Document:

Exhibit 10.3

 

 

CUSTODY AGREEMENT

 

 

dated as of April   , 2017

by and between

 

FLAT ROCK CAPITAL CORP.

 

(“Company”)

 

and

 

U.S. BANK NATIONAL ASSOCIATION

(“Custodian”)

 

 

TABLE OF CONTENTS

 

	
 
    	
 
    	
Page
    
	
 
    	
 
    	
 
    
	
1.
    	
DEFINITIONS
    	
1
    
	
 
    	
 
    	
 
    
	
2.
    	
APPOINTMENT OF   CUSTODIAN
    	
5
    
	
 
    	
 
    	
 
    
	
3.
    	
DUTIES OF CUSTODIAN
    	
6
    
	
 
    	
 
    	
 
    
	
4.
    	
REPORTING
    	
13
    
	
 
    	
 
    	
 
    
	
5.
    	
DEPOSIT IN U.S.   SECURITIES SYSTEMS
    	
14
    
	
 
    	
 
    	
 
    
	
6.
    	
RESERVED
    	
14
    
	
 
    	
 
    	
 
    
	
7.
    	
CERTAIN GENERAL TERMS
    	
14
    
	
 
    	
 
    	
 
    
	
8.
    	
COMPENSATION OF   CUSTODIAN
    	
17
    
	
 
    	
 
    	
 
    
	
9.
    	
RESPONSIBILITY OF   CUSTODIAN
    	
17
    
	
 
    	
 
    	
 
    
	
10.
    	
SECURITY CODES
    	
20
    
	
 
    	
 
    	
 
    
	
11.
    	
TAX LAW
    	
20
    
	
 
    	
 
    	
 
    
	
12.
    	
EFFECTIVE PERIOD AND   TERMINATION
    	
21
    
	
 
    	
 
    	
 
    
	
13.
    	
REPRESENTATIONS AND   WARRANTIES
    	
21
    
	
 
    	
 
    	
 
    
	
14.
    	
PARTIES IN INTEREST; NO   THIRD PARTY BENEFIT
    	
22
    
	
 
    	
 
    	
 
    
	
15.
    	
NOTICES
    	
22
    
	
 
    	
 
    	
 
    
	
16.
    	
CHOICE OF LAW AND   JURISDICTION
    	
23
    
	
 
    	
 
    	
 
    
	
17.
    	
ENTIRE AGREEMENT;   COUNTERPARTS
    	
23
    
	
 
    	
 
    	
 
    
	
18.
    	
AMENDMENT; WAIVER
    	
23
    
	
 
    	
 
    	
 
    
	
19.
    	
SUCCESSOR AND ASSIGNS
    	
24
    
	
 
    	
 
    	
 
    
	
20.
    	
SEVERABILITY
    	
24
    
	
 
    	
 
    	
 
    
	
21.
    	
REQUEST FOR   INSTRUCTIONS
    	
24
    
	
 
    	
 
    	
 
    
	
22.
    	
OTHER BUSINESS
    	
24
    
	
 
    	
 
    	
 
    
	
23.
    	
REPRODUCTION OF   DOCUMENTS
    	
25
    
	
 
    	
 
    	
 
    
	
24.
    	
MISCELLANEOUS
    	
25
    

 

	
SCHEDULES
    	
 
    	
 
    
	
 
    
	
SCHEDULE   A — Trade Confirmation
    
	
 
    
	
SCHEDULE   B — Initial Authorized Persons
    

 

i

 

THIS CUSTODY AGREEMENT (this “Agreement”) is dated as of April   , 2017 and is by and between Flat Rock Capital Corp. (and any successor or permitted assign), a corporation organized under the laws of the [              ], and U.S. BANK NATIONAL ASSOCIATION (or any successor or permitted assign acting as custodian hereunder, the “Custodian”), a national banking association.

 

RECITALS

 

WHEREAS, the Company is a closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”);

 

WHEREAS, the Company desires to retain U.S. Bank National Association to act as custodian for the Company and each Subsidiary hereafter identified to the Custodian;

 

WHEREAS, the Company desires that certain of the Company’s  Securities (as defined below) and cash be held and administered by the custodian pursuant to this Agreement; and

 

NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

 

1.                                      DEFINITIONS

 

1.1         Defined Terms.  In addition to terms expressly defined elsewhere herein, the following words shall have the following meanings as used in this Agreement:

 

“Account” or “Accounts” means the Cash Account, the Securities Account, any Subsidiary Cash Account and any Subsidiary Securities Account, collectively.

 

“Agreement” means this Custody Agreement (as the same may be amended from time to time in accordance with the terms hereof).

 

“Authorized Person” has the meaning set forth in Section 7.4.

 

“Business Day” means a day on which the Custodian or the relevant sub-custodian is open for business in the market or country in which a transaction is to take place.

 

“Cash Account” means the trust accounts to be established at the Custodian to which the Custodian shall deposit and hold any cash Proceeds received by it from time to time from or with respect to the Securities or the sale of the common stock of the Company, as applicable, which accounts shall be designated the “Flat Rock Capital Corp. Cash Interest Proceeds Account” and the “Flat Rock Capital Corp. Cash Principal Proceeds Account.”

 

“Company” means Flat Rock Capital Corp., its successors or permitted assigns.

 

“Confidential Information” means any databases, computer programs, screen formats, screen designs, report formats, interactive design techniques, and other similar or related information that may be furnished to the Company by the Custodian from time to time pursuant to this Agreement.

 

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“Custodian” has the meaning set forth in the first paragraph of this Agreement.

 

“Eligible Investment” means any investment that at the time of its acquisition is one or more of the following:

 

(a)           United States government and agency obligations;

 

(b)           commercial paper having a rating assigned to such commercial paper by Standard & Poor’s Rating Services or Moody’s Investor Service, Inc. (or, if neither such organization shall rate such commercial paper at such time, by any nationally recognized rating organization in the United States of America) equal to one of the two highest ratings assigned by such organization, it being understood that as of the date hereof such ratings by Standard & Poor’s Rating Services are “A1+” and “A1” and such ratings by Moody’s Investor Service, Inc. are “P1” and “P2”;

 

(c)            interest bearing deposits in United States dollars in United States banks with an unrestricted surplus of at least U.S. $250,000,000, maturing within one year; and

 

(d)           money market funds (including funds of the bank serving as Custodian or its affiliates) or United States government securities funds designed to maintain a fixed share price and high liquidity.

 

“Eligible Securities Depository” has the meaning set forth in Section (b)(1) of Rule 17f-7 under the 1940 Act.

 

“Federal Reserve Bank Book-Entry System” means a depository and securities transfer system operated by the Federal Reserve Bank of the United States on which are eligible to be held all United States Government direct obligation bills, notes and bonds.

 

“Financing Documents” has the meaning set forth in Section 3.3(b)(ii).

 

“Loan” means any U.S. dollar denominated commercial loan, or participation therein,  made by a bank or other financial institution that by its terms provides for payments of principal and/or interest, including discount obligations and payment-in-kind obligations, acquired by the Company from time to time.

 

“Loan Assignment Agreement” has the meaning set forth in Section 3.3(b)(ii).

 

“Noteless Loan” means a Loan with respect to which (i) the related loan agreement does not require the obligor to execute and deliver an Underlying Note to evidence the indebtedness created under such Loan and (ii) no Underlying Notes are outstanding with respect to the portion of the Loan transferred to the issuer or the prior holder of record.

 

“Participation” means an interest in a Loan that is acquired indirectly by way of a participation from a selling institution.

 

“Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary thereof)

 

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unincorporated organization, or any government or agency or political subdivision thereof.

 

“Proceeds” means, collectively, (i) the net cash proceeds to the Company of the initial public offering by the Company and any subsequent offering by the Company of any class of securities issued by the Company, (ii) cash distributions, earnings, dividends, fees and other cash payments paid on the Securities (or, as applicable, Subsidiary Securities) by or on behalf of the issuer or obligor thereof, or applicable paying agent, (iii) the net cash proceeds of the sale or other disposition of the Securities (or, as applicable, Subsidiary Securities) pursuant to the terms of this Agreement (and any Reinvestment Earnings from investment of the foregoing, as defined in Section 3.6(b) hereof) and (iv) the net cash proceeds to the Company of any borrowing or other financing by the Company.

 

“Proper Instructions” means instructions (including Trade Confirmations) received by the Custodian in form acceptable to it, from the Company, or any Person duly authorized by the Company in any of the following forms acceptable to the  Custodian:

 

(a)           in writing signed by an Authorized Person (and delivered by hand, by mail, by overnight courier or by telecopier);

 

(b)           by electronic mail from an Authorized Person;

 

(c)           in a communication utilizing access codes effected between electro mechanical or electronic devices; or

 

(d)           such other means as may be agreed upon from time to time by the Custodian and the party giving such instructions, including oral instructions.

 

“Reinvestment Earnings” has the meaning set forth in Section 3.6.

 

“Securities” means, collectively, the (i) investments, including Loans, acquired by the Company and delivered to the Custodian by the Company from time to time during the term of, and pursuant to the terms of, this Agreement and (ii) all dividends in kind (e.g., non-cash dividends) from the investments described in clause (i).

 

“Securities Account” means the segregated trust account to be established at the Custodian to which the Custodian shall deposit or credit and hold the Securities (other than Loans) received by it pursuant to this Agreement, which account shall be designated the “Flat Rock Capital Corp. Securities Custody Account”.

 

“Securities Depository” means The Depository Trust Company and any other clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, as amended (the “1934 Act”), which acts as a system for the central handling of Securities where all Securities of any particular class or series of an issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of the Securities.

 

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“Securities System” means the Federal Reserve Book-Entry System, a clearing agency which acts as a Securities Depository, or another book entry system for the central handling of securities (including an Eligible Securities Depository).

 

“Street Delivery Custom” means a custom of the United States securities market to deliver securities which are being sold to the buying broker for examination to determine that the securities are in proper form.

 

“Street Name” means the form of registration in which the securities are held by a broker who is delivering the securities to another broker for the purposes of sale, it being an accepted custom in the United States securities industry that a security in Street Name is in proper form for delivery to a buyer and that a security may be re-registered by a buyer in the ordinary course.

 

“Subsidiary” means, collectively, any wholly owned subsidiary of the Company identified to the Custodian by the Company.

 

“Subsidiary Cash Account” shall have the meaning set forth in Section 3.13(b).

 

“Subsidiary Securities” collectively, the (i) investments, including Loans, acquired by a Subsidiary and delivered to the Custodian  from time to time during the term of, and pursuant to the terms of, this Agreement and (ii) all dividends in kind (e.g., non-cash dividends) from the investments described in clause (i).

 

“Subsidiary Securities Account” shall have the meaning set forth in Section 3.13(a).

 

“Trade Confirmation” means a confirmation to the Custodian from the Company of the Company’s acquisition of a Loan, and setting forth applicable information with respect to such Loan, which confirmation may be in the form of Schedule A attached hereto and made a part hereof, subject to such changes or additions as may be agreed to by, or in such other form as may be agreed to by, the Custodian and the Company from time to time.

 

“UCC” shall have the meaning set forth in Section 3.3(b)(ii).

 

“Underlying Note” means the one or more promissory notes executed by an obligor to evidence a Loan.

 

1.2         Construction.  In this Agreement unless the contrary intention appears:

 

(a)                                 any reference to this Agreement or another agreement or instrument refers to such agreement or instrument as the same may be amended, modified or otherwise rewritten from time to time;

 

(b)                                 a reference to a statute, ordinance, code or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them;

 

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(c)                                  any term defined in the singular form may be used in, and shall include, the plural with the same meaning, and vice versa;

 

(d)                                 a reference to a Person includes a reference to the Person’s executors, successors and permitted assigns;

 

(e)                                  an agreement, representation or warranty in favor of two or more Persons is for the benefit of them jointly and severally;

 

(f)                                   an agreement, representation or warranty on the part of two or more Persons binds them jointly and severally;

 

(g)                                  a reference to the term “including” means “including, without limitation,” and

 

(h)                                 a reference to any accounting term is to be interpreted in accordance with generally accepted principles and practices in the United States, consistently applied, unless otherwise instructed by the Company.

 

1.3         Headings.  Headings are inserted for convenience and do not affect the interpretation of this Agreement.

 

2.                                      APPOINTMENT OF CUSTODIAN

 

2.1         Appointment and Acceptance.  The Company hereby appoints the Custodian as custodian of certain Securities and cash owned by the Company and the Subsidiaries (as applicable) and delivered to the Custodian from time to time during the period of this Agreement, on the terms and conditions set forth in this Agreement (which shall include any addendum hereto which is hereby incorporated herein and made a part of this Agreement), and the Custodian hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement with respect to it subject to and in accordance with the provisions hereof.

 

2.2         Instructions.  The Company agrees that it shall from time to time provide, or cause to be provided, to the Custodian all necessary instructions and information, and shall respond promptly to all inquiries and requests of the Custodian, as may reasonably be necessary to enable the Custodian to perform its duties hereunder.

 

2.3         Company Responsible For Directions.  The Company is solely responsible for directing the Custodian with respect to deposits to, withdrawals from and transfers to or from the Account.  Without limiting the generality of the foregoing, the Custodian has no responsibility for the Company’s compliance with the 1940 Act, any restrictions, covenants, limitations or obligations to which the Company may be subject or for which it may have obligations to third-parties in respect of the Account, and the Custodian shall have no liability for the application of any funds made at the direction of the Company.  The Company shall be solely responsible for properly instructing all applicable payors to make all appropriate payments to the Custodian for deposit to the

 

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Account, and for properly instructing the Custodian with respect to the allocation or application of all such deposits.

