Document:

Exhibit 10.3

[Confidential treatment has been requested with
respect to the omitted portions of this exhibit. This copy omits information
subject to a confidentiality request filed with the Securities and Exchange
Commission. Omissions are designated with the characters [***]. A complete
version of this exhibit has been filed separately with the Securities and
Exchange Commission along with the request for confidential treatment.]

PURCHASE AGREEMENT

by and among

KIRIN SD, INC. 

and

ADVANCED CELL TECHNOLOGY, INC. 

As of May 9, 2006

 

 

Table of Contents

	
  

  	
   

  	
   

  	
   

  	
  Page

  	
   

  
	
  ARTICLE 1

  	
   

  	
  PURCHASE AND PAYMENT

  	
   

  	
  1

  	
   

  
	
  1.1

  	
   

  	
  Purchase

  	
   

  	
  1

  	
   

  
	
  1.2

  	
   

  	
  Purchase Price

  	
   

  	
  1

  	
   

  
	
  ARTICLE 2

  	
   

  	
  REPRESENTATIONS AND WARRANTIES OF ACT

  	
   

  	
  2

  	
   

  
	
  2.1

  	
   

  	
  Organization and Standing

  	
   

  	
  2

  	
   

  
	
  2.2

  	
   

  	
  Power and Authority

  	
   

  	
  2

  	
   

  
	
  2.3

  	
   

  	
  Conflicts; Consents and Approvals

  	
   

  	
  2

  	
   

  
	
  2.4

  	
   

  	
  Litigation

  	
   

  	
  3

  	
   

  
	
  2.5

  	
   

  	
  Brokers

  	
   

  	
  3

  	
   

  
	
  2.6

  	
   

  	
  Ownership

  	
   

  	
  3

  	
   

  
	
  ARTICLE 3

  	
   

  	
  REPRESENTATIONS AND WARRANTIES OF PURCHASER

  	
   

  	
  3

  	
   

  
	
  3.1

  	
   

  	
  Organization and Standing

  	
   

  	
  3

  	
   

  
	
  3.2

  	
   

  	
  Authority

  	
   

  	
  4

  	
   

  
	
  3.3

  	
   

  	
  Conflicts; Consents and Approvals

  	
   

  	
  4

  	
   

  
	
  3.4

  	
   

  	
  Litigation

  	
   

  	
  5

  	
   

  
	
  3.5

  	
   

  	
  Brokers

  	
   

  	
  5

  	
   

  
	
  ARTICLE 4

  	
   

  	
  CONDITIONS TO CLOSING

  	
   

  	
  5

  	
   

  
	
  4.1

  	
   

  	
  Mutual Conditions

  	
   

  	
  5

  	
   

  
	
  4.2

  	
   

  	
  Conditions to Purchaser’s Obligations

  	
   

  	
  5

  	
   

  
	
  4.3

  	
   

  	
  Conditions to ACT’s Obligations

  	
   

  	
  6

  	
   

  
	
  ARTICLE 5

  	
   

  	
  SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
  INDEMNIFICATION

  	
   

  	
  6

  	
   

  
	
  5.1

  	
   

  	
  Survival of Representations and Warranties

  	
   

  	
  6

  	
   

  
	
  5.2

  	
   

  	
  Indemnification by ACT

  	
   

  	
  7

  	
   

  
	
  5.3

  	
   

  	
  Indemnification by Purchaser

  	
   

  	
  7

  	
   

  
	
  5.4

  	
   

  	
  Definition of Damages

  	
   

  	
  7

  	
   

  
	
  5.5

  	
   

  	
  Procedures for Indemnification

  	
   

  	
  7

  	
   

  
	
  ARTICLE 6

  	
   

  	
  POST-CLOSING COVENANTS

  	
   

  	
  8

  	
   

  
	
  6.1

  	
   

  	
  [Reserved]

  	
   

  	
  8

  	
   

  
	
  ARTICLE 7

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  8

  	
   

  
	
  7.1

  	
   

  	
  Notices

  	
   

  	
  8

  	
   

  

 

 i
 

 

Table of Contents

(continued)

	
  

  	
   

  	
   

  	
   

  	
  Page

  	
   

  
	
  7.2

  	
   

  	
  Expenses

  	
   

  	
  9

  	
   

  
	
  7.3

  	
   

  	
  Governing Law

  	
   

  	
  9

  	
   

  
	
  7.4

  	
   

  	
  Dispute Resolution

  	
   

  	
  9

  	
   

  
	
  7.5

  	
   

  	
  Assignment; Successors and Assigns; No Third Party
  Rights

  	
   

  	
  11

  	
   

  
	
  7.6

  	
   

  	
  Counterparts

  	
   

  	
  11

  	
   

  
	
  7.7

  	
   

  	
  Titles and Headings

  	
   

  	
  11

  	
   

  
	
  7.8

  	
   

  	
  Entire Agreement

  	
   

  	
  11

  	
   

  
	
  7.9

  	
   

  	
  Amendment and Modification

  	
   

  	
  11

  	
   

  
	
  7.10

  	
   

  	
  Publicity; Public Announcements

  	
   

  	
  11

  	
   

  
	
  7.11

  	
   

  	
  Waiver

  	
   

  	
  12

  	
   

  
	
  7.12

  	
   

  	
  Severability

  	
   

  	
  12

  	
   

  
	
  7.13

  	
   

  	
  No Strict Construction

  	
   

  	
  12

  	
   

  
	
  7.14

  	
   

  	
  Specific Performance

  	
   

  	
  12

  	
   

  
	
  7.15

  	
   

  	
  Further
  Assurances

  	
   

  	
  12

  	
   

  

 

 ii

PURCHASE AGREEMENT

This PURCHASE AGREEMENT, dated as of May 9, 2006
(together with the exhibits attached hereto, this “Agreement”),
is entered into by and between Kirin SD, Inc., a Delaware corporation (the
“Purchaser”), and  Advanced Cell Technology, Inc., a
Delaware corporation (“ACT”). Certain
capitalized terms used in this Agreement are defined on Exhibit A
attached hereto.

