Document:

arete8kex106_5262011.htm

 

 

Exhibit 10.6

 

 

CONTRACT OPERATOR AGREEMENT

 

THIS CONTRACT OPERATOR AGREEMENT (“Agreement”) is entered into on April 12, 2011, but will be effective on April 1, 2011 as outlined in the PSA between Tucker Family Partnership, LLLP, DNR Oil & Gas, Inc., and Arete Industries, Inc. at 7:00’clock a.m. MDT (“Effective Date”), between Arête Industries, Inc. (“Arête”) and DNR Oil & Gas, Inc, a Colorado corporation (“Contractor”).

 

RECITALS

 

A. Simultaneously herewith, Arête has entered into a Purchase and Sale Agreement (the “PSA”) with Contractor.  Terms capitalized but not defined herein shall have the meaning given such terms in the PSA.

 

B. This Agreement is being executed contemporaneously with the PSA, pursuant to which Contractor is assigning all of its right, title and interest in and to the assets described therein as the Assets to Arête on the terms and conditions set forth in the PSA. Due to the Contractor’s familiarity with and knowledge of the Assets, the Parties believe that it would be efficient and economical for Contractor to operate the Assets on Arête’s behalf as an independent contract operator under the terms and provisions set forth below.

 

C. The Parties intend that Contractor will operate the Assets on behalf of Arête under the terms and conditions set forth herein.

 

AGREEMENT

 

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

1. Scope of Services.  Contractor shall continue the physical operation of the Assets as they are currently operated, and will account to Arête for all of the Assets, subject to the limitations set forth in this Agreement (“Services”).  Pursuant to the foregoing, Contractor shall:

 

(a) operate, manage, and maintain the Assets in accordance with past practices of Contractor;

 

(b) employ such personnel as may be reasonably necessary to perform the Services;

 

(c) provide a monthly joint interest billing statement and monthly revenue check reflecting expenses and revenues on the Assets, but Contractor shall not be required to provide full financial accounting and maintenance of books and records on the Assets.  Arête shall have the right to review backup accounting detail for JIBs and revenue checks during normal business hours at Contractor’s office in Denver, Colorado;

 

(d) purchase supplies, materials, tools and equipment associated with ownership and operation of the Assets; provided that without Arête’s prior written consent,

 

  

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(e) Contractor will not purchase any of the above, if such purchase would result in a charge or cost to Arête over $10,000 for a single item, except in cases Contractor believes constitute an emergency;

 

(f) contract for Services associated with ownership and operation of the Assets; provided that without Arête’s prior written consent, Contractor will not enter into a service contract that is not terminable without penalty or cost upon thirty (30) days prior notice or would result in a charge or cost to Arête over $10,000 for a single item, except in cases Contractor believes constitute an emergency;

 

(g) pay any lease settlement, lease rentals, shut-in royalties, minimum royalties, payments in lieu of production, royalties, overriding royalties, production payments, net profit payments and other similar burdens  associated with ownership or operation of the Assets, and, at Arête’s direction, perform and comply with covenants contained in the Leases and agreements relating to the Assets;

 

(h) pay and perform all obligations of Arête which relate to the Assets, including, without limitation, the payment of operating costs, vendor invoices and contractor invoices associated with ownership or operation of the Assets;

 

(i) provide marketing, gas control and other similar services necessary to sell the products produced from the Assets in a manner basically consistent with Arête’s past practices;

 

(j) submit accurate and complete reports to state and federal authorities, as appropriate and consistent with Arête’s past practices, with copies of all reports to be provided to Arête, and provide to Arête daily production reports and monthly production reports and other reports generated by Contractor in the ordinary course of operation of the Assets; and

 

(k) inform Arête of any pending or threatened action or investigation of which the Contractor receives written notice and which Contractor believes in good faith could have a material adverse impact on the Assets, including all actions initiated or investigations threatened by a third party or governmental authority under applicable environmental laws.

 

Notwithstanding the foregoing, in carrying out its payment obligations hereunder, Contractor never shall be obligated to advance its own funds.  In addition, if any active well included in the Assets ceases production for any reason that will require other than routine maintenance in the ordinary course to restore production, Contractor shall notify Arête no later than five business days after Contractor becomes aware of such cessation of production concerning the action recommended by Contractor to restore production from such well.  The Services shall not include the drilling, reworking, deepening, sidetracking, plugging back, or recompletion of any well, or the plugging and abandonment of a well, or any other operation that, under the terms of the applicable Operating Agreement (or, in the absence of any applicable Operating Agreement, the AAPL 610 (1989 Revision) Model Form Operating Agreement), requires the prior approval of the non-operators, and Contractor shall have no obligation to perform any such operations on behalf of Arête.