 

3.                                      DUTIES OF CUSTODIAN

 

3.1         Segregation.  All Securities and non-cash property held by the Custodian, as applicable, for the account of the Company (other than Securities maintained in a Securities Depository or Securities System) shall be physically segregated from other Securities and non-cash property in the possession of the Custodian and shall be identified as subject to this Agreement.

 

3.2         Securities Custody Account.  The Custodian shall open and maintain in its trust department a segregated trust account in the name of the Company, subject only to order of the Custodian, in which the Custodian shall enter and carry, subject to Section 3.3(b), all Securities (other than Loans), cash and other assets of the Company which are delivered to it in accordance with this Agreement.  For avoidance of doubt, the Custodian shall not be required to credit or deposit Loans in the Securities Account but shall instead maintain a register (in book-entry form or in such other form as it shall deem necessary or desirable) of such Loans, containing such information as the Company and the Custodian may reasonably agree.

 

3.3         Delivery of Securities to Custodian.

 

(a)                                 The Company shall deliver, or cause to be delivered, to the Custodian certain of the Company’s Securities, cash and other investment assets, including payments of income, payments of principal and capital distributions received by the Company with respect to such Securities, cash or other assets owned by the Company at any time during the period of this Agreement.  With respect to assets other than Loans, such assets shall be delivered to the Custodian in its role as, and (where relevant) at the address identified for, the Custodian.   Except to the extent otherwise expressly provided herein, delivery of Securities to the Custodian shall be in Street Name or other good delivery form.  The Custodian shall not be responsible for such Securities, cash or other assets until actually delivered to, and received by it.

 

(b)                                 (i)            In connection with its acquisition of a Loan or other delivery of a Security constituting a Loan, the Company shall deliver or cause to be delivered to the Custodian a properly completed Trade Confirmation containing such information in respect of such Loan as the Custodian may reasonably require in order to enable the Custodian to perform its duties hereunder in respect of such Loan on which the Custodian may conclusively rely without further inquiry or investigation, in such form and format as the Custodian reasonably may require.

 

(ii)           Notwithstanding any term hereof or elsewhere to the contrary, (a) it is hereby expressly acknowledged that (i) interests in Loans may be acquired by the Company from time to time which are not evidenced by, or accompanied by delivery of, a Security or an instrument, as that term is defined in Section 9-

 

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102(a)(4a) of the UCC, and may be evidenced solely by delivery to the Custodian of a facsimile copy of an assignment agreement (“Loan Assignment Agreement”) in favor of the Company as assignee, (ii) any such Loan Assignment Agreement (and the registration of the related Loan on the books and records of the applicable obligor or bank agent) shall be registered in the name of the Company (or its nominee), and (iii) the Custodian shall have no duty to hold any documents related to such Loan (collectively, “Financing Documents”), that may be delivered to it, and (b) nothing herein shall require the Custodian  to credit to the Securities Account or to treat as a financial asset (within the meaning of Section 8-102(a)(9) of the UCC) any such Loan or other asset in the nature of a general intangible (as defined in Section 9-102(a)(42) of the UCC) or to “maintain” a sufficient quantity thereof. The Custodian is not under a duty to examine any such Financing Documents, or any underlying credit agreements or loan documents for such Loan to determine the validity, sufficiency, marketability or enforceability of any Loan Assignment Agreement or other Financing Document (and shall have no responsibility for the genuineness or completeness thereof), or for the Company’s title to any related Loan. The Custodian may assume the genuineness of each such Financing Document it may receive and the genuineness and due authority of any signatures appearing thereon, and shall be entitled to assume that each such Financing Document it may receive is what it purports to be. If an original Security or Instrument is or shall be or become available with respect to any such Loan, it shall be the sole responsibility of the Company to make or cause delivery thereof to the Custodian, and the Custodian shall not be under any obligation at any time to determine whether any such original security or instrument has been or is required to be issued or made available in respect of any Loan or to compel or cause delivery thereof to the Custodian.

 

(iii)          The Custodian may assume the genuineness of any such Financing Document it may receive and the genuineness and due authority of any signatures appearing thereon, and shall be entitled to assume that each such Financing Document it may receive is what it purports to be. If an original “security” or “instrument” as defined in Section 8-102 and Section 9-102(a)(47) of the UCC, respectively, is or shall be or become available with respect to any Loan to be held by the Custodian under this Agreement, it shall be the sole responsibility of the Company to make or cause delivery thereof to the Custodian, and the Custodian shall not be under any obligation at any time to determine whether any such original security or instrument has been or is required to be issued or made available in respect of any Loan or to compel or cause delivery thereof to the Custodian.

 

(iv)          Contemporaneously with the acquisition of any Loan, the Company shall (1) cause any appropriate Financing Documents evidencing such Loan to be delivered to the Custodian; (2) if requested by the Custodian, provide to the Custodian an amortization schedule of principal payments and a schedule of the interest payable date(s) identifying the amount and due dates of all scheduled

 

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principal and interest payments for such Loan, (3) a properly completed Trade Confirmation containing such information in respect of such Loan as the Custodian may reasonably require in order to enable the Custodian to perform its duties hereunder in respect of such Loan on which the Custodian may conclusively rely without further inquiry or investigation, in such form and format as the Custodian reasonably may require; (4) take all actions necessary for the Company to acquire good title to such Loan; and (5) take all actions as may be necessary (including appropriate payment notices and instructions to bank agents or other applicable paying agents) to cause (A) all payments in respect of the Loan to be made to the Custodian and (B) all notices, solicitations and other communications in respect of such Loan to be directed to the Company.  The Custodian shall have no liability for any delay or failure on the part of the Company to provide necessary information to the Custodian, or for any inaccuracy therein or incompleteness thereof, or for any delay or failure on the part of the Company to give such effective payment instruction to bank agents and other paying agents, in respect of the Loans.  With respect to each such Loan, the Custodian shall be entitled to rely on any information and notices it may receive from time to time from the related bank agent, obligor or similar party with respect to the related Loan, and shall be entitled to update its records (as it may deem necessary or appropriate), or from the Company, on the basis of such information or notices received, without any obligation on its part independently to verify, investigate or recalculate such information.

 

3.4         Release of Securities.

 

(a)                                 The Custodian shall release and ship for delivery, or direct its agents or sub-custodian to release and ship for delivery, as the case may be, Securities of the Company held by the Custodian, its agents or its sub-custodian from time to time upon receipt of Proper Instructions (which shall, among other things, specify the Securities to be released, with such delivery and other information as may be necessary to enable the Custodian to perform), which may be standing instructions (in form acceptable to the Custodian) in the following cases:

 

(i)                                     upon sale of such Securities by or on behalf of the Company, and such sale may, unless and except to the extent otherwise directed by Proper Instructions, be carried out by the Custodian:

 

(A)                                in accordance with the customary or established practices and procedures in the jurisdiction or market where the transactions occur, including delivery to the purchaser thereof or to a dealer therefor (or an agent of such purchaser or dealer) against expectation of receiving later payment; or

 

(B)                                in the case of a sale effected through a Securities System, in accordance with the rules governing the operations of the Securities System;

 

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(ii)                                  upon the receipt of payment in connection with any repurchase agreement related to such Securities;

 

(iii)                               to a depositary agent in connection with tender or other similar offers for Securities;

 

(iv)                              to the issuer thereof or its agent when such Securities are called, redeemed, retired or otherwise become payable (unless otherwise directed by Proper Instructions, the cash or other consideration is to be delivered to the Custodian, its agents or its sub-custodian);

 

(v)                                 to an issuer thereof, or its agent, for transfer into the name of the Custodian or of any nominee of the Custodian or into the name of any of its agents or sub-custodian or their nominees or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units;

 

(vi)                              to brokers clearing banks or other clearing agents for examination in accordance with the Street Delivery Custom;

 

(vii)                           for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the Securities of the issuer of such Securities, or pursuant to any deposit agreement (unless otherwise directed by Proper Instructions, the new securities and cash, if any, are to be delivered to the Custodian, its agents or its sub-custodian);

 

(viii)                        in the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities (unless otherwise directed by Proper Instructions, the new securities and cash, if any, are to be delivered to the Custodian, its agents or its sub-custodian); and/or

 

(ix)                              for any other purpose, but only upon receipt of Proper Instructions.

 

3.5         Registration of Securities.  Securities held by the Custodian, its agents or its sub-custodian (other than bearer securities, securities held in a Securities System or Securities that are Noteless Loans or Participations) shall be registered in the name of the Company or its nominee; or, at the option of the Custodian, in the name of the Custodian or in the name of any nominee of the Custodian, or in the name of its agents or its sub-custodian or their nominees; or if directed by the Company by Proper Instruction, may be maintained in Street Name.  The Custodian, its agents and its sub-custodian shall not be obligated to accept Securities on behalf of the Company under the terms of this Agreement unless such Securities are in Street Name or other good deliverable form.

 

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3.6         Bank Accounts, and Management of Cash

 

(a)                                 Proceeds from the Securities received by the Custodian from time to time shall be credited to the Cash Account.  All amounts credited to the Cash Account shall be subject to clearance and receipt of final payment by the Custodian.  Securities may also be delivered and held in the Cash Account by the Custodian.

 

(b)                                 Amounts held in the Cash Account from time to time may be invested in Eligible Investments pursuant to specific written Proper Instructions (which may be standing instructions) received by the Custodian from an Authorized Person acting on behalf of the Company. Such investments shall be subject to availability and the Custodian’s then applicable transaction charges (which shall be at the Company’s expense). The Custodian shall have no liability for any loss incurred on any such investment. Absent receipt of such written instruction from the Company, the Custodian shall have no obligation to invest (or otherwise pay interest on) amounts on deposit in the Cash Account. In no instance will the Custodian have any obligation to provide investment advice to the Company. Any earnings from such investment of amounts held in the Cash Account from time to time (collectively, “Reinvestment Earnings”) shall be redeposited in the Cash Account (and may be reinvested at the written direction of the Company).

 

(c)                                  In the event that the Company shall at any time request a withdrawal of amounts from the Cash Account, the Custodian shall be entitled to liquidate, and shall have no liability for any loss incurred as a result of the liquidation of, any investment of the funds credited to such account as needed to provide necessary liquidity. Investment instructions may be in the form of standing instructions (in the form of Proper Instructions acceptable to Custodian).

 

(d)                                 The Company acknowledges that cash deposited or invested with any bank (including the bank acting as Custodian) may make a margin or generate banking income for which such bank shall not be required to account to the Company.

 

(e)                                  The Custodian shall be authorized to open such additional accounts as may be necessary or convenient for administration of its duties hereunder, with notice to be provided to the Company.

 

3.7         Foreign Exchange

 

(a)                                 Upon the receipt of Proper Instructions, the Custodian, its agents or its sub-custodian may (but shall not be obligated to) enter into all types of contracts for foreign exchange on behalf of the Company, upon terms acceptable to the Custodian and the Company (in each case at the Company’s expense), including transactions entered into with the Custodian, its sub-custodian or any affiliates of the Custodian or the sub-custodian. The Custodian shall have no liability for any losses incurred in or resulting from the rates obtained in such foreign exchange transactions; and absent specific and acceptable Proper Instructions, the Custodian

 

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shall not be deemed to have any duty to carry out any foreign exchange on behalf of the Company. The Custodian shall be entitled at all times to comply with any legal or regulatory requirements applicable to currency or foreign exchange transactions.

 

(b)                                 The Company acknowledges that the Custodian, any sub-custodian or any affiliates of the Custodian or any sub-custodian, involved in any such foreign exchange transactions may make a margin or generate banking income from foreign exchange transactions entered into pursuant to this section for which they shall not be required to account to the Company.

 

3.8         Collection of Income.  The Custodian, its agents or its sub-custodian shall use reasonable efforts to collect on a timely basis all income and other payments with respect to the Securities held hereunder to which the Company shall be entitled, to the extent consistent with usual custom in the securities custodian business in the United States. Such efforts shall include collection of interest income, dividends and other payments with respect to registered domestic securities if on the record date with respect to the date of payment by the issuer the Security is registered in the name of the Custodian or its nominee (or in the name of its agent or sub-custodian, or their nominee); and interest income, dividends and other payments with respect to bearer domestic securities if, on the date of payment by the issuer such securities are held by the Custodian or its sub-custodian or agent; provided, however, that in the case of Securities held in Street Name, the Custodian shall use commercially reasonable efforts only to timely collect income. In no event shall the Custodian’s agreement herein to collect income be construed to obligate the Custodian to commence, undertake or prosecute any legal proceedings.

 

3.9         Payment of Moneys.

 

(a)                                 Upon receipt of Proper Instructions, which may be standing instructions, the Custodian shall pay out from the Cash Account (or remit to its agents or its sub-custodian, and direct them to pay out) moneys of the Company on deposit therein in the following cases:

 

(i)                                     upon the purchase of Securities for the Company pursuant to such Proper Instruction; and such purchase may, unless and except to the extent otherwise directed by Proper Instructions, be carried out by the Custodian:

 

(A)                                                  in accordance with the customary or established practices and procedures in the jurisdiction or market where the transactions occur, including delivering money to the seller thereof or to a dealer therefor (or any agent for such seller or dealer) against expectation of receiving later delivery of such securities; or

 

(B)                                                   in the case of a purchase effected through a Securities System, in accordance with the rules governing the operation of such Securities System;

 

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(ii)                                  for the purchase or sale of foreign exchange or foreign exchange agreements for the accounts of the Company, including transactions executed with or through the Custodian, its agents or its sub-custodian, as contemplated by Section 3.8 above; and

 

(iii)                               for any other purpose directed by the Company, but only upon receipt of Proper Instructions specifying the amount of such payment, and naming the Person or Persons to whom such payment is to be made.