RECITALS

WHEREAS, on July 18, 2005, the Purchaser
purchased all of the issued and outstanding limited liability company interests
or units of Aurox, LLC, a Delaware limited liability company (“Aurox”), and substantially all of the limited liability
company interests or units of Hematech, LLC, a Delaware limited liability
company (“Hematech”); and

WHEREAS, ACT owns the remaining limited liability
company interests or units of Hematech (the “ACT
Interests”); and

WHEREAS, the Purchaser wishes to purchase, and ACT
wishes to sell, the ACT Interests in accordance with the terms and subject to
the conditions of this Agreement; and

WHEREAS, Kirin Beer Kabushiki Kaisha (“Kirin”) and ACT desire to enter into that
certain Exclusive License Agreement and certain Non-Exclusive License Agreement
substantially in the forms attached hereto as Exhibit D and Exhibit E
(the “License Agreements”) concurrent with
and as a condition to the closing of the transactions contemplated by this
Agreement.

NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants, agreements, representations and warranties contained in
this Agreement, the parties agree as follows:

ARTICLE 1

PURCHASE AND
PAYMENT

1.1           Purchase. Upon the terms and
subject to the conditions of this Agreement, ACT hereby sells, conveys,
assigns, transfers and delivers to the Purchaser, and the Purchaser hereby
purchases, acquires and accepts from ACT, all of ACT’s right, title and
interest in and to the ACT Interests free and clear of all Encumbrances.

1.2           Purchase Price. In
consideration for the purchase by the Purchaser of the ACT Interests, the
Purchaser hereby pays to ACT [***] U.S. Dollars ($[***]) (the “Purchase Price”) by wire transfer to the account designated
by ACT.

 

ARTICLE
2

REPRESENTATIONS
AND WARRANTIES OF ACT

ACT hereby represents and warrants to the Purchaser as
of the date hereof (or, if made as of a specified date, as of such specified
dated) as follows:

2.1           Organization and Standing. ACT
is a corporation, duly organized, validly existing and in good standing under
the Laws of the state or jurisdiction of its organization and has all requisite
power and authority (corporate, partnership or otherwise) to own, lease, use
and operate its properties and to conduct its business.

2.2           Power and Authority.

(a)           ACT has all requisite power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. ACT has all power and authority to execute
and deliver the other agreements, documents and instruments to be executed and
delivered by it in connection with this Agreement and to consummate the transactions
contemplated thereby.

(b)           The execution, delivery and
performance of this Agreement by ACT and the consummation by ACT of the
transactions to be consummated by ACT hereby, and the execution, delivery and
performance of the other agreements, documents and instruments to be executed
and delivered in connection with this Agreement by ACT and the consummation of
the transactions contemplated thereby, have been duly authorized by all
necessary action or proceeding on the part of ACT.

(c)           This Agreement and the other
agreements, documents and instruments executed and delivered in connection with
this Agreement, have been duly executed and delivered by ACT and constitute the
legal, valid and binding obligation of ACT enforceable against ACT in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or
hereafter in effect relating to or affecting creditors’ rights generally,
including the effect of statutory and other Laws regarding fraudulent
conveyances and preferential transfers and subject to the limitations imposed
by general equitable principles (regardless of whether such enforceability is
considered in a proceeding at law or in equity).

2.3           Conflicts; Consents and Approvals.
Neither the execution and delivery by ACT of this Agreement and the other
agreements, documents and instruments to be executed and delivered by ACT in
connection with this Agreement nor the consummation of the transactions
contemplated hereby or thereby, does:

(a)           conflict with, or result in a breach
of any provision of, the organizational documents of ACT, if applicable;

(b)           violate, or conflict with, or result
in a breach of any provision of, or constitute a default (or an event that,
with the giving of notice, the passage of time or otherwise, would constitute a
default) under, or entitle any Person (with the giving of notice, the passage
of 

 2
 

 

time or otherwise) to terminate, accelerate, modify or
call a default under, or give rise to any obligation to make a payment under,
or to any increased, additional or guaranteed rights of any Person under, or
result in the creation of any Encumbrance upon any of the properties or assets
of ACT under any of the terms, conditions or provisions of (i) any
material Contract to which ACT is a party or to which any of their properties
or assets are bound or (ii) any permit, registration, approval, license or
other authorization or filing to which ACT is subject or to which any of its
properties or assets is subject, that would, individually or in the aggregate,
be reasonably likely to prevent or materially impede or delay the consummation
by ACT, of the transactions contemplated by this Agreement;

(c)           require any action, consent or
approval of any non-governmental third party other than any such action,
consent or approval the failure to obtain which would not, individually or in
the aggregate, be reasonably likely to prevent or materially impede or delay
the consummation by ACT of the transactions contemplated by this Agreement;

(d)           violate any material order, writ, or
injunction, decree or Law applicable to ACT; or

(e)           require any material action, consent
or approval of, or review by, or registration or filing by ACT with, any
Governmental Authority.

2.4           Litigation. There is no Action
pending or threatened in writing, or, to ACT’s knowledge, otherwise threatened,
against ACT that seeks, or would be reasonably likely, to prohibit or
materially restrain the ability of ACT to enter into this Agreement or prevent
or materially impede or delay the consummation by ACT of any of the
transactions contemplated hereby.

2.5           Brokers. No Person has acted
directly or indirectly as a broker, finder or financial advisor for ACT in
connection with the negotiations relating to or the transactions contemplated
by this Agreement, and no Person is entitled to any fee or commission or like
payment in respect thereof based in any way on any agreement, arrangement or
understanding made by or on behalf of ACT.

2.6           Ownership. ACT is the lawful
owner beneficially and of record of the ACT Interests, free and clear of all
Encumbrances. As of the date hereof, Purchaser shall acquire good and
marketable title to the ACT Interests, free and clear of all Encumbrances.