 

  

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Limitation on Services.  Notwithstanding any other provisions in this Agreement, Contractor is not obligated to provide Services that Contractor did not perform immediately prior to the Closing Date.

 

2. Termination/Partial Termination.  This Agreement commences on the Effective Date referenced above and will terminate one year thereafter, unless extended or terminated earlier by mutual agreement of Arête and Contractor.

 

3. Reimbursement/Fee.  Arête shall reimburse Contractor for all third party costs and expenses (including without limitation, operating costs, capital expenditures, production taxes and producing, drilling and construction overhead charges billed by third party operators) incurred or borne by Contractor and associated with the Assets during the term of this Agreement.  In addition to the foregoing reimbursements, Arête shall pay Contractor $25,000 per month (pro rated for partial months) for the Services during the term of this Agreement. Any adjustments of the fee shall be adjusted as of the first day of April each year in accordance with the procedures established in Section III.1.A.3. of the “Accounting Procedure, Joint Operations” form (1984, Onshore) published by the Council of Petroleum Accountants Societies.  Contractor shall provide monthly statements to Arête detailing third party costs and expenses and the fee for the Services and Arête shall pay such invoices within 30 days following receipt.  If payment is not made within such time, the unpaid balance shall bear interest monthly at the prime rate in effect at JP Morgan Chase Bank, N.A. on the first day of the month in which delinquency occurs plus 2% or the maximum contract rate permitted by applicable Colorado law, whichever is lesser, plus attorneys’ fees, court costs, and other costs in connection with the collection of unpaid amounts.  In the event that any delinquency in payment exists for a period of more than 60 days, Contractor may, at its option, immediately declare this Agreement terminated and shall provide no further Services with respect to the Assets and shall have no further liability or responsibility with respect to the Assets.

 

4. Independent Contractor.  Contractor shall perform the Services under the general direction of Arête, but in all events Contractor shall be an independent contractor in accordance with the specifications herein set out.  Arête shall look to Contractor for results only and shall have no right at any time to direct or supervise Contractor or its servants or employees as to the manner, means, and method in which the Services are performed.  The detailed manner and method of performing the Services shall be under the control of Contractor.  Neither Contractor nor anyone employed by Contractor shall be deemed to be an employee, agent, servant, or representative of Arête.  Contractor shall be responsible for the payment of federal income tax, social security tax, workers’ compensation insurance, unemployment tax, and other similar payments, if any, relating to Contractor’s business and employees, and Arête shall not withhold any amounts for such purposes from payments made to Contractor.  As an independent contractor, neither Contractor nor anyone employed by Contractor will be eligible for the benefits provided to regular employees of Arête, including but not limited to health and disability insurance.  Contractor’s engagement as an independent contractor by Arête will terminate upon the termination of this Agreement as provided for herein.

 

5. No Agency.  Contractor shall not be deemed to be the agent or attorney-in-fact of Arête.  Contractor shall have no authority to amend, modify, or waive compliance with any operating agreement, oil and gas lease, or other contract or agreement in effect with respect to the Assets.  Contractor shall not undertake to negotiate new agreements or submit transaction

 

  

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6. proposals to other parties without Arête’s prior written consent.  Any new contract or agreement negotiated by Contractor with respect to the Assets must be executed by a duly authorized officer or representative of Arête before such contract or agreement becomes binding on Arête.  Nothing contained in this Agreement shall be deemed or construed to create a relationship among Arête and Contractor of partnership, joint venture, agency, or other relationship creating fiduciary, quasi-fiduciary, or similar duties or obligations inter se, or that would otherwise subject Arête and Contractor to joint and several or vicarious liability in favor of any other person.