 

(b)                                 At any time or times, the Custodian shall be entitled to pay (i) itself from the Cash Account, whether or not in receipt of express direction or instruction from the Company, any amounts due and payable to it pursuant to Section 8 hereof, and (ii) as otherwise permitted by Section 7.5, 9.4 or Section 12.5 below, provided, however, that in each case all such payments shall be accounted for to the Company.

 

3.10      Proxies. The Custodian will, with respect to the Securities held hereunder, use reasonable efforts to cause to be promptly executed by the registered holder of such Securities proxies received by the Custodian from its agents or its sub-custodian or from issuers of the Securities being held for the Company, without indication of the manner in which such proxies are to be voted, and upon receipt of Proper Instructions shall promptly deliver such proxies, proxy soliciting materials and notices relating to such Securities. In the absence of such Proper Instructions, or in the event that such Proper Instructions are not received in a timely fashion, the Custodian shall be under no duty to act with regard to such proxies.

 

3.11      Communications Relating to Securities.  The Custodian shall transmit promptly to the Company all written information (including pendency of calls and maturities of Securities and expirations of rights in connection therewith) received by the Custodian, from its agents or its sub-custodian or from issuers of the Securities being held for the Company. The Custodian shall have no obligation or duty to exercise any right or power, or otherwise to preserve rights, in or under any Securities unless and except to the extent it has received timely Proper Instruction from the Company in accordance with the next sentence. The Custodian will not be liable for any untimely exercise of any right or power in connection with Securities at any time held by the Custodian, its agents or sub-custodian unless:

 

(i)                                     the Custodian has received Proper Instructions with regard to the exercise of any such right or power; and

 

(ii)                                  the Custodian, or its agents or sub-custodian are in actual possession of such Securities,

 

in each case, at least three (3) Business Days prior to the date on which such right or power is to be exercised. It will be the responsibility of the Company to notify the Custodian of the Person to whom such communications must be forwarded under this Section.

 

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3.12      Records.  The Custodian shall create and maintain complete records relating to its activities under this Agreement with respect to the Securities, cash or other property held for the Company under this Agreement.  All such records shall be the property of the Company and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Company, upon reasonable request and at least five Business Days’ prior written notice and at the Company’s expense. The Custodian shall, at the Company’s request, supply the Company with a tabulation of securities owned by the Company and held by the Custodian and shall, when requested to do so by the Company and for such compensation as shall be agreed upon between the Company and the Custodian, include, to the extent applicable, the certificate numbers in such tabulations, to the extent such information is available to the Custodian.

 

3.13      Custody of Subsidiary Securities.

 

(a)                                 With respect to each Subsidiary identified to the Custodian by the Company, there shall be established at the Custodian a segregated trust account to which the Custodian shall deposit and hold any Subsidiary Securities (other than Loans) received by it (and any Proceeds received by it in the form of dividends in kind) pursuant to this Agreement, which account shall be designated the “[INSERT NAME OF SUBSIDIARY] Securities Account” (the “Subsidiary Securities Account”).

 

(b)                                 With respect to each Subsidiary identified to the Custodian by the Company, there shall be established at the Custodian a segregated trust account to which the Custodian shall deposit and hold any cash Proceeds received by it from time to time from or with respect to Subsidiary Securities, which account shall be designated the  “[INSERT NAME OF SUBSIDIARY] Cash Proceeds Account” (the “Subsidiary Cash Account”).

 

(c)                                  To the maximum extent possible, the provisions of this Agreement regarding Securities of the Company, the Securities Account and the Cash Account shall be applicable to any Subsidiary Securities, Subsidiary Securities Account and Subsidiary Cash Account, respectively.  The parties hereto agree that the Company shall notify the Custodian in writing as to the establishment of any Subsidiary as to which the Custodian is to serve as custodian pursuant to the terms of this Agreement; and identify in writing any accounts the Custodian shall be required to establish for such Subsidiary as herein provided.

 

4.                                      REPORTING

 

(a)                                 For each Business Day, the Custodian shall render to the Company a daily report of (i) all deposits to and withdrawals from the Cash Account for such Business Day and the outstanding balance as of the end of such Business Day and (ii) an

 

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itemized statement of the Securities held pursuant to this Agreement and a report of settled trades of Securities as of the end of the prior Business Day.

 

(b)                                 The Custodian shall have no duty or obligation to undertake any market valuation of the Securities under any circumstance.

 

(c)                                  The Custodian shall provide the Company with such reports as are reasonably available to it and as the Company may reasonably request from time to time, on the internal accounting controls and procedures for safeguarding securities, which are employed by the Custodian.

 

5.                                      DEPOSIT IN U.S. SECURITIES SYSTEMS

 

The Custodian may deposit and/or maintain Securities in a Securities System within the United States in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, and subject to the following provisions:

 

(a)                                 The Custodian may keep domestic Securities in a U.S. Securities System provided that such Securities are represented in an account of the Custodian in the U.S. Securities System which shall not include any assets of the Custodian other than assets held by it as a fiduciary, custodian or otherwise for customers;

 

(b)                                 The records of the Custodian with respect to Securities which are maintained in a U.S. Securities System shall identify by book-entry those Securities belonging to the Company;

 

(c)                                  If requested by the Company, the Custodian shall provide to the Company copies of all notices received from the U.S. Securities System of transfers of Securities for the account of the Company; and

 

(d)                                 Anything to the contrary in this Agreement notwithstanding, the Custodian shall not be liable to the Company for any direct loss, damage, cost, expense, liability or claim to the Company resulting from use of any Securities System (other than to the extent resulting from the gross negligence or willful misconduct of the Custodian itself, or from failure of the Custodian to enforce effectively such rights as it may have against the U.S. Securities System.)

 

6.                                      RESERVED

 

7.                                      CERTAIN GENERAL TERMS

 

7.1         No Duty to Examine Financing Documents.  Nothing herein shall obligate the Custodian to review or examine the terms of any underlying instrument, certificate, credit agreement, indenture, loan agreement, promissory note, or other financing document evidencing or governing any Security to determine the validity, sufficiency, marketability or enforceability of any Security or Loan (and shall have no responsibility for the genuineness or completeness thereof), or otherwise.

 

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7.2         Resolution of Discrepancies.  In the event of any discrepancy between the information set forth in any report provided by the Custodian to the Company and any information contained in the books or records of the Company, the Company shall promptly notify the Custodian thereof and the parties shall cooperate to diligently resolve the discrepancy.

 

7.3         Improper Instructions.  Notwithstanding anything herein to the contrary, the Custodian shall not be obligated to take any action (or forebear from taking any action), which it reasonably determines (at its sole option) to be contrary to the terms of this Agreement or applicable law.  In no instance shall the Custodian be obligated to provide services on any day that is not a Business Day.

 

7.4         Proper Instructions

 

(a)                                 The Company will give a notice to the Custodian, in form acceptable to the Custodian, specifying the names and specimen signatures of persons authorized to give Proper Instructions (collectively, “Authorized Persons” and each is an “Authorized Person”) which notice shall be signed by an Authorized Person previously certified to the Custodian.  The Custodian shall be entitled to rely upon the identity and authority of such persons until it receives written notice from an Authorized Person of the Company to the contrary.  The initial Authorized Persons are set forth on Schedule B attached hereto and made a part hereof (as such Schedule B may be modified from time to time by written notice from the Company to the Custodian); and the Company hereby represents and warrants that the true and accurate specimen signatures of such initial Authorized Persons are set forth on the “funds transfer authorization” documentation that has been provided separately to the Custodian by the Company.  If such person elects to give the Custodian email or facsimile instructions (or instructions by a similar electronic method) and the Custodian in its discretion elects to act upon such instructions, the Custodian’s reasonable understanding of such instructions shall be deemed controlling.  The Custodian shall not be liable for any losses, costs or expenses arising directly or indirectly from the Custodian’s reliance upon and compliance with such instructions notwithstanding such instructions conflicting with or being inconsistent with a subsequent written instruction.  Any person providing such instructions or directions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Custodian, including without limitation the risk of the Custodian acting on unauthorized instructions, and the risk of interception and misuse by third parties.

 

(b)                                 The Custodian shall have no responsibility or liability to the Company (or any other person or entity), and shall be indemnified and held harmless by the Company, in the event that a subsequent written confirmation of an oral instruction fails to conform to the oral instructions received by the Custodian.  The Custodian shall not have an obligation to act in accordance with purported instructions to the extent that they conflict with applicable law or regulations, local market practice or the Custodian’s operating policies and practices. The

 

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Custodian shall not be liable for any loss resulting from a delay while it obtains clarification of any Proper Instructions.

 

7.5         Actions Permitted Without Express Authority.  The Custodian may, at its discretion, without express authority from the Company:

 

(a)                                 make payments to itself as described in or pursuant to Section 3.9(b), or to make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this agreement, provided that all such payments shall be accounted for to the Company;

 

(b)                                 surrender Securities in temporary form for Securities in definitive form;

 

(c)                                  endorse for collection cheques, drafts and other negotiable instruments; and

 

(d)                                 in general attend to all nondiscretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Company.

 

7.6         Evidence of Authority.  The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate instrument or paper reasonably believed by it to be genuine and to have been properly executed or otherwise given by or on behalf of the Company by an Authorized Person.  The Custodian may receive and accept a certificate signed by any Authorized Person as conclusive evidence of:

 

(a)           the authority of any person to act in accordance with such certificate; or

 

(b)           any determination or of any action by the Company as described in such certificate,

 

and such certificate may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary from an Authorized Person of the Company.

 

7.7         Receipt of Communications.  Any communication received by the Custodian on a day which is not a Business Day or after 3:30 p.m., Eastern time (or such other time as is agreed by the Company and the Custodian from time to time), on a Business Day will be deemed to have been received on the next Business Day (but in the case of communications so received after 3:30 p.m., Eastern time, on a Business Day the Custodian will use its best efforts to process such communications as soon as possible after receipt).

 

7.8        Actions on the Loans.  The Custodian shall have no duty or obligation hereunder to take any action on behalf of the Company, to communicate on behalf of the Company, to collect amounts or proceeds in respect of,  or otherwise to interact or exercise rights or remedies on behalf of the Company, with respect to any of the Loans.  All such actions and communications are the responsibility of the Company.

 

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8.                                      COMPENSATION OF CUSTODIAN

 

8.1         Fees.  The Custodian shall be entitled to compensation for its services in accordance with the terms of that certain fee letter dated              , between the Company and the Custodian.

 

8.2         Expenses.  The Company agrees to pay or reimburse to the Custodian upon its request from time to time all costs, disbursements, advances, and expenses (including reasonable fees and expenses of legal counsel) incurred, and any disbursements and advances made (including any account overdraft resulting from any settlement or assumed settlement, provisional credit, chargeback, returned deposit item, reclaimed payment or claw-back, or the like), in connection with the preparation or execution of this Agreement, or in connection with the transactions contemplated hereby or the administration of this Agreement or performance by the Custodian of its duties and services under this Agreement, from time to time (including costs and expenses of any action deemed necessary by the Custodian to collect any amounts owing to it under this Agreement).

 

9.                                      RESPONSIBILITY OF CUSTODIAN

 

9.1         General Duties.  The Custodian shall have no duties, obligations or responsibilities under this Agreement or with respect to the Securities or Proceeds except for such duties as are expressly and specifically set forth in this Agreement, and the duties and obligations of the Custodian shall be determined solely by the express provisions of this Agreement.  No implied duties, obligations or responsibilities shall be read into this Agreement against, or on the part of, the Custodian.

 

9.2         Instructions

 

(a)                                 The Custodian shall be entitled to refrain from taking any action unless it has such instruction (in the form of Proper Instructions) from the Company as it reasonably deems necessary, and shall be entitled to require, upon notice to the Company, that Proper Instructions to it be in writing.  The Custodian shall have no liability for any action (or forbearance from action) taken pursuant to the Proper Instruction of the Company.

 

(b)                                 Whenever the Custodian is entitled or required to receive or obtain any communications or information pursuant to or as contemplated by this Agreement, it shall be entitled to receive the same in writing, in form, content and medium reasonably acceptable to it and otherwise in accordance with any applicable terms of this Agreement; and whenever any report or other information is required to be produced or distributed by the Custodian it shall be in form, content and medium reasonably acceptable to it and the Company, and otherwise in accordance with any applicable terms of this Agreement.

 

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9.3         General Standards of Care.  Notwithstanding any terms herein contained to the contrary, the acceptance by the Custodian of its appointment hereunder is expressly subject to the following terms, which shall govern and apply to each of the terms and provisions of this Agreement (whether or not so stated therein):

 

(a)                                 The Custodian may rely on and shall be protected in acting or refraining from acting upon any written notice, instruction, statement, certificate, request, waiver, consent, opinion, report, receipt or other paper or document furnished to it (including any of the foregoing provided to it by telecopier or electronic means), not only as to its due execution and validity, but also as to the truth and accuracy of any information therein contained, which it in good faith believes to be genuine and signed or presented by the proper person (which in the case of any instruction from or on behalf of the Company shall be an Authorized Person); and the Custodian shall be entitled to presume the genuineness and due authority of any signature appearing thereon.  The Custodian shall not be bound to make any independent investigation into the facts or matters stated in any such notice, instruction, statement, certificate, request, waiver, consent, opinion, report, receipt or other paper or document, provided, however, that if the form thereof is specifically prescribed by the terms of this Agreement, the Custodian shall examine the same to determine whether it substantially conforms on its face to such requirements hereof.