ARTICLE 3

REPRESENTATIONS
AND WARRANTIES OF PURCHASER

Purchaser hereby represents and warrants to ACT, as of
the date hereof (or, if made as of a specified date, as of such specified
date), as follows:

3.1           Organization and Standing. The
Purchaser is a corporation duly organized, validly existing and in good
standing under the Laws of the jurisdiction of its organization.

 3
 

 

3.2           Authority.

(a)           The Purchaser has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. Purchaser has all requisite
corporate power and authority to execute and deliver the other agreements,
documents and instruments to be executed and delivered by it in connection with
this Agreement and to consummate the transactions contemplated thereby.

(b)           The execution, delivery and
performance of this Agreement by the Purchaser and the consummation by the
Purchaser of the transactions contemplated to be consummated by the Purchaser
hereby, and the execution, delivery and performance of the other agreements,
documents and instruments to be executed and delivered in connection with this
Agreement by the Purchaser and the consummation of the transactions
contemplated thereby, have been duly authorized by all necessary action or
proceeding on the part of the Purchaser.

(c)           This Agreement and the other
agreements, documents and instruments executed and delivered in connection with
this Agreement have been duly executed and delivered by the Purchaser and
constitute the legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its respective terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to or
affecting creditors’ rights generally, including the effect of statutory and
other Laws regarding fraudulent conveyances and preferential transfers and
subject to the limitations imposed by general equitable principles (regardless
of whether such enforceability is considered in a proceeding at law or in
equity).

3.3           Conflicts; Consents and Approvals.
Neither the execution and delivery by the Purchaser of this Agreement and the
other agreements, documents and instruments to be executed and delivered by either
of them in connection with this Agreement, nor the consummation of the
transactions contemplated hereby or thereby, does:

(a)           conflict with, or result in a breach
of any provision of, the organizational documents of the Purchaser;

(b)           violate, or conflict with, or result
in a breach of any provision of, or constitute a default (or an event that,
with the giving of notice, the passage of time or otherwise, would constitute a
default) under, or entitle any Person (with the giving of notice, the passage of
time or otherwise) to terminate, accelerate, modify or call a default under, or
give rise to any obligation to make a payment under, or to any increased,
additional or guaranteed rights of any Person under, or result in the creation
of any Encumbrance upon any of the properties or assets of the Purchaser under
any of the terms, conditions or provisions of (i) any Contract to which
the Purchaser is a party or to which any of its properties or assets are bound
or (ii) any permit, registration, approval, license or other authorization
or filing to which the Purchaser is subject or to which any of its properties
or assets is subject, that would, individually or in the aggregate, be
reasonably likely to prevent or materially impede or delay the consummation by the
Purchaser, of the transactions contemplated by this Agreement;

 4
 

 

(c)           require any action, consent or
approval of any non-governmental third party other than any such action,
consent or approval the failure to obtain which would not, individually or in
the aggregate, be reasonably likely to prevent or materially impede or delay
the consummation by the Purchaser of the transactions contemplated by this
Agreement;

(d)           violate any material order, writ, or
injunction, decree or Law applicable to the Purchaser; or

(e)           require any material action, consent
or approval of, or review by, or registration or filing by the Purchaser with,
any Governmental Authority, except possible actions in connection with U.S.
export control laws.

3.4           Litigation. There is no Action
pending or threatened in writing, or, to Purchaser’s knowledge, otherwise
threatened, against the Purchaser that seeks, or would be reasonably likely, to
prohibit or materially restrain the ability of the Purchaser to enter into this
Agreement or prevent or materially impede or delay the consummation by the
Purchaser of any of the transactions contemplated hereby.

3.5           Brokers. No Person has acted
directly or indirectly as a broker, finder or financial advisor for the
Purchaser in connection with the negotiations relating to or the transactions
contemplated by this Agreement, and no Person is entitled to any fee or
commission or like payment in respect thereof based in any way on any
agreement, arrangement or understanding made by or on behalf of the Purchaser.

ARTICLE 4

CONDITIONS TO
CLOSING

4.1           Mutual Conditions. The
respective obligations of each party hereto to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment or, if
legally permitted, waiver by all parties hereto at or prior to the execution of
this Agreement of the following conditions:

(a)           There shall not be in effect any
Order issued by any Governmental Authority preventing the consummation of the
transactions contemplated herein, seeking any material damages as a result of
the transactions contemplated herein, or otherwise materially affecting the
right or ability of the Purchaser to own the ACT Interests, nor shall any
Action be pending that seeks any of the foregoing.

(b)           There shall not be any Law prohibiting
ACT from selling the ACT Interests or the Purchaser from owning the ACT
Interests or that makes this Agreement or the consummation of the transactions
contemplated herein illegal.

4.2           Conditions to Purchaser’s
Obligations. The obligations of the Purchaser to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment
or waiver by the Purchaser prior to or at the Closing of each of the following
conditions:

 5
 

 

(a)           ACT shall have executed and delivered
to the Purchaser an Instrument of Transfer and Receipt.

(b)           ACT shall have executed and delivered
to the Purchaser a covenant not to sue substantially in the form of Exhibit B
attached hereto.

(c)           ACT shall have executed and delivered
to the Purchaser a release, substantially in the form of Exhibit C
attached hereto.

(d)           ACT shall have executed and delivered
to Kirin the Exclusive License Agreement and Non-Exclusive License Agreement
substantially in the form of Exhibit D and Exhibit E
attached hereto.

(e)           ACT shall have delivered to the
Purchaser certified copies of the resolutions, duly adopted by the Board of
Directors of ACT, which shall be in full force and effect on the date hereof,
authorizing the execution and delivery and performance by ACT of this Agreement
and the consummation of the transactions contemplated hereby.

(f)            No Action shall have been commenced
or threatened against the Purchaser or against any Representative (as
hereinafter defined) of Purchaser (i) involving any challenge to, or
seeking Damages (as hereinafter defined) or other relief in connection with,
the transactions contemplated herein; or (ii) that may have the effect of
preventing, delaying, making illegal, imposing limitations or conditions on or
otherwise interfering with the transactions contemplated herein.