 

7. Standard of Performance.  Contractor shall perform the Services as a reasonable and prudent operator, in good faith, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practices, and in compliance with all applicable laws and regulations and the terms of the applicable oil and gas leases, operating agreements, and this Agreement.  Notwithstanding the foregoing, the parties understand and agree that Contractor shall never have any liability to Arête in connection with its performance of the Services hereunder greater than that which it would have as the operator to a non-operator under the applicable Operating Agreement (or, in the absence of such an agreement, under the AAPL 610 (1989 Revision) Model Form Operating Agreement), IT BEING RECOGNIZED THAT UNDER SUCH AGREEMENTS, THE PARTY NAMED AS OPERATOR IS RESPONSIBLE ONLY FOR ITS GROSS NEGLIGENCE AND WILLFUL MISCONDUCT.

 

8. Obligations of Arête.  Except for any obligations set forth in and assumed by Contractor in this Agreement, Contractor shall not be responsible or liable for the performance of, or for its failure to perform, any duties or obligations of Arête under any operating agreement or any other contract or agreement between Arête and any other person or persons, whether written or oral, including, without limitation, any drilling contract.  In addition, Contractor shall not be responsible or liable for any obligation, costs, or expenses related to remediation of pollution or contamination of natural resources (including soil, air, surface water or groundwater) which might exist on the Assets as of the Effective Date of this Agreement.

 

9. Indemnification.  Contractor and its members, managers, officers, affiliates, employees, attorneys, contractors and agents (the “Contractor Group”) shall have no liability for or in connection with any and all claims, demands, suits, causes of action, losses, damages, liabilities, fines, penalties and costs (including reasonable attorneys’ fees and costs of litigation) whether known or unknown, asserted or unasserted (including, without limitation, claims under applicable environmental laws) that are brought by or owed to Arête or any third party (“Claims”) arising out of or resulting from the Services; and Arête hereby releases the Contractor Group from and shall fully protect, defend, indemnify and hold the Contractor Group harmless from and against all Claims arising out of or resulting from the Services, including, without limitation, Claims relating to (a) injury or death of any person(s) whomsoever, (b) damages to or loss of any property or resources, (c) breach of contract, (d) common law causes of action such as negligence, strict liability, nuisance or trespass, or (e) fault imposed by statute, rule, regulation or otherwise.  This indemnity and defense obligation applies regardless of cause or of any negligent acts or omissions of the Contractor Group including, without limitation sole negligence, concurrent negligence or strict liability of the Contractor Group, but not including gross negligence or willful misconduct of the Contractor Group.

 

  

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10. Assignability.  Neither Arête nor Contractor shall assign or sublease any rights or obligations under this Agreement without prior written consent of the non-assigning party; provided that without Arête’s consent, Contractor may subcontract all or any portion of the Services to a third party, provided that Contractor remains liable for all obligations hereunder.

 

11. Confidentiality.  Contractor shall treat as confidential information all maps, logs, geological, geophysical, reserve, engineering, and other scientific and technical information, reports, and data (including, without limitation, conventional and 3-D seismic data) generated pursuant to operations performed under this Agreement during the term of this Agreement, as well as all other confidential or proprietary information and rights of Arête of which Contractor becomes aware.  In like manner, Arête shall treat as confidential information all accounting and other confidential or proprietary data and rights of Contractor of which Arête becomes aware.  Each party agrees to keep confidential all such information, reports, and data, and shall not disclose or disseminate any such information, reports, or data to any third person without the prior written consent of the other party.  In no event shall the obligations contained in this Section 11 apply to information (a) required to be disclosed by or pursuant to applicable law, rule or regulation (b) that is or becomes public knowledge, other than as a result of a breach of this Agreement, (c) that Arête or Contractor obtains from a third person when such disclosure by the third person does not violate any confidentiality or other contractual obligation of such third person, (d) that pertains to the excluded assets, or (e) that is required to be provided to non-operators under any operating agreement.

 

12. Notices.  All notices and communications required or permitted to be given hereunder shall be in writing and shall be delivered personally, or sent by bonded overnight courier, or by facsimile transmission (provided any such facsimile transmission is confirmed either orally or by written confirmation), addressed to the appropriate party at the address for such party shown below or at such other address as such party shall have theretofore designated by written notice delivered to the party giving such notice:

 

	
If to Arête:

	  
	
Arête Industries, Inc.

	
7260 Osceola Street

	
Westminster, CO 80030

	
Attn.: Donald W. Prosser

	
Fax: (303) 429-0664

E-mail: dpro-cpa@msn.com.

 

	
If to Contractor:

	  
	
DNR Oil & Gas Inc.