 

(b)                                 Neither the Custodian nor any of its directors, officers or employees shall be liable to anyone for any error of judgment, or for any act done or step taken or omitted to be taken by it (or any of its directors, officers of employees), or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection herewith, unless such action constitutes gross negligence or willful misconduct on its part and in breach of the terms of this Agreement.  The Custodian shall not be liable for any action taken by it in good faith and reasonably believed by it to be within powers conferred upon it, or taken by it pursuant to any direction or instruction by which it is governed hereunder, or omitted to be taken by it by reason of the lack of direction or instruction required hereby for such action.  The Custodian shall not be under any obligation at any time to ascertain whether the Company is in compliance with the 1940 Act, the regulations thereunder, or the Company’s investment objectives and policies then in effect.

 

(c)                                  In no event shall the Custodian be liable for any indirect, special, punitive or consequential damages (including lost profits) whether or not it has been advised of the likelihood of such damages.

 

(d)                                 The Custodian may consult with, and obtain advice from, legal counsel selected in good faith with respect to any question as to any of the provisions hereof or its duties hereunder, or any matter relating hereto, and the written opinion or advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by the Custodian in good faith in

 

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accordance with the opinion and directions of such counsel; the reasonable cost of such services shall be reimbursed pursuant to Section 8.2 above.

 

(e)                                  The Custodian shall not be deemed to have notice of any fact, claim or demand with respect hereto unless actually known by an officer working in its Corporate Trust Services group and charged with responsibility for administering this Agreement or unless (and then only to the extent received) in writing by the Custodian at the applicable address(es) as set forth in Section 15 and specifically referencing this Agreement.

 

(f)                                   No provision of this Agreement shall require the Custodian to expend or risk its own funds, or to take any action (or forbear from action) hereunder which might in its judgment involve any expense or any financial or other liability unless it shall be furnished with acceptable indemnification.  Nothing herein shall obligate the Custodian to commence, prosecute or defend legal proceedings in any instance, whether on behalf of the Company or on its own behalf or otherwise, with respect to any matter arising hereunder, or relating to this Agreement or the services contemplated hereby.

 

(g)                                  The permissive right of the Custodian to take any action hereunder shall not be construed as duty.

 

(h)                                 The Custodian may act or exercise its duties or powers hereunder through agents (including for the avoidance of doubt, sub-custodians) or attorneys, and the Custodian shall not be liable or responsible for the actions or omissions of any such agent or attorney appointed with reasonable due care.

 

(i)                                     All indemnifications contained in this Agreement in favor of the Custodian shall survive the termination of this Agreement or earlier resignation or removal of the Custodian.

 

9.4         Indemnification; Custodian’s Lien.

 

(a)                                 The Company shall and does hereby indemnify and hold harmless each of the Custodian and its directors, officers, agents or employees for and from any and all costs and expenses (including reasonable attorney’s fees and expenses), and any and all losses, damages, claims and liabilities, that may arise, be brought against or incurred by the Custodian, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action or proceeding (including any inquiry or investigation) by any person, including without limitation the Company or any Subsidiary, and any advances or disbursements made by the Custodian (including in respect of any Account overdraft, returned deposit item, chargeback, provisional credit, settlement or assumed settlement, reclaimed payment, claw-back or the like), as a result of, relating to, or arising out of this Agreement, or enforcement of any provision herein or the administration or performance of the Custodian’s duties hereunder, or the relationship between the Company (including, for the avoidance of doubt,

 

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any Subsidiary) and the Custodian created hereby, other than such liabilities, losses, damages, claims, costs and expenses as are directly caused by the Custodian’s own action or inaction constituting gross negligence or willful misconduct on its part.

 

(b)                                 The Custodian shall have and is hereby granted a continuing lien upon and security interest in, and right of set-off against, the Account, and any funds (and investments in which such funds may be invested) held therein or credited thereto from time to time, whether now held or hereafter required, and all proceeds thereof, to secure the payment of any amounts that may be owing to the Custodian under or pursuant to the terms of this Agreement, whether now existing or hereafter arising.

 

9.5         Force Majeure.  Without prejudice to the generality of the foregoing, the Custodian shall be without liability to the Company for any damage or loss resulting from or caused by events or circumstances beyond the Custodian’s reasonable control including nationalization, expropriation, currency restrictions, the interruption, disruption or suspension of the normal procedures and practices of any securities market, power, mechanical, communications or other technological failures or interruptions, computer viruses or the like, fires, floods, earthquakes or other natural disasters, civil and military disturbance, acts of war or terrorism, riots, revolution, acts of God, work stoppages, strikes, national disasters of any kind, or other similar events or acts; errors by the Company (including any Authorized Person) in its instructions to the Custodian; or changes in applicable law, regulation or orders.

 

10.                               SECURITY CODES

 

If the Custodian issues to the Company, security codes, passwords or test keys in order that it may verify that certain transmissions of information, including Proper Instructions, have been originated by the Company, the Company shall take all commercially reasonable steps to safeguard any security codes, passwords, test keys or other security devices which the Custodian shall make available.

 

11.                               TAX LAW

 

11.1      Domestic Tax Law.  The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Company or the Custodian as custodian of the Securities or the Proceeds, by the tax law of the United States or any state or political subdivision thereof.  The Custodian shall be kept indemnified by and be without liability to the Company for such obligations including taxes, (but excluding any income taxes assessable in respect of compensation paid to the Custodian pursuant to this Agreement) withholding, certification and reporting requirements, claims for exemption or refund, additions for late payment interest, penalties and other expenses (including legal expenses) that may be assessed against the Company, or the Custodian as custodian of the Securities or Proceeds.

 

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11.2      Foreign Tax Law.  It shall be the responsibility of the Company to notify the Custodian of the obligations imposed on the Company by the tax law of foreign (e.g., non-U.S.) jurisdictions, including responsibility for withholding and other taxes, assessments or other government charges, certifications and government reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to cooperate with the Company with respect to any claims for exemption or refund under the tax law of the jurisdictions for which the Company has provided such information.

 

12.                               EFFECTIVE PERIOD AND TERMINATION

 

12.1      Effective Date.  This Agreement shall become effective as of its due execution and delivery by each of the parties.  This Agreement shall continue in full force and effect until terminated as hereinafter provided.  This Agreement may be terminated by the Custodian or the Company pursuant to Section 12.2.

 

12.2      Termination.  This Agreement shall terminate upon the earliest of (a) occurrence of the effective date of termination specified in any written notice of termination given by either party to the other not later than sixty (60) days prior to the effective date of termination specified therein, (b) such other date of termination as may be mutually agreed upon by the parties in writing.

 

12.3      Resignation.  The Custodian may at any time resign under this Agreement by giving not less than sixty (60) days advance written notice thereof to the Company.

 

12.4      Successor.  Prior to the effective date of termination of this Agreement, or the effective date of the resignation of the Custodian, as the case may be, the Company shall give Proper Instruction to the Custodian designating a successor Custodian, if applicable.

 

12.5      Payment of Fees, etc.  Upon termination of this Agreement or resignation of the Custodian, the Company shall pay to the Custodian such compensation, and shall likewise reimburse the Custodian for its costs, expenses and disbursements, as may be due as of the date of such termination or resignation.  All indemnifications in favor of the Custodian under this Agreement shall survive the termination of this Agreement or any resignation of the Custodian.

 

12.6      Final Report.  In the event of any resignation of the Custodian, the Custodian shall provide to the Company a complete final report or data file transfer of any Confidential Information as of the date of such resignation.

 

13.                               REPRESENTATIONS AND WARRANTIES

 

13.1      Representations of the Company.  The Company represents and warrants to the Custodian that:

 

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(a)                                 it has the power and authority to enter into and perform its obligations under this Agreement, and it has duly authorized, executed and delivered this Agreement so as to constitute its valid and binding obligation; and

 

(b)                                 in giving any instructions which purport to be “Proper Instructions” under this Agreement, the Company will act in accordance with the provisions of its certificate of incorporation and bylaws and any applicable laws and regulations.

 

13.2      Representations of the Custodian.  The Custodian hereby represents and warrants to the Company that:

 

(a)                                 it has the power and authority to enter into and perform its obligations under this Agreement;

 

(b)                                 it has duly authorized, executed and delivered this Agreement so as to constitute its valid and binding obligations; and

 

(c)                                  that it maintains business continuity policies and standards that include data file backup and recovery procedures that comply with all applicable regulatory requirements.

 

14.                               PARTIES IN INTEREST; NO THIRD PARTY BENEFIT

 

This Agreement is not intended for, and shall not be construed to be intended for, the benefit of any third parties and may not be relied upon or enforced by any third parties (other than successors and permitted assigns pursuant to Section 19).

 

15.                               NOTICES

 

Any Proper Instructions shall be given to the following address (or such other address as either party may designate by written notice to the other party), and otherwise any notices, approvals and other communications hereunder shall be sufficient if made in writing and given to the parties at the following address (or such other address as either of them may subsequently designate by notice to the other), given by (i) certified or registered mail, postage prepaid, (ii) recognized courier or delivery service, or (iii) confirmed telecopier or telex, with a duplicate sent on the same day by first class mail, postage prepaid:

 

(a)                                 if to the Company or any Subsidiary, to

 

Flat Rock Capital Corp.

[Address]

Telephone:                         

Attention:                           

Email:                                  

 

With a copy to:

[  ]

 

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(b)                                 if to the Custodian, to

 

U.S. Bank National Association

CDO Group/ Corporate Trust Services

214 North Tryon Street

Charlotte, NC 28202-1078

Telephone:  (704) 335-4620

Attention: Crystal Crudup-Burt

Email: crystal.crudupburt@usbank.com

 

16.                               CHOICE OF LAW AND JURISDICTION

 

This Agreement shall be construed, and the provisions thereof interpreted under and in accordance with and governed by the laws of the State of New York for all purposes (without regard to its choice of law provisions); except to the extent such laws are inconsistent with federal securities laws, including the 1940 Act, in which case such federal securities laws shall govern.  The Custodian and the Company each waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this agreement, any other agreement or the transactions contemplated hereby.

 

17.                               ENTIRE AGREEMENT; COUNTERPARTS

 

17.1      Complete Agreement.  This Agreement constitutes the complete and exclusive agreement of the parties with regard to the matters addressed herein and supersedes and terminates as of the date hereof, all prior agreements, agreements or understandings, oral or written between the parties to this Agreement relating to such matters.

 

17.2      Counterparts.  This Agreement may be executed in any number of counterparts and all counterparts taken together shall constitute one and the same instrument.

 

17.3      Facsimile Signatures.  The exchange of copies of this Agreement and of signature pages by facsimile transmission or pdf shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes.  Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

 

18.                               AMENDMENT; WAIVER

 

18.1      Amendment.  This Agreement may not be amended except by an express written instrument duly executed by each of the Company and the Custodian.

 

18.2      Waiver.  In no instance shall any delay or failure to act be deemed to be or effective as a waiver of any right, power or term hereunder, unless and except to the

 

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extent such waiver is set forth in an expressly written instrument signed by the party against whom it is to be charged.

 

19.                               SUCCESSOR AND ASSIGNS

 

19.1      Successors Bound.  The covenants and agreements set forth herein shall be binding upon and inure to the benefit of each of the parties and their respective successors and permitted assigns.  Neither party shall be permitted to assign their rights under this Agreement without the written consent of the other party; provided, however, that the foregoing shall not limit the ability of the Custodian to delegate certain duties or services to or perform them through agents or attorneys appointed with due care as expressly provided in this Agreement.

 

19.2      Merger and Consolidation.  Any corporation or association into which the Custodian may be merged or converted or with which it may be consolidated, or any corporation or association resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any corporation or association to which the Custodian transfers all or substantially all of its corporate trust business, shall be the successor of the Custodian hereunder, and shall succeed to all of the rights, powers and duties of the Custodian hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto.

 

20.                               SEVERABILITY

 

The terms of this Agreement are hereby declared to be severable, such that if any term hereof is determined to be invalid or unenforceable, such determination shall not affect the remaining terms.

 

21.                               REQUEST FOR INSTRUCTIONS

 

If, in performing its duties under this Agreement, the Custodian is required to decide between alternative courses of action, the Custodian may (but shall not be obliged to) request written instructions from the Company as to the course of action desired by it.  If the Custodian does not receive such instructions within two (2) Business Days after it has requested them, the Custodian may, but shall be under no duty to, take or refrain from taking any such courses of action.  The Custodian shall act in accordance with instructions received from the Company in response to such request after such two-Business Day period except to the extent it has already taken, or committed itself to take, action inconsistent with such instructions.

 

22.                               OTHER BUSINESS

 

Nothing herein shall prevent the Custodian or any of its affiliates from engaging in other business, or from entering into any other transaction or financial or other relationship with, or receiving fees from or from rendering services of any kind to the Company or any other Person.  Nothing contained in this Agreement shall constitute the Company and/or the Custodian (and/or any other Person) as members of any partnership, joint venture, association, syndicate,

 

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unincorporated business or similar assignment as a result of or by virtue of the engagement or relationship established by this Agreement.