4.3           Conditions to ACT’s Obligations.
The obligations of ACT to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment or waiver by ACT at or prior to
the Closing of each of the following conditions:

(a)           Kirin shall have executed and
delivered to ACT the Exclusive License Agreement and Non-Exclusive License
Agreement substantially in the form of Exhibit D and Exhibit E
attached hereto.

(b)           No Action shall have been commenced
or threatened against ACT (i) involving any challenge to, or seeking
Damages or other relief in connection with, the transactions contemplated
herein; or (ii) that may have the effect of preventing, delaying, making
illegal, imposing limitations or conditions on or otherwise interfering with
the transactions contemplated herein.

(c)           Purchaser shall deliver or cause to
be delivered to ACT the Purchase Price.

 6
 

 

ARTICLE
5

SURVIVAL
OF REPRESENTATIONS AND 

WARRANTIES; INDEMNIFICATION

5.1           Survival of Representations and
Warranties. All of the representations and warranties provided for in this
Agreement shall survive the closing of the transactions contemplated herein
until December 31, 2006; provided that the representations and warranties
set forth in Sections 2.1, 2.2, 2.6, 3.1 and 3.2 shall survive indefinitely;
provided further that any representations and warranties shall survive with
respect to, and to the extent of, any claim for indemnification in accordance
with this Article V prior to the applicable termination date until final
resolution of such claim. The representations and warranties contained in this
Agreement (and any right to indemnification for breach thereof) shall not be
affected by any investigation, verification or examination by any party hereto
or by any Representative (as defined below) of any such party or by any such
party’s knowledge of any facts with respect to the accuracy of any such
representation or warranty.

5.2           Indemnification by ACT. ACT,
jointly and severally, shall indemnify, defend and hold harmless the Purchaser
and its Affiliates, and their respective officers, directors, employees, agents
and representatives, and each of their heirs, executors, successors and assigns
(collectively, the “Representatives”),
against and in respect of any and all Damages to the extent arising out of or
resulting from any breach of a representation or warranty made by ACT in this
Agreement.

5.3           Indemnification by Purchaser. Purchaser
shall indemnify, defend and hold harmless ACT and its Representatives, against
and in respect of any and all Damages to the extent arising out of or resulting
from any breach of a representation or warranty made by the Purchaser in this
Agreement.

5.4           Definition of Damages. “Damages” shall mean and include, collectively, any and all
damages, injuries, claims, demands, settlements, judgments, awards, fines,
penalties, Taxes, losses, Liabilities, together with all out-of-pocket costs
and expenses, including reasonable fees and disbursements of counsel,
accountants, consultants or experts and expenses of investigation incurred by a
party entitled to indemnification hereunder as a result of a matter giving rise
to a claim for indemnification hereunder.

5.5           Procedures for Indemnification.

(a)           A party entitled to be indemnified
pursuant to Section 5.2 or 5.3 (the “Indemnified Party”)
shall promptly notify the party liable for such indemnification (the “Indemnifying Party”) in writing, of any claim or demand with
reasonable specificity, under which the Indemnified Party has determined has
given or is reasonably likely to give rise to a right of indemnification under
this Agreement within 45 days of such determination; provided, however,
that a failure to provide such notice shall not relieve any Indemnifying Party
of its obligations hereunder except to the extent that it has been materially
prejudiced by such failure.

 7
 

 

(b)           If the Indemnified Party shall notify
the Indemnifying Party of any claim or demand pursuant to Section 5.5(a),
and if such claim or demand relates to a claim or demand asserted by a third
party against the Indemnified Party that the Indemnifying Party acknowledges is
a claim or demand for which it must indemnify or hold harmless the Indemnified
Party under Section 5.2 or 5.3, the Indemnifying Party shall have the
right to employ counsel of its choice to defend any such claim or demand
asserted against the Indemnified Party. The Indemnified Party shall have the
right to participate in the defense of any such claim or demand at its own
expense. The Indemnifying Party shall notify the Indemnified Party in writing,
as promptly as possible (but in any case before the due date for the answer or
response to a claim) after the date of the notice of claim given by the
Indemnified Party to the Indemnifying Party under Section 5.5(a), of its
election to defend in good faith any such third party claim or demand. So long
as the Indemnifying Party is defending in good faith any such claim or demand
asserted by a third party against the Indemnified Party, the Indemnified Party
shall not settle or compromise such claim or demand. The Indemnified Party
shall make available to the Indemnifying Party or its agents, at the
Indemnifying Party’s cost, all records and other material in the Indemnified
Party’s possession reasonably required by it for its use in contesting any
third party claim or demand. Neither the Indemnifying Party nor the Indemnified
Party shall settle or compromise any such claim or demand unless the
Indemnifying Party or the Indemnified Party, as the case may be, is given a
full and complete release of any and all liability by all relevant parties
relating thereto. If notice is given to an Indemnifying Party of the
commencement of any action and it does not, within 15 days after the
Indemnified Party’s notice is given, give notice to the Indemnified Party of
its election to assume the defense thereof, the Indemnifying Party shall be
bound by any determination made in such action or any compromise or settlement
thereof effected by the Indemnified Party. Notwithstanding the foregoing, if an
Indemnified Party determines in good faith that there is a reasonable
probability that an action may adversely affect it or its Affiliates other than
a result of monetary damages, such Indemnified Party may, by notice to the
Indemnifying Party, assume the exclusive right to defend, compromise or settle
such action, but the Indemnifying Party shall not be bound any determination of
an action so defended or any compromise or settlement thereof effected without
its consent (which shall not be unreasonably withheld, conditioned or delayed).