	
12741 E. Caley, Unit 142

	
Englewood, CO 80111

	
Attn:  Charles B. Davis, President

	
Fax:   303-825-2968

 

 

  

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ny notice given in accordance herewith shall be deemed to have been given on the business day when delivered to the addressee in person or by facsimile or bonded overnight courier; provided, however, that if any such notice is received after normal business hours, the notice will be deemed to have been given on the next succeeding business day.  Any party may change the address, telephone number, or facsimile number to which such communications to such party are to be addressed by giving written notice to the other party in the manner provided in this Section 12.

 

13. Amendment.  This Agreement may be amended only by an instrument in writing executed by the party against whom enforcement is sought.

 

14. GOVERNING LAW.  THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION.

 

15. Limitation on Damages.  For the breach or non-performance by any party of any representation, warranty, covenant, or agreement contained in this Agreement, the liability of the obligor shall be limited to direct actual damages only, except to the extent that the obligee is entitled to specific performance or injunctive relief.  AS BETWEEN THE PARTIES, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER CONTRACTOR NOR ARÊTE SHALL BE LIABLE TO THE OTHER AS THE RESULT OF A BREACH OR A VIOLATION OF ANY REPRESENTATION, WARRANTY, COVENANT, AGREEMENT, OR CONDITION CONTAINED IN THIS AGREEMENT FOR CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT, IN CONTRACT, UNDER ANY INDEMNITY PROVISION, ARISING BY OPERATION OF LAW (INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY), OR OTHERWISE.

 

16. Dispute Resolution.

 

(a) Senior management of Arête and Contractor will attempt to resolve any and all disputes arising from this Agreement. Failing a settlement between the parties, any matters shall be handled as set forth herein.

 

(b) Any disagreement, difference, or dispute between the parties provided in this Agreement to be resolved by arbitration shall be resolved pursuant to arbitration according to the procedures set forth in this Section 16.

 

(c) Either Arête or Contractor may commence an arbitration proceeding hereunder by giving written notice to the other party.  No later than five (5) business days after the delivery of the notice commencing the arbitration proceeding, Arête and Contractor shall each select an arbitrator.  Promptly following their selection, the arbitrators selected by the parties jointly shall select a third arbitrator.  All arbitrators selected under this Agreement shall have at least eight (8) years of professional experience in the oil and gas industry and shall not previously have been employed by either party and shall not have a direct or indirect interest in either party or the subject matter of the arbitration.  The arbitration hearing shall commence as soon as is practical, but in no event later than thirty (30) days after the

 

  

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(d) selection of the third arbitrator.  If any arbitrator selected under this Section 16(c) should die, resign, or otherwise be unable to perform his duties hereunder, a successor arbitrator shall be selected pursuant to the procedures set forth in this Section 16(c).  The arbitrators shall settle all disputes in accordance with the Federal Arbitration Act and the Commercial Arbitration Rules of the American Arbitration Association, to the extent that such Rules do not conflict with the terms of such Act or the terms of this Agreement.  Any arbitration hearing shall be held in Denver, Colorado.  The arbitrators shall render their decision within thirty (30) days after the hearing(s) conclude, unless the parties settle the matter.

 

(e) The decision of the arbitrators shall be final and binding on the parties and, if necessary, may be enforced in any court of competent jurisdiction.  The law governing all such disputes shall be the laws of the State of Colorado, but without regard to conflicts of laws.  The fees and expenses of the arbitrators shall be borne by the party not substantially prevailing, or, if that cannot be determined, shall be shared one-half by Contractor and one-half by Arête.

 

The Parties have caused their duly authorized representatives to execute this Agreement as of the day and year first set forth above.

 

 

	  	
DNR OIL & GAS, INC.

	  	  
	  	
By: /s/ Charles B. Davis

	  	
Name: Charles B. Davis

	  	
Title:President

	  	  
	  	  
	  	
ARÊTE INDUSTRIES, INC.

	  	  
	  	
By: /s/ Donald W. Prosser

	  	
Name: Donald W. Prosser

	  	
Title:  Chairman

 

 

 

 

Page 7exh10_19.htm

PROMISSORY NOTE

$5,700,000.00 Minneapolis, Minnesota

 May 26, 2011

FOR VALUE RECEIVED, NETREIT BROADWAY, INC., a Maryland corporation (the “Borrower”), agrees and promises to pay to the order of DOUGHERTY FUNDING LLC, a Delaware limited liability company, its endorsees, successors and assigns (the “Lender”), at its principal office at Suite 4300, 90 South Seventh Street, Minneapolis, Minnesota 55402-4110 or such other place as the Lender may from time to time designate, the principal sum of FIVE MILLION SEVEN HUNDRED THOUSAND AND NO/100THS DOLLARS ($5,700,000.00) or so much as may from time to time be disbursed hereon, together with Interest (as defined herein) on the Principal Balance (as defined herein) at the Interest Rate or Rates hereinafter set forth, payable in the following manner and on all the following terms and at the following times:

	
1.  