 

23.                               REPRODUCTION OF DOCUMENTS

 

This Agreement and all schedules, exhibits, attachments and amendment hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process.  The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further production shall likewise be admissible in evidence.

 

24.                               MISCELLANEOUS

 

The Company acknowledges receipt of the following notice:

 

“ IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.

 

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.  For a non-individual person such as a business entity, a charity, a trust or other legal entity the Custodian will ask for documentation to verify its formation and existence as a legal entity.  The Custodian may also ask to see financial statements, licenses, identification and authorization documents from individuals claiming authority to represent the entity or other relevant documentation.”

 

[PAGE INTENTIONALLY ENDS HERE. SIGNATURES APPEAR ON NEXT PAGE.]

 

25

 

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed and delivered by a duly authorized officer, intending the same to take effect as of the date first written above.

 

	
Witness:
    	
 
    	
FLAT   ROCK CAPITAL CORP.
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
By:
    	
 
    	
 
    
	
Name:
    	
 
    	
 
    	
Name:
    	
 
    	
 
    
	
Title:
    	
 
    	
 
    	
Title:
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
Witness:
    	
 
    	
U.S.   BANK NATIONAL ASSOCIATION
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
By:
    	
 
    	
 
    
	
Name:
    	
 
    	
Name:
    	
 
    	
 
    
	
Title:
    	
 
    	
Title:
    	
 
    

 

26

 

SCHEDULE A

 

(Trade Confirmation)

 

[See Attached.]

 

 

SCHEDULE B

 

Any of the following persons (each acting singly) shall be an Authorized Person (as this list may subsequently be modified by the Company from time to time by written notice to the Custodian):

 

	
NAME:
    	
 
    	
SPECIMEN SIGNATURE:Exhibit

CONSTRUCTION LOAN AGREEMENT 
THIS CONSTRUCTION LOAN AGREEMENT (this "Agreement") is made effective as of April 28, 2017, between SOUTHSIDE BANK, a Texas state bank ("Lender") and LANTANA PLACE, L.L.C., a Texas limited liability company ("Borrower").
RECITALS
A.    Borrower is the owner and developer of a planned mixed use retail center called “Lantana Place” on approximately 35 acres of land located at the intersection of Southwest Parkway and William Cannon Drive West in Austin, Travis County, Texas (the “Land”, as more particularly described in the Deed of Trust) and that will include, without limitation (i) approximately 99,663 square feet of class A rentable space, including a movie theater and eatery (the “Theater”) and six other buildings on the Land, (ii) a national franchise hotel (the “Hotel”) to be constructed on the Land and that will be ground leased to the hotel franchisee/developer (the Land and the improvements are referred to collectively as the "Project"), as depicted on the site plan attached hereto as Exhibit "A".   
B.    Borrower has applied to Lender for a loan not to exceed the principal amount of $26,310,482.00 to finance a portion of the cost of the construction of the budgeted  improvements to the Land (the “Improvements”), secured by, among other things, a first lien on the Project (the "Loan").
C.    Lender is willing to make the Loan to Borrower subject to the terms and conditions stated in this Agreement and in the other Security Documents (as hereinafter defined). 
AGREEMENTS
NOW, THEREFORE, for and in consideration of Lender's agreement to make the Loan to Borrower and the mutual covenants contained herein and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged by the parties hereto, Borrower and Lender hereby agree as follows:
1.Commitment of Lender. Upon the terms and subject to the conditions and limitations set forth in this Agreement, and provided that no Event of Default (as hereinafter defined) has occurred, Lender will make advances to Borrower from time to time in accordance with the terms of this Agreement.  Notwithstanding anything to the contrary contained in this Agreement, the Note (as hereinafter defined) or in any of the other Security Documents (as hereinafter defined), Lender's commitment shall not exceed the lesser of (a) the stated principal amount of the Note, (b) sixty-five percent (65%) of the sum of the cost of the Land plus the budgeted cost of the Improvements per the cost schedule approved by Lender, or (c) sixty-five percent (65%) of the “as is” value or “as stabilized” value of the Land and Improvements according to the appraisal approved by Lender.  The Loan is not a revolving line of credit, and any principal advanced and paid may not be re-borrowed.

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2.    Security Documents. Borrower agrees to execute or cause to be executed contemporaneously herewith (or prior to the first advance under the Note) each of the following documents:
(a)    Promissory Note (the "Note") payable to Lender in the principal face amount of $26,310,482.00;
(b)    Deed of Trust and Security Agreement (the "Deed of Trust") covering the Land, condominium units and common elements, the Improvements, and the personal property and other assets therein described;
(c)    Guaranty Agreement duly executed by Stratus Properties Inc., a Delaware corporation (“Stratus”) as guarantor;
(d)    Assignment of Rights to Plans and Specifications;
(e)    Assignment of Rights under Construction Contract;
(f)    Assignment of Rights under Architect's Contract;
(g)    Disclaimer Regarding Inspection of Collateral;
(h)    Closing Certificate (the “Closing Certificate”);
(i)    UCC-1 “All Assets” Financing Statement;
(j)    Notice of Final Agreement; and
(k)    Such other documents, certificates, affidavits, loan applications and agreements that Lender may reasonably require prior to advancing proceeds of the Loan.
This Agreement and all of the foregoing and such other agreements, documents and instruments now or hereafter evidencing, governing, securing or guaranteeing any portion of the indebtedness evidenced by the Note or the performance and discharge of the obligations related hereto or thereto, together with any and all renewals, modifications, amendments, restatements, consolidations, substitutions, replacements, extensions and supplements hereof or thereof, are collectively referred to herein as the "Security Documents".
3.    Conditions to Closing. The obligation of the Lender to close the Loan (“Loan Closing”) shall be subject to the prior or simultaneous occurrence or satisfaction of each of the following conditions:
(a)    Borrower shall have executed (or caused to be executed) and delivered to Lender each of the Security Documents (other than Assignment of Rights under Construction Contract), and all other requirements of Lender shall have been satisfied;

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(b)    Borrower shall have acquired fee simple title to the Land and provided evidence of the same to Lender, using funds from sources other than Loan proceeds, and as part of Borrower's Equity (hereinafter defined) in the Project, prior to closing of the Loan, and Borrower shall have provided to Lender a true copy of Borrower’s settlement statement signed at closing of Borrower’s purchase of the Land;
(c)    Borrower shall provide Lender with evidence that all necessary action on the part of Borrower and Stratus has been taken with respect to the execution and delivery of this Agreement, the Security Documents and the consummation of the transactions contemplated hereby and thereby, so that this Agreement and all of the other Security Documents shall be valid and binding upon Borrower and each other person or entity executing and delivering any of the Security Documents. Such evidence shall include certified organizational documents, certified resolutions, certificates of incumbency and Certificates of Existence and Good Standing for the Borrower, Stratus and each such other entity as applicable;
(d)    Lender shall have obtained, at Borrower's expense, (i) an appraisal of the Land and Improvements by an appraiser acceptable to Lender, and Lender shall have completed a review of such appraisal and approved it, and (ii) an environmental site assessment of the Land prepared by consultants and with results acceptable to Lender;
(e)    Lender shall have received, at Borrower's expense, the unconditional commitment from a title insurance company acceptable to Lender for the issuance of a loan policy of title insurance in the full amount of the Loan, insuring the lien of the Deed of Trust as a first and prior lien upon the Land, and containing no exceptions except for those approved by Lender, in its reasonable discretion;
(f)    Borrower shall have furnished Lender with (i) a final subdivision plat of the Land approved by the City of Austin and duly filed in the appropriate official plat records in the office of the Travis County Clerk, (ii) a current survey of the Land, prepared by a registered professional land surveyor or a licensed engineer, containing a metes and bounds perimeter description of the Land, showing the location of all easements and all other matters of record, certifying that no improvements encroach upon any easements or other encumbrances affecting the Land, certified to Lender, and otherwise in a form approved by Lender, (iii) evidence that no portion of the Land lies in, and that the Improvements will not be constructed in, a flood hazard area, (iv) evidence that the Land has been properly zoned for the Project, and (v) evidence that all utilities are available to service the Project (other than utility facilities that are to be constructed as part of the Project in accordance with the Budget);
(g)    Borrower shall have furnished to Lender customer identification information, verification and such other information and supporting documentation regarding Borrower, Stratus and each person with authority or control with respect to Borrower, as Lender shall reasonably require for purposes of complying with the provisions of the Bank Secrecy Act (31 U.S.C. 5311 et. seq.), as amended by the USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 

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of 2001, Pub. L. 107-56), and Lender's policies and procedures implemented in accordance therewith;
(h)    Borrower shall have furnished Lender with a geotechnical survey or report of the Land, which survey or report shall have been performed and prepared by consultants acceptable to Lender and shall be acceptable to Lender in all respects; 
(i)    Borrower shall have furnished Lender with evidence that the following insurance policy is in force: commercial general liability insurance, in form and amounts, and issued by an insurer reasonably satisfactory to Lender, and naming the Lender as an additional insured;
(j)    Lender shall have reviewed and approved in advance the Borrower's settlement statement for the Loan prepared by Heritage Title Company of Austin, Inc. (Gregg Krumme and Amy Love Fisher, Senior Vice President), as the closing agent for the Loan;
(k)    Lender shall have received an opinion letter from Borrower’s legal counsel, Armbrust & Brown, PLLC, in form and substance satisfactory to Lender; 
(l)    Borrower shall have established with Lender a demand deposit account through which payments for costs of construction of the Improvements shall be made (the “Construction Account”); and
(m)    Lender shall have received and approved a signed lease agreement for the Theater, together with a signed attornment subordination, non-disturbance and attornment agreement in form and substance satisfactory to Lender.
4.    Conditions to All Advances. The obligation of the Lender to make the first advance of proceeds of the Loan, and each successive advance hereunder, shall be subject to the prior or simultaneous occurrence or satisfaction of each of the following conditions:
(a)    All of the conditions to the Loan Closing set forth in Section 3 hereof shall have been and continue to be satisfied;
(b)     Borrower shall have established with Lender a demand deposit account for Borrower’s business operations (the “Operating Account”);
(c)    Each of the statements set forth in the Closing Certificate shall be and remain true and correct in all material respects; 
(d)    Borrower shall have furnished to Lender evidence that Borrower has paid and contributed, out of funds from sources other than the Loan proceeds, Project costs (including only the cost of items included in the Budget, but excluding the cost of the Land) equal to or greater than $6,425,463.00 ("Borrower's Equity"); 
(e)    Borrower shall have entered into a construction contract with a general contractor reasonably satisfactory to Lender for the work that is subject to the advance 

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request.  Lender shall have received and approved true and correct copies of Borrower's construction contract with Borrower's general contractor regarding construction of the Improvements (which approval will not be unreasonably withheld), and Borrower shall have delivered to Lender (i) a full and complete set of the preliminary and final plans and specifications for the Project (the "Plans and Specifications"); and (ii) Lender shall have received from Borrower evidence that all necessary approvals to start construction from governmental authorities have been obtained and that a building permit for the Improvements has been issued by the City of Austin; and (iii) Lender shall have received from Borrower evidence of all required approvals of the Plans and Specifications;
(f)    Borrower shall have provided Lender with evidence that the following insurance policies and coverages are in force: (i) builder's risk "all risk" insurance, in an amount not less than one hundred percent (100%) of the full replacement costs, including the cost of debris removal, without deduction for depreciation and sufficient to prevent Borrower or Lender from becoming a co‐insurer (until Completion of the Improvements), (ii) contractor's general liability insurance and/or Borrower's commercial general liability insurance with such minimum coverage requirements (on an aggregate and a per occurrence basis) as may be reasonably required by Lender (until Completion of the Improvements), (iii) worker's compensation insurance (or any statutorily approved alternative acceptable to Lender) (until Completion of the Improvements), and (iv) upon Completion of the Improvements (as such terms are defined in Section 5(c) hereof), "all risk" casualty insurance (including fire and extended coverage).  Each insurance policy required hereunder shall be in form and amounts, and issued by insurers reasonably satisfactory to Lender, shall provide for thirty (30) days' prior written notice of cancellation to Lender, and shall each name Lender as additional insured, additional loss payee and with mortgagee clauses in favor of Lender, as applicable.  Each insurance policy required hereunder may be referred to as an "Insurance Policy" and collectively, the "Insurance Policies";
(g)    Lender shall have received from Borrower a cover letter, signed by Borrower requesting the advance, together with a draw request on an AIA form or such form as may be acceptable to Lender, completed to Lender's reasonable satisfaction, signed by Project architect and the general contractor for the Project, together with, if required by Lender, the certification by and satisfactory report from the Inspecting Person (as hereinafter defined);
(h)    Lender shall have received such other instruments and documents including, but not limited to, an affidavit of payment executed by Borrower and lien waivers, invoices and other documents supporting each advance from such contractors and suppliers, and in such form and content and containing such certifications, approvals and other information as the Lender may reasonably require to confirm payment for labor and materials supplied (except for any applicable retainage) attributable to the last advance under the Loan and lien-free status of the Project.  Lender acknowledges and agrees that lien waivers will be on forms promulgated under the Texas Property Code and that unconditional partial lien waivers will be provided to Lender in arrears.  Accordingly, with regard to the first construction advance, Borrower will only provide conditional partial lien waivers from the general contractor and the applicable subcontractors and that with the application for 