ARTICLE 6

POST-CLOSING
COVENANTS

6.1           [Reserved]

ARTICLE 7

MISCELLANEOUS

7.1           Notices. All notices or other
communications required or permitted hereunder shall be in writing and shall be
delivered personally, by facsimile or electronic mail (with confirming copy
sent by one of the other delivery methods specified herein) or by overnight
courier or sent by certified, registered or express air mail, postage prepaid,
and shall be deemed given when so delivered personally, or when so received by
facsimile or electronic mail or courier, or, if mailed, five calendar days
after the date of mailing, as follows:

 8
 

 

If to ACT:

Advanced Cell Technology, Inc.

11100 Santa Monica Blvd.

Suite 850

Los Angeles, CA  90025

Facsimile:  310.481.0833

Attention:        Jon Atzen, Senior Vice
President and General Counsel

                           jatzen@advancedcell.com

If to Purchaser:

Kirin SD, Inc.

Hamlet Professional Building

4001 Valhalla Boulevard

Suite 103

Sioux Falls, SD  57106

Facsimile: 605.361.9702

Attention:        Dr. Toshifumi
Mikayama
                           Chief Executive
Officer

and with a copy to:

Morrison &
Foerster LLP

1290 Avenue of the Americas

New York, NY  10104

Facsimile:         (212) 468-7900

Attention:        Rory J. Radding, Esq.

                           rradding@mofo.com

or to such
other address and with such other copies as any party hereto shall notify the
other parties hereto (as provided above) from time to time.

7.2           Expenses. Regardless of
whether the transactions provided for in this Agreement are consummated, ACT on
the one hand and the Purchaser on the other hereto shall pay its own expenses
incident to this Agreement and the transactions contemplated hereby and thereby
(including legal fees, accounting fees, investment banking fees and filing
fees).

7.3           Governing Law. This Agreement
shall be governed by, and construed in accordance with, the internal Laws of
the State of New York, without reference to the choice of law principles
thereof.

7.4           Dispute Resolution.

(a)           The parties hereto intend that all
disputes between the parties, directly or indirectly, arising out of, under or in
connection with or relating to, this Agreement or the consummation of the
transactions contemplated hereby shall be settled by the parties amicably
through good faith discussions upon the written request of any party.

 9
 

 

(b)           Prior to filing suit, instituting an
action or seeking arbitration pursuant to Section 7.4(d) in
connection with any dispute between the Purchaser on the one hand and ACT on
the other (each, for purposes of this Section 7.4, a “Dispute
Party” and, collectively, the “Dispute Parties”)
or any of their respective Affiliates or Subsidiaries, directly or indirectly,
arising out of, under or in connection with or relating to, this Agreement or
any of the transactions contemplated hereby, the Dispute Parties will attempt
to resolve such dispute by good faith negotiations. Such negotiations shall
proceed as follows:

(i)            Either Dispute Party may send a
written notice to the other Dispute Party requesting such negotiations. Promptly
following receipt of such notice by the other Dispute Party, each Dispute Party
shall cause the individual designated by it as having general responsibility
for the affected Agreement or transaction to meet with the individual so
designated by the other Dispute Party to discuss the dispute.

(ii)           If the dispute is not resolved within
30 days after the first meeting between the individuals designated in clause (i) (or
if earlier, within 45 days of the notice referred to in clause (i) above),
then, upon the written request of either Dispute Party, each Dispute Party
shall cause the individual designated by it as having general responsibility
for the overall relationship defined by this Agreement to meet with the
individual so designated by the other Dispute Party to discuss the dispute.

(iii)          If the dispute is not resolved within
15 days after the first meeting between the individuals designated in clause (ii) (or
if earlier within 30 days of the notice referred to in clause (ii) above),
then, upon the written request of either Dispute Party, Dr. Michael West
or William Caldwell, IV on behalf of ACT, on the one hand, and Dr. Toshifumi
Mikayama on behalf of the Purchaser, on the other hand, shall meet and attempt
in good faith to negotiate a resolution to the dispute.

Except and
only to the limited extent provided in Section 7.4(c), neither Dispute
Party shall, and shall cause their respective Affiliates not to, file suit,
institute an action or seek arbitration pursuant to Section 7.4(d) with
respect to the dispute until at least 30 days after the first meeting between
the corporate officers described in clause (iii) above (or, if earlier, 45
days after the notice referred to in such clause (iii)).

(c)           Notwithstanding the provisions of Section 7.4(b),
either Dispute Party may institute an action seeking a preliminary injunction,
temporary restraining order, or other equitable relief, if necessary in the
reasonable opinion of that Dispute Party to avoid material harm to its
property, rights or other interests, before commencing, or at any time during
the course of, the dispute procedure described in Section 7.4(b). In
addition, either Dispute Party may file an action prior to the commencement of
or at any time during or after the dispute resolution procedures in Section 7.4(b) if
in the sole opinion of that Dispute Party it is necessary to prevent the
expiration of a statute of limitations or filing period or the loss of any
other substantive or procedural right.

(d)           In the event of any dispute,
controversy, or claim arising out of or relating to any provision of this
Agreement or the interpretation, enforceability, performance, breach,
termination, or validity hereof (including, without limitation, this Section 7.4)
which cannot be 

 10
 

 

resolved pursuant to Sections 7.4(a) and (b),
such matter shall be solely and finally settled pursuant to arbitration
conducted in accordance with the Rules of
Arbitration of the International Chamber of Commerce (the “Rules”). Such arbitration shall be
conducted by three arbitrators to be appointed in accordance with the then
existing Rules as modified by this Section 7.4. Of the three
arbitrators, ACT shall nominate one arbitrator, the Purchaser shall nominate
one arbitrator, and the third arbitrator, who will act as chairman, will be
nominated by the other two appointed arbitrators or, failing agreement between
them within 30 days of their appointment, by the International Court of
Arbitration of the International Chamber of Commerce, pursuant to the Rules. If
the chairman nominated by the other two appointed arbitrators does not agree to
act, or is unable to act, as chairman, the chairman shall be appointed pursuant
to the Rules. The place of arbitration shall be in New York, New York, U.S.A.,
and the arbitration shall be conducted in English. The arbitration panel shall
decide the dispute applying the substantive laws of the State of New York. Judgment
of the arbitration panel shall be final and binding and may be entered in, and
shall be fully enforceable by, a court of competent jurisdiction. The parties
hereby agree that the state and federal courts located in New York, New York
are courts of competent jurisdiction and the parties hereby submit to the
jurisdiction of such courts waiving any objection each may now have or
hereafter have to jurisdiction, venue or convenience of forum. The parties
agree that any party may file a copy of this provision with any court as
written evidence of the parties’ voluntary agreement to waive any objections to
jurisdiction.