	
Definitions.  Unless the context otherwise indicates, capitalized terms not otherwise defined herein shall have the meanings given such terms in the Loan Agreement (as defined herein).  For purposes of this Note the following terms shall have the following meanings:

 

	
a.  

	
“Adjusted Rate” shall mean the Interest Rate as adjusted on each Adjustment Date in accordance with the provisions of this Note.

 

	
b.  

	
“Adjustment Date” shall mean the first (1st) day of each calendar month, with the first Adjustment Date being June 1, 2011.

 

	
c.  

	
“Basis Points” shall mean an arithmetic expression of a percentage measured in hundredths of a percent (e.g. 50 Basis Points equals fifty hundredths of one percent).

 

	
d.  

	
“Loan Agreement” shall mean that Loan Agreement of even date herewith executed by the Borrower, as borrower, and the Lender, as lender, wherein the Lender has agreed to advance to the Borrower the principal sum of this Note, subject to compliance with the terms and conditions of such agreement, as such agreement may be amended, supplemented or modified by written agreement of the Borrower and the Lender.

 

	
e.  

	
“Loan Documents” shall mean this Note, the Loan Agreement, the Mortgage, the Assignment, the Guaranty and any other instruments given to evidence or secure this Note, as such documents may be amended, supplemented or modified by written agreement of the Borrower and the Lender

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 May 26, 2011

	
f.  

	
“Maturity Date” shall mean May 31, 2016, or such earlier date as this Note may be declared due and payable by the Lender in accordance with its terms.

 

	
g.  

	
“Mortgage” shall mean that Mortgage, Security Agreement and Fixture Financing Statement of even date herewith given by the Borrower to the Lender, granting a lien on the Premises as security for this Note and granting a security interest to the Lender in the real personal property described therein, as amended, supplemented or modified by written agreement of the Borrower and the Lender.

 

	
h.  

	
“One Month LIBOR Rate” shall mean the London Interbank Offered Rate as quoted in the “Money Rates” section of The Wall Street Journal at which U.S. dollar deposits in immediately available funds are offered in the London Interbank Dollar Market for a period of one month and in an amount comparable to the principal amount of this Note.  If The Wall Street Journal ceases to publish the One Month LIBOR Rate, the Lender may select a comparable publication or service to determine the One Month LIBOR Rate and if the One Month LIBOR Rate is no longer published, then the Lender may select a comparable interest rate index that measures the average of interbank offered rates for dollar deposits in the London, England market and if such index is no longer available in the London, England market, then, at the Lender’s option, it may substitute the prime, base or reference rate as announced by a bank of Lender’s selection in the Minneapolis-St. Paul metropolitan area or a similar rate quoted by any such bank to its business customers for business loans.

 

	
i.  

	
“Premises” shall mean those certain parcels of land and the improvements thereon, located in the City of Fargo, County of Cass, State of North Dakota, all as more fully described in the Mortgage.

 

	
j.  

	
“Principal” shall mean the sums of money from time to time disbursed by the Lender pursuant to this Note.

 

	
k.  

	
“Principal Balance” shall mean, at any given time, the amount of Principal remaining unpaid at such time.

 

	
l.  

	
“Term of Amortization” shall mean a period of twenty-five (25) consecutive years, commencing on the date hereof.

 

	
2.  

	
Disbursements.  Disbursements of the proceeds of this Note are to be made pursuant to the terms and conditions of the Loan Agreement.

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 May 26, 2011

 

	
3.  

	
Interest Rate.  The Principal Balance of this Note outstanding at the close of each day shall bear interest (“Interest”) at the following per annum rates of interest (the “Interest Rate”):

 

	
a.  

	
Initial Rate.  From and after the date hereof and up to and including June 1, 2011, this Note shall bear interest at a per annum rate of interest equal to five and seventy-five one hundredths of one percent (5.75%).

 

	
b.  