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payment for the next advance and each subsequent advance, Borrower will provide Lender with unconditional partial lien waivers from the general contractor and applicable subcontractors for work funded with the immediately prior Loan advance.  Each lien waiver will be subject to applicable retainage;
(i)    Lender shall have received and approved a signed lease agreement for the Hotel, together with a signed subordination, non-disturbance and attornment agreement (both of which shall be in form and substance satisfactory to Lender); and Lender shall have received satisfactory evidence that both the Hotel lease and the Theater lease remain in effect and unmodified, except for any amendments approved by Lender; and
(j)    All of the work usually complete at the stage of construction attained when the advance is requested shall have been done in good and workmanlike manner and all materials, supplies, chattels and fixtures usually furnished and/or installed at such stage of construction shall have been furnished and/or installed;
(k)    At Lender's option, Lender shall have received, at Borrower's sole cost and expense, a "down date endorsement" to the Lender's mortgagee policy of title insurance in form and containing no exceptions other than those acceptable to Lender in Lender's reasonable discretion;
(l)    There shall currently exist no Event of Default or any condition under any of the Security Documents, which, with the giving of notice or passing of time, or both, would constitute an Event of Default;
(m)    Borrower shall have made any Borrower's Deposit required hereunder; and
(n)    Lender shall have received and approved signed estoppel certificates from Lantana Commercial Community, Inc. and Stratus Properties Operating Co., L.P., which shall include an express subordination of any liens for assessments, fees or other charges to the liens and security interests created by the Deed of Trust. 
The foregoing notwithstanding, with regard to each application for any advance under the Loan that does not include an advance for construction costs (such as any advances solely for any broker commissions or any tenant finish allowances that are included in the Budget), Borrower will not be required to submit items contemplated by subsections (g) and (h) above.
5.    Limits on Advances; Construction Account. 
(a)    Notwithstanding anything contained herein to the contrary, Lender shall have no obligation to make construction advances hereunder (a) more frequently than once each month, (b) in amounts which exceed ninety percent (90%) of the cost to Borrower of construction of the Improvements during the period since the last advance made hereunder (except for the final payment of Borrower’s general contractor under the applicable construction contract), (c) other than in accordance with Lender's then current, reasonable 

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draw procedures, and (d) sooner than five (5) business days following Borrower's request for the advance (Lender agreeing to make advances within five (5) business days after receipt of a proper and complete draw request from Borrower, including all required supporting documentation).  All advances shall be deposited into the Construction Account, and Borrower agrees to pay all expenses associated with the Project for which Loan proceeds are available hereunder by checks written on such Construction Account.  Provided, Lender may, at its sole discretion during the continuance of an Event of Default, issue all checks jointly payable to Borrower and Borrower's contractors, subcontractors or suppliers.  In the event the Budget includes interest due and payable under the Note during the interest only period, such sums shall be advanced from time to time upon the written request of Borrower; provided, however, that Borrower hereby irrevocably authorizes and directs Lender to advance any available funds hereunder for the payment of accrued interest under the Note which is due and payable at any time.  Borrower agrees that all amounts advanced by Lender under the Loan for the payment of accrued interest shall be deemed an advance under the Note to the same extent as if such funds were made available to Borrower.  Absent the satisfaction of the conditions precedent to advances contained herein, Lender shall have no obligation to make such advances for interest payments hereunder, and Lender's commitment under this Agreement is at all times subject to the limitations and conditions contained in the Security Documents.  Borrower acknowledges that, in the event funds available from advances under the Loan are not sufficient to fully pay accrued but unpaid interest on the Note, Borrower shall remain liable for and shall in fact pay such amounts with other funds of Borrower.
(b)    Further, Lender shall have no obligation to make construction advances hereunder in an amount that in the aggregate exceeds the value of work then completed. Lender may, at its sole discretion during the continuance of an Event of Default, issue all checks jointly payable to Borrower and Borrower's suppliers, contractors or subcontractors.
(c)    The final construction advance, including, but not limited to, all related retainage, shall not be made until: (i) at least thirty (30) days shall have elapsed from the later of (A) the date of completion of the Improvements, as specified in Texas Property Code §53.106, if the affidavit of completion provided for in this Agreement is filed within ten (10) days after such date of completion as such completion has been certified by the Inspecting Person, or (B) the date of filing of such affidavit of completion if such affidavit of completion is filed ten (10) days or more after the date of the completion of the Improvements as specified in Texas Property Code §53.106; (ii) Borrower has provided Lender with evidence reasonably satisfactory to Lender that no mechanic's or materialmen's liens or other encumbrances have been filed against the Project; (iii) Borrower has provided Lender with final conditional lien releases and conditional lien waivers executed and delivered by the general contractor and all subcontractors, materialmen and other parties who have supplied not less than $5,000.00 worth of labor, materials or services for the construction of the Project, or who otherwise might be entitled to claim a contractual, statutory or constitutional lien against the Project in an amount not less than $5,000.00, all in the applicable form promulgated under the Texas Property Code, and (iv) Borrower has provided Lender with evidence reasonably satisfactory to Lender of the satisfaction of all 

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other statutory conditions to the release of the related retainage.  The term "Completion" shall mean satisfaction of the following items: (i) Borrower shall have delivered or caused to be delivered to Lender a written certification in the form of AIA Document G704, executed by the general contractor, the Architect, and the Borrower, certifying that the applicable portion of the Improvements are completed and the date of such completion; and (ii) Borrower shall have delivered a "final completion certificate" or equivalent from the City of Austin, Texas, evidencing completion of the applicable portion of the Improvements and approval thereof by the City of Austin.  Lender acknowledges that certificates of occupancy will only be issued by the City of Austin as tenants complete finish improvements for their respective premises in the Improvements.  Notwithstanding the foregoing, Lender may make construction advances for soft costs in accordance with the terms of Section 4 above before the final construction advance for the Improvements.  The term "Completion Achievement Date" shall mean the date that Borrower satisfies Completion in accordance with the terms and conditions of the Loan Documents.  
6.    Budget; Plans and Specifications. Borrower agrees that any advance hereunder shall be for the payment of costs, labor, materials and services supplied for the construction of the Improvements and for the payment of other costs and expenses incident to the Loan or the construction of the Improvements as specified in the budget attached hereto as Exhibit "B" (the "Budget"). During the continuance of an Event of Default or upon the written request of Borrower, Lender shall have the right, from time to time, to make advances that are allocated solely to any of the designated items in the Budget for such other purposes or in such different proportions as Lender may, in its sole discretion, deem necessary or advisable. Borrower may not re-allocate items of costs or make changes in the Budget without the prior written consent of Lender, which consent shall not be unreasonably withheld; provided, however, that if the actual advances made with respect to any line item in the Budget are less the amount of such line item specified in the Budget, Borrower may, at Borrower’s discretion, reallocate such savings to any other line items in the Budget for which the actual costs exceed the amount of such line item specified in the Budget, and Lender shall disburse advance proceeds in accordance with such reallocation. The Plans and Specifications shall not be modified without the prior written consent of Lender, except that consent by Lender shall not be required for modifications which do not exceed $100,000.00, individually, and $500,000.00 in the aggregate and do not change, in any material respect, the nature or scope of the work to be completed.
7.    Inspecting Person. An architect or other person (the "Inspecting Person") approved by Lender shall inspect the Improvements for the benefit of Lender at such times as Lender desires. Borrower will pay the reasonable fees and expenses and cooperate with the Inspecting Person and will cause Borrower's employees, agents and subcontractors to cooperate with the Inspecting Person; provided, however, Borrower shall be required to reimburse Lender for the cost of no more than one inspection a month.  Upon request, Borrower will furnish the Inspecting Person whatever information and documentation the Inspecting Person may consider necessary or useful in connection with the performance of his duties aforesaid, including, without limiting the generality of the foregoing, working details, Plans and Specifications and details thereof, samples of materials, licenses, permits, required certificates of public authorities, applicable zoning ordinances, building codes and copies of the contracts between Borrower and Borrower's contractors and suppliers.

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8.    Borrower's Deposit.  Subject to the reallocation provisions in Section 6 hereof, Borrower hereby covenants and agrees with Lender that if from time to time Lender reasonably determines that the unadvanced portion of the Loan will be insufficient for payment in full of (a) costs of labor, materials, and services required for the construction of the Improvements, (b) other costs and expenses specified herein or in the Budget (subject to Borrower’s right to reallocate savings in accordance with Section 6 hereof), or (c) other costs and expenses required to be paid in connection with the construction of the Improvements in accordance with the Plans and Specifications or any governmental requirements, then Borrower shall, on request of Lender, immediately make a "Borrower's Deposit" (herein so called) with Lender in an amount equal to the deficiency.  Lender will advance all or any portion of the Borrower's Deposit prior to any portion of the Loan proceeds. Borrower shall promptly notify Lender in writing if and when the cost of the construction of the Improvements exceeds, or appears likely to exceed, the amount of the unadvanced portion of the Loan, plus the unadvanced portion of the Borrower's equity contribution, plus the unadvanced portion of any then existing Borrower's Deposit. Borrower's Deposit is hereby pledged as additional collateral for the Loan, and Borrower hereby grants and conveys to Lender a security interest in all funds so deposited with Lender. Upon an Event of Default, Lender may, but shall not be obligated to, apply all or any portion of the Borrower's Deposit against the interest due or the outstanding principal balance under the Note or amounts due under any of the other Security Documents.
9.    Financial Reporting.  Borrower hereby covenants and agrees to timely deliver to Lender the financial statements, reports and information described on Schedule 1 attached hereto and made a part hereof for all purposes. All of such financial statements and reports shall be prepared in accordance with accurate accounting principles and procedures, applied on a consistent basis in a manner, and in form and substance reasonably satisfactory to Lender, and shall in all respects present a true, correct, complete and fair representation of the financial position of Borrower and shall be prepared and certified as to accuracy by a representative of Borrower reasonably acceptable to Lender. Lender is hereby authorized to disclose to any assignee or participant (or proposed assignee or participant) any financial or other information in its knowledge or possession regarding Borrower, the Project or the Loan.
10.    Commitment Fee.  In consideration of Lender's origination of the Loan to the Borrower contemplated hereby and of the commitment of the Lender to make the proceeds of the Loan available to the Borrower, Borrower agrees to pay to Lender, prior to or simultaneously with the execution of this Agreement, $131,552.41 as a commitment fee.
11.    Debt Service Coverage Ratio.
(a)Debt Service Coverage Ratio-Covenant.  Commencing on December 31, 2019, Borrower shall at all times thereafter maintain a Debt Service Coverage Ratio greater than or equal to the Debt Service Coverage Ratio (Minimum).
(b)    DSC Compliance Certificate.  Commencing on December 31, 2019, as described in Schedule 1 hereof, Borrower shall deliver to Lender annual DSC Compliance Certificates within forty-five (45) days after each calendar quarter, evidencing calculation of the Debt Service Coverage Ratio for the applicable DSC Period, and such written evidence, documents and backup information to support the calculations for each such DSC Period, 

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certified to by an appropriate senior representative of Borrower to be true and correct in all material respects.  Lender shall be entitled to request and require such additional or other backup documentation, including but not limited to certified financial information, as may be required by Lender in order to satisfy itself as to the correct calculation of such Debt Service Coverage Ratio;
(c)    Events of Default.  In addition to those Events of Default as defined in any of the Security Documents, the following events shall also constitute Events of Default under the Security Documents:
(i)    DSC Compliance Certificate.  If Borrower refuses or neglects to deliver to Lender the DSC Compliance Certificate in accordance with the terms and conditions of this Agreement and such failure is not cured within thirty (30) days after Borrower’s receipt of written notice thereof from Lender; or
(ii)    Covenant.  If Borrower fails to maintain the Debt Service Coverage Ratio (Minimum) for any DSC Period as described and required herein and such failure is not cured within thirty (30) days after Borrower’s receipt of written notice thereof from Lender; provided, Borrower may cure any failure to maintain the required Debt Service Coverage Ratio (Minimum) for any DSC Period by (x) prepaying the Loan to reduce the outstanding principal balance of the Loan to an amount that, when re-amortized, will result in a compliant Debt Service Coverage Ratio (Minimum), as calculated and reasonably determined by Lender (the "Required Prepayment Amount"), or (y) make a cash deposit with Lender in an amount equal to the Required Prepayment Amount, and execute such documents as Lender may require in order to pledge the cash deposit to secure payment of the Loan until the required Debt Service Coverage Ratio (Minimum) is achieved with respect to a subsequent DSC Period, at which time the Required Prepayment Amount shall be released to the Borrower if no Event of Default then exists.
(d)    Definitions.  The following terms which relate to the provisions contained in the Security Documents which relate to a Debt Service Coverage Ratio are as follows:
DSC Period:  The initial DSC Period shall be the six month period ending on December 31, 2019; the second DSC Period shall be the nine month period ending on March 31, 2020; and thereafter the DSC Period shall be each trailing twelve (12) consecutive calendar month period ending on June 30, September 30, December 31, and March 31, respectively, of each calendar year.
DSC Compliance Certificate:  A certificate to be furnished to Lender, in the form as may be reasonably approved by Lender from time to time, certified by the appropriate officer of Borrower pursuant to the applicable provisions of this Agreement, certifying that as of the date thereof, the calculation of Debt Service Coverage Ratio for the applicable DSC Period, together with such documentation as may be reasonably requested by Lender to substantiate such calculation.