7.5           Assignment; Successors and
Assigns; No Third Party Rights. This Agreement may not be assigned by any
party hereto or thereto without the prior written consent of the other parties
hereto or thereto, and any attempted assignment shall be null and void;
provided, however, this Agreement may be assigned or transferred by the
Purchaser upon notice but without the prior written consent of the other
parties hereto to an Affiliate of the Purchaser and nothing in this Agreement
shall prevent the consolidation, merger or sale of the Purchaser to an
Affiliate of the Purchaser. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. Except as provided in Sections 5.2 and 5.3, this Agreement shall be
for the sole benefit of the parties hereto, and their respective successors and
permitted assigns and is not intended, nor shall be construed, to give any
Person, other than the parties hereto and their respective successors and
permitted assigns any legal or equitable right, benefit, remedy or claim
hereunder.

7.6           Counterparts. This Agreement
may be executed in counterparts, each of which shall be deemed an original
agreement, but all of which together shall constitute one and the same
instrument.

7.7           Titles and Headings. The
headings and table of contents in this Agreement are for reference purposes
only, and shall not in any way affect the meaning or interpretation of this
Agreement.

7.8           Entire Agreement. This
Agreement constitutes the entire agreement among the parties hereto with
respect to the matters covered hereby and thereby, and supersede all previous
written, oral or implied understandings among them with respect to such
matters.

7.9           Amendment and Modification. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.

 11

 

7.10         Publicity; Public Announcements.
Unless otherwise required by applicable Laws or the requirements of any
national securities exchange (and, in that event, only if time does not
permit), ACT and the Purchaser shall consult with each other before issuing,
and give each other a reasonable opportunity to review and comment upon, any
press release with respect to the transactions contemplated hereby and shall
not issue any such press release without each other’s consent, which consent
shall not be unreasonably withheld or delayed. The parties agree that the
initial press release to be issued with respect to this Agreement and the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties. The parties agree that this Agreement and the other
agreements related to this Agreement may be disclosed pursuant to all
applicable Laws including, without limitation, state and federal securities
laws and regulations.

7.11         Waiver. Any of the terms or
conditions of this Agreement may be waived at any time by the party or parties
hereto entitled to the benefit thereof, but only by a writing signed by the
party or parties waiving such terms or conditions.

7.12         Severability. If any term,
provisions, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination, the parties shall negotiate in
good faith to modify this Agreement so as to affect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the fullest extent possible.

7.13         No Strict Construction. Each of
the parties hereto acknowledges that this Agreement has been prepared jointly
by the parties hereto and shall not be strictly construed against any party
hereto.

7.14         Specific Performance. The
parties agree that if any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached,
irreparable damage would occur, no adequate remedy at law would exist and
damages would be difficult to determine; accordingly, the parties shall be entitled
to specific performance of the terms hereof or injunctive relief, in addition
to any other remedy at law or in equity.

7.15         Further Assurances. Each party
agrees to (a) furnish upon request to each other party such further
information, (b) to execute and deliver to each other party such other
documents and (c) to do such other acts and things, all as another party
may reasonably request for the purpose of carrying out the intent of this
Agreement and the transactions contemplated herein.

[signature
pages follow]

 12
 

 

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

	
   

  	
   

  	
   

  
	
  

  	
   

  	
  KIRIN SD, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
  /s/ TOSHIFUMI
  MIKAYAMA

  
	
   

  	
   

  	
   

  	
   

  	
  Name: Toshifumi Mikayama

  
	
   

  	
   

  	
   

  	
   

  	
  Title: President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ADVANCED CELL TECHNOLOGY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
  /s/ William Caldwell, IV

  
	
   

  	
   

  	
   

  	
   

  	
  Name: William Caldwell, IV

  
	
   

  	
   

  	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

 13

 

Exhibit A

Definitions

“Action” means any
administrative, regulatory, judicial or other proceeding, inquiry or
investigation by or before any Governmental Authority or arbitrator.

“Affiliate” means, with respect
to any Person, any other Person that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, such Person. The term “control” means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, including the ability
to elect the majority of members of the board of directors or other governing
body of a Person, and the terms “controlled”
and “controlling” have correlative
meanings.

“Claims” means any and all (i) claims,
(ii) demands, (iii) disputes, or (iv) causes of action, relating
to or resulting from an Action.

“Contract” means any legally
binding contract, agreement, indenture, deed of trust, license, note, bond,
loan instrument, mortgage, lease, purchase or sales order, guarantee and any
similar undertaking, commitment, understanding or arrangement, whether written
or oral.

“Encumbrances” means security
interests, liens (statutory or otherwise), Claims, charges, title defects,
mortgages, pledges, easements, encroachments, restrictions on use,
rights-of-way, rights of first refusal, conditional sales or other title
retention agreements, covenants, conditions or other similar restrictions (including
restrictions on transfer) or other encumbrances of any nature whatsoever.

“GAAP” means United States
generally accepted accounting principles.

“Governmental Authority” means
any supranational, national, federal, state or local government, foreign or domestic,
or the government of any political subdivision of any of the foregoing, or any
entity, authority, agency, commission, court, ministry or other similar body
exercising executive, legislative, judicial, regulatory or administrative
authority or functions of or pertaining to government, including any authority
or other quasi-Governmental Authority or self-regulatory body or stock exchange
established by a Governmental Authority to perform any of such functions.