	
Adjusted Rate.  On each Adjustment Date the Interest Rate will be set at a per annum rate of interest equal to three hundred (300) Basis Points plus the One Month LIBOR Rate, on such Adjustment Date or, if any such Adjustment Date is not a Business Day, on the immediately preceding Business Day.  At no time shall the Adjusted Rate be less than 5.75% per annum or if the Default Rate applies, as provided below, less than 9.75% per annum.

 

	
c.  

	
Default Rate.  Notwithstanding anything to the contrary in a. or b. above, if an Event of Default (as defined herein) occurs or if this Note is not fully paid on the Maturity Date, then, at the option of the Lender, during the entire period during which such Event of Default shall occur and be continuing or on and after the Maturity Date, as applicable, Interest shall be payable on the Principal Balance at a per annum rate of interest equal to the lesser of (i) the maximum lawful rate of interest permitted to be paid on this Note, or (ii) four percent (4%) plus the Interest Rate then in effect under the terms of this Note (as described in (a) or (b) above, as applicable) (the “Default Rate”), whether or not the Lender has exercised its option to accelerate the maturity of this Note and declare the entire Principal Balance due and payable.

 

	
4.  

	
Basis of Computation.  Interest shall be calculated by multiplying the actual number of days elapsed in the period for which Interest in being calculated by a daily rate based on a 360-day year.  Interest shall commence as to any Principal disbursed on the date of disbursement of such Principal.

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 May 26, 2011

 

	
5.  

	
Late Charge.  In the event that any payment required hereunder is not paid within five (5) days after the date when due, the Borrower agrees to pay a late charge equal to the lesser of (i) the maximum lawful amount permitted to be paid on this Note as a late charge or (ii) $.04 per $1.00 of the unpaid payment (the “Late Charge”) to defray the costs of the Lender incident to collecting such late payment.  This Late Charge shall apply individually to all payments past due and there will be no daily pro rata adjustment.  This provision shall not be deemed to excuse a late payment or be deemed a waiver of any other rights the Lender may have, including the right to declare the entire Principal Balance and all unpaid Interest immediately due and payable.  Any Late Charge due hereunder shall be payable five (5) days after demand therefor.

 

	
6.  

	
Terms of Payment.  This Note shall be payable as follows:

 

	
a.  

	
On the first (1st) day of each calendar month following the date of this Note and continuing until this Note is fully paid, the Borrower shall pay to the Lender the accrued and unpaid Interest on the Principal Balance for the preceding calendar month;

 

	
b.  

	
On July 1, 2011 and on the first (1st) day of each month thereafter up to and including May 1, 2016, the Borrower shall pay to the Lender consecutive monthly amortized installments of Principal and Interest sufficient to fully amortize the Principal Balance over the remaining unexpired years in the Term of Amortization at the Adjusted Rate, as adjusted on each Adjustment Date, with any adjustment in the amount of the installment payments to take effect on the installment payment date next following each Adjustment Date; and

 

	
c.  

	
On the Maturity Date, the entire Principal Balance plus accrued and unpaid Interest and all other charges and sums due under this Note and the Loan Agreement shall be due and payable in full.

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$5,700,000.00 Minneapolis, Minnesota

 May 26, 2011

 

	
7.  

	
Application of Payments.  All payments shall be applied first to any Costs of Collection (as defined herein), then to Late Charges, then to Interest and then to the Principal Balance, except that if any advance made by the Lender under the terms of any instruments securing this Note is not repaid, any monies received, at the option of the Lender, may first be applied to repay such advances, plus Interest thereon, and the balance, if any, shall be applied as above.  If any payment of Principal, Interest, Costs of Collection (as defined herein), Late Charges or any other sum due hereunder becomes due and payable on a day other than a Business Day, the due date of such payment shall be extended to the next succeeding Business Day and Interest thereon shall be payable at the applicable Interest Rate during such extension.  Notwithstanding the foregoing, upon the occurrence of an Event of Default, any monies received shall, at the option and direction of the Lender, be applied to any sums due under this Note or any instrument securing this Note in such order and priority as the Lender shall determine.

 

	
8.  

