
question, inquiry or request for information as required by legal process); (2)
not to voluntarily (except in response to legal compulsion) assist any third
party in bringing or pursuing any proposed or pending litigation, arbitration,
administrative claim or other formal proceeding against the Company, its parent
or subsidiary entities, affiliates, officers, directors, employees or agents;
and (3) to reasonably cooperate with the Company, by voluntarily (without legal
compulsion) providing accurate and complete information, in connection with the
Company’s actual or contemplated defense, prosecution, or investigation of any
claims or demands by or against third parties, or other matters, arising from
events, acts, or failures to act that occurred during the period of my
employment by the Company.

     

    
    

     

    
      	By:  /s/ Bryon
      McGregor                                
      	 
	
              Bryon
      McGregor

            	
              Date

            

    

     

     

     

     

    
      
        
        

      

      
        B-2

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