“Laws” means all national,
federal, state or local laws (including common law), constitutions, statutes,
codes, rules, regulations, ordinances, directives, concessions, executive
Orders or decrees of a Governmental Authority.

“Liabilities” means any and all
debts, liabilities, commitments and obligations, whether or not fixed,
contingent or absolute, matured or unmatured, direct or indirect, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whether or not required
by GAAP to be reflected in financial statements or disclosed in the notes
thereto.

 A-1
 

 

“Orders” means any order,
judgment, injunction, decree or award or writ of any court, tribunal,
arbitrator, Governmental Authority or other Person having jurisdiction.

“Person” means an individual,
general or limited partnership, corporation, limited liability company, joint
stock company, unincorporated organization or association, trust, estate, joint
venture, firm, branch, registered office, Governmental Authority or any other
entity.

“Subsidiary” of any entity
means, at any date, any Person of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary
voting power or, in the case of a partnership, more than 50% of the general
partnership interests or more than 50% of the profits or losses of which are,
as of such date, owned, controlled or held by the applicable entity or one or
more subsidiaries of such entity.

“Tax” or “Taxes”
means any national, federal, state or local taxes, including but not limited to
any income, gross receipts, payroll, employment, excise, customs duties,
severance, stamp, business, premium, windfall profits, environmental,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, service, service use,
occupation, lease, lease use, transfer, registration, value added, workers’
compensation, employee withholding tax, or similar tax, any alternative or
add-on minimum tax, and any estimated tax, in each case, including any interest,
penalty, or addition thereto, whether disputed or not.

 A-2

 

Exhibit B

Covenant Not To Sue

As a material consideration and inducement to Kirin SD, Inc.
(“Purchaser”) to execute the Purchase Agreement dated as of May      ,
2006 (the “Purchase Agreement”) by and between Advanced Cell Technology, Inc.
(“ACT”) and Purchaser, ACT and all of its respective past, present and future
parents, subsidiaries, and affiliates, and each of their past, present and
future constituent members, partners, officers, shareholders, directors,
agents, employees, contractors or consultants and each of their respective
successors and assigns, and any other person or entity now, previously or
hereafter affiliated in any manner with any of them (collectively with ACT, the
“Seller Parties”) hereby unconditionally covenant and agree that each of them
shall, except as otherwise expressly provided herein, forever refrain from (i) initiating,
filing, instituting, maintaining, or proceeding upon, or encouraging, advising,
or voluntarily assisting any other person or entity to initiate, institute,
maintain, or proceed upon any claim, demand, cause of action or right of any
nature whatsoever, against any of Purchaser and its past, present and future
parents, subsidiaries, and affiliates, and each of their past, present and
future constituent members, partners, officers, shareholders, directors, agents
and employees, and each of their respective successors and assigns, and any
other person or entity now, previously or hereafter affiliated in any manner
with any of them (collectively with Purchaser, the “Purchaser Parties”),
arising from or related to, whether directly or indirectly, the infringement or
violation of any patent, or other intellectual property rights, arising out of
or related to the subject matter of the UMASS Litigation (as defined below), of
any Seller Parties, or (ii) assigning or otherwise transferring any such
claim, demand, cause of action or right against any Purchaser Parties to any
person or entity. The Seller Parties, collectively and each of them
individually, represent and warrant that as of this date there are no claims,
demands, or causes of action against any Purchaser Parties of any nature known
to any of the Seller Parties. The Seller Parties, collectively and each of them
individually, acknowledge and agree that the covenants and obligations set
forth in this Covenant may be pleaded as a full and complete defense to, and
may be used as the basis for an injunction against, any claim, demand, action,
suit or other proceeding which may be instituted, prosecuted or attempted in breach
of this Covenant. Notwithstanding the foregoing, the aforementioned covenant
and agreement by the Seller Parties shall not apply to any claims or causes of
action that the Seller Parties may have against any of the Purchaser Parties
arising out of or relating to (1) a breach by any of the Purchaser Parties
of the Exclusive License Agreement or Non-Exclusive License Agreement between
certain of the Purchaser Parties and ACT (the “License Agreements”) or the
inaccuracy of any of the representations and warranties made by any of the
Purchaser Parties in the Purchase Agreement or the License Agreements, or (2) the
infringement or violation by any of the Purchaser Parties of any ACT Owning and
Controlling Technologies (as defined below). For purposes of this Covenant Not
To Sue, the term “UMASS Litigation” means the lawsuit filed by the University
of Massachusetts against Drs. Philippe Collas and James Robl (styled as University of Massachusetts v. Robl & Collas,
No. 03-0445 BLS2 (Mass. Super. Ct., Suffolk County)) with respect to
certain intellectual property that Drs. Collas and Robl have assigned to
Aurox, LLC; and the term “ACT Owning and Controlling Technologies” means any
technology, including patent rights or other intellectual property rights,
owned by or licensed to the Seller Parties 

 B-1
 

 

that the Seller Parties have not authorized the
Purchaser Parties to use, either pursuant to a license agreement or otherwise.

IN WITNESS WHEREOF, the parties hereto have caused
this Covenant-Not-to-Sue to be duly executed as of the day and year first above
written.

ADVANCED CELL TECHNOLOGY,
INC.