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Debt Service Coverage Ratio: The ratio of Net Operating Income for a DSC Period divided by Debt Service Requirements with respect to such same DSC Period. 
Debt Service Coverage Ratio (Minimum): 1.35 to 1.00.
Debt Service Requirements:  With respect to any DSC Period, the principal and interest payable under the Loan for such DSC Period based on a 30-year amortization and the greater of (i) the interest rate in effect at the time of measurement, or (ii) the 10 year US Treasury rate in effect at the time of measurement, plus 2.75% per annum.
Gross Income:  The annualized sum of (i) the rentals, revenues and other cash forms of consideration from Qualified Leases including, without duplication, Tenant Reimbursements, received by, or paid to or for the account of or for the benefit of Borrower resulting from or attributable to the operation, leasing and occupancy of the Improvements, determined on a cash basis (except as specified herein), during the applicable DSC Period and (ii) the rentals, revenues and other cash forms of consideration, including, without duplication, Tenant Reimbursements, from any Qualified Lease that, on the date of determination, is then in a rent abatement or free rent period, to the extent the tenant is in occupancy and such rent and expense recoveries would have been paid under such Qualified Lease during the applicable DSC Period, if such rent abatement or free rent period were not then in effect during such applicable DSC Period (any such amount shall be annualized if such DSC Period is less than the full trailing twelve (12) consecutive calendar month period).  Notwithstanding anything included within the above definition of Gross Income, there shall be excluded from Gross Income the following:  (i) any security or other deposits of lessees and tenants, unless and until the same actually are either applied to actual rentals owed or other charges or fees; (ii) any security and other type deposits and advance rentals relating to the Improvements which have not been forfeited or other non-recurring income; (iii) the proceeds of any financing or refinancing with respect to all or any part of the Improvements; (iv) the proceeds of any sale or other capital transaction of all or any portion of the Improvements; (v) any insurance or condemnation proceeds paid with respect to the Improvements, except for rental loss or business interruption insurance and (vi) any insurance and condemnation proceeds applied in reduction of the principal of the Note in accordance with the terms of the Mortgage or the other Security Documents; provided, however, nothing set forth herein shall in any manner imply Lender's consent to a sale, refinancing or other capital transaction.
Net Operating Income:  For each applicable DSC Period, Gross Income, annualized, less Operating Expenses, determined on a cash basis of accounting except as otherwise provided herein. 
Operating Expenses:  Collectively, the aggregate of those amounts actually incurred and paid with respect to the ownership, operation, management, leasing and occupancy of the Improvements, determined on a cash basis, except as otherwise specified herein, with respect to the Project for the immediately preceding DSC Period including, but not limited to, any and all of the following (but without duplication of any item): (i) real property taxes calculated on an accrual basis (and not on the cash basis) of accounting for 

11

the DSC Period; such accrual accounting for real property taxes shall be based upon taxes actually assessed for the current calendar year, or if such assessment for the current calendar year has not been made, then until such assessment has been made (and with any retroactive adjustments for prior calendar months as may ultimately be needed when the actual assessments has been made) real property taxes for the DSC Period shall be estimated based on the last such assessment for the Project; (ii) foreign, U.S., state and local sales, use or other taxes, except for taxes measured by net income; (iii) special assessments or similar charges against the Project; (iv) costs of utilities, air conditioning and heating for the Project to the extent not directly paid by lessees or tenants; (v) maintenance and repair costs for the Project; (vi) a capital expenditure reserve in the amount of $830 per month; (vii) management fees; provided, however, the amount of such management fees which may be charged hereunder shall not be less than the sum of three percent (3.00%) of the Gross Income for each applicable calendar month; (viii) all salaries, wages and other benefits to "on-site" employees of Borrower or Borrower's property manager (excluding all salaries, wages and other benefits of officers and supervisory personnel, and other general overhead expenses of Borrower and Borrower's property manager) employed in connection with the leasing, maintenance and management of the Project which are specifically not included within the management fee outlined in subparagraph (vii) above; (ix) insurance premiums calculated on an accrual basis (and not on the cash basis) of accounting for the DSC Period; such accrual accounting for insurance premiums shall be based upon the insurance premiums for the Project which was last billed to Borrower, adjusted to an annualized premium if necessary; (x) an amortized and prorated allocation of costs, including leasing commissions, advertising and promotion costs, to obtain new leases or to extend or renew existing leases, and the costs of work performed and materials provided to ready tenant space in the Improvements for new or renewal occupancy under leases, excluding capital expenses and replacements; (xi) outside accounting and audit fees and costs and administrative expenses in connection with the direct operation and management of the Project; (xii) any payments, and any related interest thereon, to lessees or tenants of the Project with respect to security deposits or other deposits required to be paid to tenants but only to the extent any such security deposits and related interest thereon have been previously included in Gross Income and (xiii) to the extent not otherwise included in items (i) through (xii) above, amounts reimbursable as Tenant Reimbursements.  Notwithstanding anything to the contrary as being included in the definition of Operating Expenses, there shall be excluded from Operating Expenses the following: (i) depreciation and any other non-cash deduction allowed to Borrower for income tax purposes and (ii) any and all principal, interest or other costs paid under or with respect to the Note or Loan.
Qualified Lease:  A written lease agreement respecting all or any part of the Improvements that includes an attornment provision that is reasonably satisfactory to Lender, and that (i) covers less than five percent 5% of the rentable square feet of the Improvements; is made by Borrower, as landlord, in the ordinary course of business to an unaffiliated third party tenant; and that reflects fair market terms; or (ii) covers more than five percent 5% of the rentable square feet of the Improvements; is made by Borrower, as landlord; and is approved in writing by Lender (which approval shall not be unreasonably withheld).  

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Tenant Reimbursements:  All amounts paid by tenants under any Qualified Lease as reimbursements for operating expenses billed separately from the gross rent payable under such Qualified Leases, such as by way of example but not limitation, taxes, insurance and common area maintenance charges, but excluding capital expenses and construction or tenant finish expenses incurred by Borrower which are amortized and reimbursed by the tenant as part of the base or minimum rent payable under a Qualified Lease during the term of the Qualified Lease.
12.    Event of Default. The occurrence of any of the following shall constitute an event of default hereunder (an "Event of Default"):
(a)    Borrower shall fail to pay when due any installment of principal or interest or any other monetary obligation arising under the Note or any of the other Security Documents, and such failure continues for more than ten (10) days after written notice thereof, provided, however, that the obligation of Lender to provide notice and allow ten (10) days for cure under this subsection 12(a), shall terminate if Borrower shall fail to pay when due any installment of principal or interest due under the Note more than two (2) times in any twelve (12) month period;
(b)    Any representation or warranty made in any of the Security Documents or in any certificate, report, notice or financial statement furnished at any time in connection with the Note shall be false, misleading or erroneous in any material respect when made;
(c)    Borrower shall fail to perform, observe or comply with any non-monetary covenant, agreement or term contained in the Note or any of the other Security Documents and such failure continues for thirty (30) days after written notice thereof provided, however, Borrower shall have the right to attempt to cure said default for up to an additional sixty (60) days if, at all times, Borrower is diligently prosecuting a cure of said default;
(d)    Borrower or Stratus shall commence a voluntary proceeding seeking liquidation, reorganization or other relief with respect to its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or a substantial part of their property or shall consent to any such relief or to the appointment of or taking possession by any such official in such a proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any action to authorize any of the foregoing;
(e)    Any involuntary proceeding shall be commenced against Borrower or Stratus seeking liquidation, reorganization or other relief with respect to its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of one hundred twenty (120) days;

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(f)    If any one or more of the Security Documents shall be terminated, revoked, or otherwise rendered void or unenforceable, in any case, without Lender's prior written consent;
(g)    If Borrower or Stratus shall allow the levy against all or any part of the Project of any execution, attachment, sequestration or other writ which is not vacated within sixty (60) days after the levy;
(h)    The sale, encumbrance or other unauthorized transfer of all or any portion of the Project without Lender's prior written consent, except for sales of one or more of the out-parcel pad sites as expressly permitted in Section 11.7 of the Deed of Trust;
(i)    If Borrower fails to timely comply with any material requirements of any governmental authority within sixty (60) days after Borrower shall have received written notice thereof, and the failure to so comply could reasonably be expected to have a material adverse effect on the Project;
(j)    The rendering of one or more judgments or decrees for the payment of money in an amount in excess of $50,000.00, against Borrower or Stratus, and such judgment or decree has not been paid, vacated, bonded or stayed by appeal or otherwise, for a period of sixty (60) consecutive days after the date of entry;
(k)    A lawsuit or other proceeding shall be filed against Borrower or Stratus, and such lawsuit or proceeding shall not be dismissed within one hundred twenty (120) days of such filing, and Lender reasonably determines, in its sole discretion, that the lawsuit or proceeding, the cost of defense and the allegations contained therein shall materially impair the ability of Borrower or Stratus to pay or perform their respective obligations under the Note and the Security Documents;
(l)    Borrower shall default beyond any applicable grace or cure period in the payment of any other material debt or obligation related thereto (other than the indebtedness which is the subject of Section 12(a) hereof, or which is being contested in accordance with the terms and provisions of this Agreement or the Deed of Trust), or shall default in the performance of any other material agreement binding upon Borrower or Borrower’s assets or properties which could reasonably be expected to have a material adverse effect on the Project or on Borrower;
(m)    If there is a Change of Control (as defined on Schedule 2 attached hereto and incorporated herein for all purposes), without Lender’s prior written consent; 
(n)    If any Insurance Policy shall lapse, expire or terminate for any reason without a replacement policy being in full force and effect in accordance herewith within thirty (30) days of the lapse, expiration or termination of such Insurance Policy;
(o)    If any lien for the performance of work or the supply of materials be filed against the Land or Project and shall not be released, satisfied or bonded at the time of any 

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request for a construction advance hereunder or for a period of thirty (30) days after the date Borrower receives written notice of the filing thereof, unless such lien is being contested in good faith by Borrower and is discharged before a final and non-appealable order is issued by a court of competent jurisdiction authorizing foreclosure of such lien;
(p)    If the Plans and Specifications for the Project are amended or modified in any material respect (other than change orders permitted by this Agreement) without securing the prior approval of Lender, which shall not be unreasonably withheld;
(q)    If the construction of the Improvements or materials, articles or fixtures used in connection therewith shall not be in substantial compliance with the Plans and Specifications, or any amendment or modification thereof, approved by Lender (other than due to change orders permitted by this Agreement);
(r)    If, after commencement, construction of the Improvements is at any time discontinued for a period of (i) thirty (30) consecutive days if due to acts or matters within the Borrower's control, or (ii) ninety (90) consecutive days if due to strikes, riots, acts of God, war, unavailability of labor or materials, governmental laws, regulations or restrictions or other matters outside of Borrower's control;
(s)    The construction of the Improvements is (i) not commenced on or before the earlier to occur of (A) June 1, 2017 or (B) the date required, if any, for commencement of construction of the Improvements under any Qualified Lease or other agreement to which Borrower is a party, or (ii) not completed to the satisfaction of Lender, and Borrower shall not have obtained a "final completion certificate" or equivalent from the City of Austin, Texas, evidencing Completion of the Improvements and approval thereof by the City of Austin, prior to the date that is the earlier to occur of (A) December 31, 2018, or (B) the date that is thirty (30) days prior to the earliest date required for completion of construction of the Improvements under any Qualified Lease or other agreement to which Borrower is a party; 
(t)    The failure of Borrower to deposit with Lender any Borrower's Deposit requested by Lender within ten (10) days after's Lender's notice to Borrower and request for such Borrower's Deposit; 
(u)    Upon the occurrence of any Event of Default as defined in the Deed of Trust or any of the other Security Documents;  
(v)    Borrower shall incur any indebtedness (direct, indirect or contingent), except for the Loan, obligations under the Site Development Agreement, obligations under Leases (as defined in the Deed of Trust), obligations under commission agreements related to the Leases, obligations under construction contracts, professional services agreements, and other services or procurement agreements for the Project, unsecured trade payables incurred in the ordinary course of business, and any unsecured loans from owners or affiliates of Borrower (which shall be fully subordinated to the Loan on terms satisfactory to Lender in Lender’s sole discretion); 

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(w)    Stratus shall have a NAV (as defined in Schedule 1) of less than $125,000,000.00; or 
(x)    Prior to Completion of the Project, Borrower shall declare or make any distributions to the owners of Borrower, or apply any of its property or assets to the purchase, redemption or other retirement of any ownership interests in Borrower or in any way amend its capital structure, or enter into any merger, consolidation or conversion. 
(y)    Borrower shall close, or cease use of, the Operating Account. 
(z)    Borrower shall enter into any swap agreement, hedge agreement or similar derivative agreement or contact without Lender’s prior written consent. 
13.    Remedies. Upon the occurrence, and during the continuance, of an Event of Default, Lender shall have the right (in addition to any rights or remedies available to it under the Note, the Deed of Trust or any of the Security Documents, at law or in equity) to enter into and take possession of the Land and the Project, and to perform any and all work and labor necessary to complete the Improvements and to employ watchmen and security guards to protect the Project; and all sums so expended by the Lender shall be deemed to have been paid to the Borrower and secured by the Deed of Trust. For this purpose, Borrower hereby constitutes and appoints the Lender and any officer of Lender, as Borrower's true and lawful attorney-in-fact with full power of substitution, effective only upon the occurrence, and during the continuance of, an Event of Default, to complete the Project in the name of the Borrower, and hereby empowers said attorney-in-fact or attorneys-in-fact as follows:
(a)    To use any funds of the Borrower, including any funds which may remain unadvanced hereunder and any Borrower's Deposit, for the purpose of completing the Improvements.
(b)    To make such additions and changes and corrections in the Plans and Specifications which shall be necessary or desirable to facilitate the completion of the Improvements.
(c)    To employ such contractors, subcontractors, agents, architects and inspectors as shall be required for said purposes.
(d)    To pay, settle or compromise all existing bills and claims which are or may be liens against the Land, or may be necessary or desirable in order to complete and/or clear title to the Project.
(e)    To execute all the applications and certificates in the name of the Borrower which may be required by any construction contract.
(f)    To do any and every act with respect to the construction of the Improvements which the Borrower may do in Borrower's own behalf.