	
Mandatory and Permitted Prepayment.  The Principal Balance of this Note may be voluntarily prepaid in whole or in part at any time without premium or penalty, provided, however, that any partial prepayment shall be not less than $100,000 and in integral multiples thereof.  Any voluntary prepayment shall be made on any regularly scheduled installment payment date, with not less than thirty (30) days advance written notice to the Lender.  At the option of the Lender, the Principal Balance is subject to mandatory prepayment, in whole or part as the case may be, upon certain events of damage, destruction or condemnation of the Premises given as security for this Note, all as more fully set forth in the Mortgage.  Any partial prepayment shall not suspend any required payments of either Principal or Interest and shall not reduce the amount of any scheduled installment payment.

 

	
9.  

	
Security.  This Note is the Promissory Note referred to and is secured by (i) the Mortgage, (ii) the Assignment, (iii) the Guaranty, and (iv) certain other Loan Documents given by the Borrower to the Lender encumbering the Premises, granting a security interest in fixtures and other personal property thereon or used or generated in connection therewith and/or assigning the rents, leases, income and profits therefrom (the “Collateral”), as such documents may be amended, modified or supplemented by written agreement of the parties thereto.

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 May 26, 2011

 

	
10.  

	
Event of Default.  If (i) any payment is not be made within five (5) days after the date when due in accordance with the terms and conditions of this Note (other than on the Maturity Date when all payments shall be due without any grace period), or (ii) any event designated as an “Event of Default” occurs under the Mortgage or under any other Loan Document, the entire Principal Balance together with accrued Interest thereon, Late Charges, Costs of Collection and all other charges and sums due under this Note or the Loan Documents shall become immediately due and payable at the option of the Lender upon notice to the Borrower.

 

	
11.  

	
Time of Essence.  Time is of the essence.  No delay or omission on the part of the Lender in exercising any right hereunder shall operate as a waiver of such right or of any other remedy under this Note.  A waiver on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on a future occasion.

 

	
12.  

	
Costs of Collection.  In the event of any default hereunder the Borrower agrees to pay the costs of collection including attorney’s fees and costs incurred, all other costs and fees incurred in litigation, mediation, bankruptcy and administrative proceedings and all appeals therefrom and all other costs and expenses incurred in the collection of the amounts due under this Note (the “Costs of Collection”).  Any Costs of Collection incurred hereunder shall be payable five (5) days after demand therefor.

 

	
13.  

	
Waiver of Presentment, Etc.  Presentment for payment, protest and notice of non-payment are waived.  Consent is given to any extension or alteration of the time or terms of payment hereof, any renewal, any release of any part or all of the security given for the payment hereof, any acceptance of additional security of any kind, and any release of, or resort to any party liable for payment hereof.  To the extent permitted by law all rights and benefits of any statute of limitations, and any moratorium, reinstatement, marshalling, forbearance, valuation, stay, extension, redemption, appraisement, exemption and homestead laws are waived.

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 May 26, 2011

 

	
14.  

	
Savings Clause.  It is expressly stipulated and agreed to be the intent of the Borrower and the Lender at all times to comply with applicable state law or applicable United States federal law (to the extent that it permits the Lender to contract for, charge, take, reserve, or receive a greater amount of interest than permitted under state law) and that this section shall control every other covenant and agreement in this Note and any other Loan Document.  If the applicable law is ever judicially interpreted so as to render usurious any amount called for under this Note or under any other Loan Documents, or contracted for, charged, taken, reserved, or received with respect to the indebtedness evidenced by this Note (the “Indebtedness”), or if the Lender’s exercise of the option to accelerate the maturity of this Note, or if any prepayment by the Borrower results in the Borrower having paid any Interest in excess of that permitted by applicable law, then it is the Borrower’s and the Lender’s express intent that all excess amounts theretofor collected by the Lender shall be credited on the Principal Balance of this Note and all other Indebtedness (or, if this Note and all other Indebtedness have been or would thereby be paid in full, refunded to the Borrower), and the provisions of this Note and the other Loan Documents shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new documents, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder.  All sums paid or agreed to be paid to the Lender for the use, forbearance, or detention of the Indebtedness shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Indebtedness until payment in full so that the rate or amount of Interest on account of the Indebtedness does not exceed the maximum lawful rate from time to time in effect and applicable to the Indebtedness for so long as the Indebtedness is outstanding.  Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of the Lender to accelerate the maturity of any Interest that has not accrued at the time of such acceleration or to collect unearned Interest at the time of such acceleration.

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15.  