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(g)    To prosecute and defend all actions or proceedings in connection with the Improvements.
It is understood that this power of attorney shall be deemed to be a power coupled with an interest that cannot be revoked until the Loan has been repaid to Lender in full.
14.    Advances to Contractors. At Lender's option upon the occurrence, and during the continuance, of an Event of Default, Lender may make advances directly to contractors, subcontractors and/or suppliers and the execution of this Agreement by the Borrower constitutes an irrevocable direction and authorization to so advance the Loan proceeds. No further direction or authorization from Borrower shall be necessary to warrant such direct advances and all such advances shall satisfy pro tanto the obligations of Lender hereunder and shall be evidenced by the Note and secured by the Deed of Trust as fully if made to Borrower, regardless of the disposition thereof by such contractors, subcontractors or suppliers.
15.    Role of Lender. Lender shall have no liability, obligation, or responsibility whatsoever with respect to the construction of all or any part of the Improvements except to make advances of the proceeds of the Loan pursuant to the covenants, terms and conditions of this Agreement. Lender shall not be obligated to inspect the Project or the construction of the Improvements, or any part thereof, nor shall Lender be liable for the performance or default of Borrower, Borrower's architect, the Inspecting Person, any contractor, subcontractors, or any other party, or for any failure to construct, complete, protect or insure any part of the Improvements, or for the payment of costs of labor, materials or services supplied for the construction of any part of the Improvements, or for the performance of any obligation of Borrower whatsoever. No action, omission or writing, including, without limitation, Lender's advance of Loan proceeds hereunder or Lender's review of the Plans and Specifications, shall be construed as a representation or warranty as to the quality of construction or the accuracy of such Plans and Specifications, express or implied, to any party by Lender.
16.    Indemnification. Borrower agrees to indemnify, defend and hold the Lender and its shareholders, employees, officers, directors, agents and attorneys harmless from and against any and all loss, liability, obligation, damage, penalty, judgment, claim, deficiency and expense (including interest, penalties, attorneys' fees and amounts paid in settlement) to which the Lender or its shareholders, employees, officers, directors, agents and attorneys may become subject arising out of or based upon a breach or Event of Default by Borrower hereunder, or arising out of or in connection with the Project or construction of the Improvements.
17.    Expenses. Notwithstanding any provision hereof to the contrary, the Borrower shall pay all out-of-pocket expenses (including, without limitation, the reasonable fees and expenses of counsel for the Lender) in connection with the negotiation, preparation, execution, filing, recording, refiling, re-recording, modification and supplement of the Security Documents and the making, servicing and collection of the Loan.
18.    General Interest and Usury Provisions.

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(a)    Savings Clause. It is expressly stipulated and agreed to be the intent of Borrower and Lender at all times to comply strictly with the applicable Texas law governing the maximum rate or amount of interest payable on the indebtedness evidenced by the Note and the Related Indebtedness (as hereinafter defined) or applicable United States federal law to the extent that it permits Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas law. If the applicable law is ever judicially interpreted so as to render usurious any amount (i) contracted for, charged, taken, reserved or received pursuant to the Note, any of the other Security Documents or any other communication or writing by or between Borrower and Lender related to the transaction or transactions that are the subject matter of the Security Documents, (ii) contracted for, charged, taken, reserved or received by reason of Lender's exercise of the option to accelerate the maturity of the Note and/or the Related Indebtedness, or (iii) Borrower will have paid or Lender will have received by reason of any voluntary prepayment by Borrower of the Note and/or the Related Indebtedness, then it is Borrower's and Lender's express intent that all amounts charged in excess of the Maximum Lawful Rate shall be automatically canceled, ab initio, and all amounts in excess of the Maximum Lawful Rate theretofore collected by Lender shall be credited on the principal balance of the Note and/or the Related Indebtedness (or, if the Note and all Related Indebtedness have been or would thereby be paid in full, refunded to Borrower), and the provisions of the Note and the other Security Documents shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable laws, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder; provided, however, if the Note has been paid in full before the end of the stated term of the Note, then Borrower and Lender agree that Lender shall, with reasonable promptness after Lender discovers or is advised by Borrower that interest was received in an amount in excess of the Maximum Lawful Rate, either credit such excess interest against the Note and/or any Related Indebtedness then owing by Borrower to Lender and/or refund such excess interest to Borrower. Borrower hereby agrees that as a condition precedent to any claim seeking usury penalties against Lender, Borrower will provide written notice to Lender, advising Lender in reasonable detail of the nature and amount of the violation, and Lender shall have sixty (60) days after receipt of such notice in which to correct such usury violation, if any, by either refunding such excess interest to Borrower or crediting such excess interest against the Note and/or the Related Indebtedness then owing by Borrower to Lender. All sums contracted for, charged, taken, reserved or received by Lender for the use, forbearance or detention of any debt evidenced by the Note and/or the Related Indebtedness shall, to the extent permitted by applicable law, be amortized, prorated, allocated or spread, using the actuarial method, throughout the stated term of the Note and/or the Related Indebtedness (including any and all renewal and extension periods) until payment in full so that the rate or amount of interest on account of the Note and/or the Related Indebtedness does not exceed the Maximum Lawful Rate from time to time in effect and applicable to the Note and/or the Related Indebtedness for so long as debt is outstanding. In no event shall the provisions of Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving tri-party accounts) apply to the Note and/or any of the Related Indebtedness. Notwithstanding anything to the contrary contained herein or in any of the other Security Documents, it is 

18

not the intention of 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. The terms and provisions of this paragraph shall control and supersede every other term, covenant or provision contained herein, in any other Security Document or in any other agreement between the Borrower and Lender.
(b)    Ceiling Election. To the extent that Lender is relying on Chapter 303 of the Texas Finance Code to determine the Maximum Lawful Rate payable on the Note and/or any other portion of the Related Indebtedness, Lender will utilize the weekly ceiling from time to time in effect as provided in such Chapter 303, as amended. To the extent United States federal law permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law, Lender will rely on United States federal law instead of such Chapter 303 for the purpose of determining the Maximum Lawful Rate. Additionally, to the extent permitted by applicable law now or hereafter in effect, Lender may, at its option and from time to time, utilize any other method of establishing the Maximum Lawful Rate under such Chapter 303 or under other applicable law by giving notice, if required, to Borrower as provided by such applicable law now or hereafter in effect.
(c)    Definitions.
(i)    As used herein, the term "Maximum Lawful Rate" shall mean the maximum lawful rate of interest which may be contracted for, charged, taken, received or reserved by Lender in accordance with the applicable laws of the State of Texas (or applicable United States federal law to the extent that such law permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law), taking into account all Charges made in connection with the transaction evidenced by the Note and the other Security Documents.
(ii)    As used herein, the term "Charges" shall mean all fees, charges and/or any other things of value, if any, contracted for, charged, taken, received or reserved by Lender in connection with the transactions relating to the Note and the other Security Documents, which are treated as interest under applicable law.
(iii)    As used herein, the term "Related Indebtedness" shall mean any and all indebtedness paid or payable by Borrower to Lender pursuant to the Security Documents or any other communication or writing by or between Borrower and Lender related to the transaction or transactions that are the subject matter of the Security Documents, except such indebtedness which has been paid or is payable by Borrower to Lender under the Note.
19.    Notices. Any notice or demand required hereunder shall be deemed to be delivered when deposited in the United States mail, postage prepaid, certified mail, return receipt requested, addressed to Borrower or Lender, as the case may be, at the address set out hereinbelow, or at such other address as such party may hereafter deliver in accordance herewith. Any other method of delivery or demand shall be effective only when actually received by the recipient thereof. If and when included within the term "Borrower" or "Lender" there are more than one person, all shall 

19

jointly arrange among themselves for their joint execution and delivery of a notice to the other specifying some person at some specific address for the receipt of all notices, demands, payments or other documents. All persons included within the terms "Borrower" or "Lender," respectively, shall be bound by notices, demands, payments and documents given in accordance with the provisions of this paragraph to the same extent as if each had received such notice, demand, payment or document. 
20.    Governing Law; Venue; Waiver of Jury. THIS AGREEMENT AND EACH OF THE OTHER SECURITY DOCUMENTS SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE LAWS OF THE STATE OF TEXAS, LENDER'S PRINCIPAL PLACE OF BUSINESS, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON BORROWER IN ANY LEGAL PROCEEDING RELATING TO ANY OF THE SECURITY DOCUMENTS BY ANY MEANS ALLOWED UNDER TEXAS OR FEDERAL LAW. VENUE FOR ANY LEGAL PROCEEDINGS SHALL BE IN SMITH COUNTY, TEXAS (WITH THE EXCEPTION OF ACTIONS FOR JUDICIAL OR NON-JUDICIAL FORECLOSURE OF THE PROJECT BY LENDER). LENDER AND BORROWER WAIVE THE RIGHT TO TRIAL BY JURY. 
21.    Relief in Bankruptcy. Borrower hereby agrees that, in consideration of the recitals and mutual covenants contained herein, and for other good and valuable consideration, to the extent permitted by applicable law, in the event Borrower shall (i) file with any bankruptcy court of competent jurisdiction or be the subject of any petition under Title 11 of the U.S. Code, as amended, (ii) be the subject of any order for relief issued under such Title 11 of the U.S. Code, as amended, (iii) file or be the subject of any petition seeking any reorganization rearrangement, composition, adjustment, liquidation, dissolution, or similar relief under any present or future state act or law relating to bankruptcy, insolvency or other relief for debtors, (iv) have sought or consented to or acquiesced to any appointment of any trustee, receiver, conservator, or liquidator, (v) be the subject of any order, judgment or decree entered by any court of competent jurisdiction approving a petition filed against such part for any reorganization, rearrangement, composition, adjustment, liquidation, dissolution, or similar relief under any present or future federal or state act of law relating to bankruptcy, insolvency or relief for debtors, Lender shall thereupon be entitled to relief from the automatic stay imposed by Section 362 of Title 11 of the U.S. Code, as amended, or otherwise, on or against the exercise of the rights and remedies otherwise available to Lender as provided herein, in any of the other Security Documents, and as otherwise provided by applicable state and federal law.
22.    Survival; Parties Bound; Time of Essence. All representations, warranties, covenants and agreements made by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of the Security Documents, shall not be affected by any investigation made by or on behalf of Lender, and shall bind the Borrower and its successors, trustees, receivers and assigns and inure to the benefit of the successors and assigns of the Lender. The term of this 

20

Agreement shall be until the later of the final maturity of the Note and the payment of all amounts due under the Security Documents. Time is of the essence in the performance of this Agreement.
23.    Counterparts. This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument.
24.    Severability. If any provision of any of the Security Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby.
25.    Loan Participations.  Borrower acknowledges and agrees that Lender reserves the right to, and shall be permitted to, sell or offer to sell participation interests in the Loan and the Security Documents to one or more participants.  Borrower authorizes Lender to disseminate any information that it has pertaining to the Loan, including without limitation financial statements and credit reports and other information relating to Borrower, or otherwise relating to the Project, to any participant or prospective participant in the Loan.
26.    Captions. The headings and captions appearing in the Security Documents have been included solely for convenience and shall not be considered in construing the Security Documents.
27.    USA Patriot Act Notice.  Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account or obtains a loan.  The Lender will ask for Borrower's legal name, address, tax ID number or social security number and other identifying information.  Lender may also ask for additional information or documentation or take other actions reasonably necessary to verify the identity of Borrower or other related persons.  
28.    Entire Agreement. THIS WRITTEN LOAN AGREEMENT AND OTHER SECURITY DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.  This Agreement can be amended only by a written agreement signed by Borrower and Lender, and no waiver, consent or approval by Lender shall be valid or enforceable against Lender unless made in writing and signed by Lender. 
[SIGNATURE PAGES FOLLOW THIS PAGE] 
 

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[CONSTRUCTION LOAN AGREEMENT – SIGNATURE PAGE]
LENDER:

SOUTHSIDE BANK

By: _______________________
Pam Cunningham, Executive VP

ADDRESS FOR NOTICE FOR LENDER:
	
		
	 
	 

	 
	 

	Southside Bank
 P.O. Box 1079
 Tyler, Texas 75710
 Attn:   Pam Cunningham 

	 

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[CONSTRUCTION LOAN AGREEMENT – SIGNATURE PAGE]

BORROWER:

LANTANA PLACE, L.L.C., a Texas limited liability company

By:    /s/ Erin D. Pickens            
Erin D. Pickens, Senior Vice President

ADDRESS FOR NOTICE FOR BORROWER:
	
		
	 
	 

	 
	 

	Lantana Place, L.L.C.
212 Lavaca Street, Suite 300
Austin, Texas 78701 
Attn:  William H. Armstrong, III

With Copy To:

Armbrust & Brown PLLC
100 Congress Avenue, Suite 1300
Austin, Texas 78701
Attn:  Kenneth Jones
	 

1

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