	
Notices.  Any notices and other communications permitted or required by the provisions of this Note (except for telephonic notices expressly permitted) shall be in writing and shall be deemed to have been properly given or served by: (i) personal delivery, (ii) depositing the same with the United States Postal Service, or any official successor thereto, designated as Registered or Certified Mail, Return Receipt Requested, bearing adequate postage, or (iii) depositing the same with a reputable private courier or overnight delivery service, in each case addressed as hereinafter provided.  Each such notice shall be effective: (a) immediately upon personal delivery, (b) three (3) days after being deposited in the U.S. Mail, or (c) one (1) business day after delivery to such courier or overnight delivery service.  The time period within which a response to any such notice must be given, however, shall commence to run from the date of receipt of the notice by the addressee thereof.  Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice sent.  By giving to the other party hereto at least ten (10) days’ notice thereof, either party hereto shall have the right from time to time to change its address and shall have the right to specify as its address and shall have the right to specify as its address any other address within the United States of America.

 

Each notice to the Lender shall be addressed as follows:

 

	
Dougherty Funding LLC

	
Suite 4300

	
90 South Seventh Street

	
Minneapolis, MN  55102-4110

	
Attention:  Loan Servicing Department

	  
	
With a copy to:

	  
	
Fabyanske, Westra, Hart & Thomson, P.A.

	
800 LaSalle Avenue

	
Suite 1900

	
Minneapolis, MN 55402

	
Attention:  Mark W. Westra, Esq.

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Promissory Note

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$5,700,000.00 Minneapolis, Minnesota

 May 26, 2011

Each notice to the Borrower shall be addressed as follows:

	
NetREIT Broadway, Inc.

	
1282 Pacific Oaks Place

	
Escondido, CA 92029

	
Attention:  Gary Katz and Ken Elsberry

	  
	
With a copy to:

	  
	
NetREIT, Inc.

	
1282 Pacific Oaks Place

	
Escondido, CA  92029

	
Attention:  Kathryn Richman, Esq.

	  

	
16.  

	
Consent to Jurisdiction.  The Borrower hereby submits and consents to personal jurisdiction to the courts of the county in which the Premises are located, the courts of Hennepin County, Minnesota, and the courts of the United States of America located in such state or states for the enforcement of this Note and waives any and all personal rights under the laws of any state or the United States of America to object to jurisdiction in such courts.  Litigation may be commenced in any state court of general jurisdiction for such counties or in the United States District Court located in such state or states, at the election of the Lender.  Nothing contained herein shall prevent the Lender from bringing any action in any other state or jurisdiction against any other person or exercising any rights against any security given to the Lender or against the Borrower or any Guarantor personally or against any property of the Borrower or any Guarantor in any other state or jurisdiction.  Commencement of any such action or proceeding in any other state or jurisdiction shall not constitute a waiver of consent to jurisdiction of or the submission made by the Borrower to personal jurisdiction in any of such courts.  In the event an action is commenced in another jurisdiction or venue under any tort or contract theory arising directly or indirectly from the relationship created by this Note, the Lender, at its option, shall be entitled to have the case transferred to one of the jurisdictions and venues above described or any other jurisdiction, or if such transfer cannot be accomplished under applicable law, to have such case dismissed without prejudice.

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Promissory Note

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$5,700,000.00 Minneapolis, Minnesota

 May 26, 2011

 

	
17.  

	
Governing Law.  Notwithstanding the place of execution of this Note, the parties to this Note have contracted for North Dakota law to govern this Note and it is agreed that this Note is made pursuant to and shall be construed and governed by the laws of the State of North Dakota without regard to the principles of conflicts of law.

 

	
18.  

	
Waiver.  THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH ANY PARTIES TO THIS INSTRUMENT ARE INVOLVED AND WHICH DIRECTLY OR INDIRECTLY IN ANY WAY ARISES OUT OF, IS RELATED TO, OR IS CONNECTED WITH THIS INSTRUMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER, WHETHER ARISING OR ASSERTED BEFORE OR AFTER THE DATE OF THIS INSTRUMENT.

[Signature Page Follows]

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Promissory Note

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$5,700,000.00 Minneapolis, Minnesota

 May 26, 2011

 

Executed as of the date first above written.

 

 

	  	  	
NETREIT BROADWAY, INC.

	  	  	
a Maryland corporation

	  	
By:

	
 /s/ Kenneth W. Elsberry

	  	  	
Kenneth W. Elsberry,

	  	  	
Chief Financial Officer

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