	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  
	
   

  

 

 

 B-2

 

Exhibit C

Release

FOR AND IN CONSIDERATION of the purchase by Kirin SD, Inc.,
a Delaware corporation (“Buyer”),
of all the issued and outstanding limited liability company interests
(collectively, the “Interests”) of
Hematech, LLC, a Delaware limited liability company (“Hematech”), held by Advanced Cell
Technology, Inc., a Delaware corporation (the “Member”), pursuant to a Purchase Agreement (as defined
herein), the undersigned, hereby, unconditionally and irrevocably releases and
forever discharges, Hematech, Hematech-GAC Venture, LLC, a Delaware limited
liability company, Buyer, and Kirin Brewery Company, Limited, a Japanese
corporation, and their respective Affiliates, officers, directors, employees,
stockholders, members, agents, legal representatives and other advisers,
successors and assigns and the respective officers, directors, employees,
stockholders, members, agents, legal representatives and other advisers,
successors and assigns of such Affiliates (hereinafter collectively referred to
as the “Released Parties”),
absolutely and forever, of and from any and all direct or indirect liabilities,
claims, losses, damages, costs, expenses, deficiencies, obligations,
commitments, disputes, responsibilities, demands, benefits, accounts, liens,
rights of action, claims for relief and causes of action, of every nature and
kind whatsoever, in law or in equity, known or unknown, fixed or unfixed,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, including without limitation, any rights to
reimbursement or indemnification from the Hematech under the Hematech’s
organizational documents, their operating agreements or otherwise (“Claims”), which the undersigned and its
respective affiliates, representatives, agents, attorneys, heirs, executors,
administrators, successors and assigns had, have or may have against any
Released Party for, upon or by reason of any matter, cause or thing whatsoever
from the beginning of the world to the Closing Date, except for any Claims
arising out of or related to the Agreement

Capitalized terms used in this Release without
definition have the respective meanings given to them in the Purchase Agreement
dated as of May     , 2006, by and among Buyer
and Advanced Cell Technology, Inc. (the “Agreement”).

The foregoing Release includes all claims, actions,
and demands that now exist or may hereafter accrue based on matters now unknown
as well as known and matters unanticipated as well as anticipated, resulting or
to result from the status of the undersigned as a Member or otherwise.

The undersigned hereby represents that it has not
heretofore transferred, conveyed, or assigned any Claim or any portion thereof
or interest therein. The undersigned further represents that in executing this
Release it has not relied upon any representation or statement made by any
Released Party or any of the representatives with regard to the subject matter,
basis, or effect of this Release, except such representations as are set forth
in the Agreement.

This Release may not be changed except in a writing
signed by each of the undersigned and Buyer (or any of their respective
successors). This Release shall be binding upon the undersigned and its
respective heirs, executors, administrators, successors and assigns and shall 

 C-1
 

 

inure to the benefit of the Released Parties and their
respective heirs, executors, administrators, successors and assigns. This
Release is made and entered into in the State of New York and shall be in all
respects interpreted, enforced and governed under the laws of said State. The
provisions of this Release shall be construed broadly so as to effectuate the
intent of the parties, but not so broadly as to require that any provision must
be declared or be determined by any court to be illegal or invalid. If any
provision is declared or determined to be illegal or invalid, the validity of
the remaining provisions shall not be affected hereby and said illegal or
invalid provision shall not be deemed to be a part of this Release.

IN WITNESS WHEREOF, the undersigned has caused this
Release to be executed as of the        
day of May, 2006.

	
  

  	
   

  	
  ADVANCED CELL TECHNOLOGY, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

 C-2

 

Exhibit D

Exclusive
License Agreement

See Exhibit 10.2
to this Quarterly Report on Form 10-QSB

 D-1

 

 

Exhibit E

Non-Exclusive
License Agreement

See Exhibit 10.1
to this Quarterly Report on Form 10-QSB

 E-1Exhibit 10.1

 

 

OPERATING AGREEMENT

OF

1100 WEST HOLDINGS, LLC

 

Dated as of August     , 2006

 

 

 

 

TABLE OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 1

  	
   

  	
  DEFINITIONS

  	
   

  	
  1

  
	
  Section 1.1

  	
   

  	
  Definitions

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 2

  	
   

  	
  COMPANY FORMATION

  	
   

  	
  9

  
	
  Section 2.1

  	
   

  	
  Formation

  	
   

  	
  9

  
	
  Section 2.2

  	
   

  	
  Name

  	
   

  	
  9

  
	
  Section 2.3

  	
   

  	
  Purpose

  	
   

  	
  9

  
	
  Section 2.4

  	
   

  	
  Place of Business

  	
   

  	
  9

  
	
  Section 2.5

  	
   

  	
  Duration

  	
   

  	
  9

  
	
  Section 2.6

  	
   

  	
  Management

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 3

  	
   

  	
  CAPITAL; ALLOCATIONS; DISTRIBUTIONS

  	
   

  	
  9

  
	
  Section 3.1

  	
   

  	
  Capital
  Contributions

  	
   

  	
  9

  
	
  Section 3.2

  	
   

  	
  No Withdrawal of
  Capital Contributions

  	
   

  	
  11

  
	
  Section 3.3

  	
   

  	
  Return of
  Capital Contributions

  	
   

  	
  12

  
	
  Section 3.4

  	
   

  	
  Liability of
  Members and Their Affiliates

  	
   

  	
  12

  
	
  Section 3.5

  	
   

  	
  No Priority

  	
   

  	
  12

  
	
  Section 3.6

  	
   

  	
  No Interest

  	
   

  	
  12

  
	
  Section 3.7

  	
   

  	
  No Obligation to
  Restore Negative Balances in Capital Accounts

  	
   

  	
  12

  
	
  Section 3.8

  	
   

  	
  Capital Accounts

  	
   

  	
  12

  
	
  Section 3.9

  	
   

  	
  Allocation of
  Net Income and Net Loss

  	
   

  	
  13

  
	
  Section 3.10

  	
   

  	
  Other Allocation
  Rules

  	
   

  	
  15

  
	
  Section 3.11

  	
   

  	
  Tax Allocations

  	
   

  	
  15

  
	
  Section 3.12

  	
   

  	
  State and Local
  Items

  	
   

  	
  15

  
	
  Section 3.13

  	
   

  	
  Distributions

  	
   

  	
  16

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 4

  	
   

  	
  MANAGEMENT

  	
   

  	
  16

  
	
  Section 4.1

  	
   

  	
  Management of the
  Company

  	
   

  	
  16

  
	
  Section 4.2

  	
   

  	
  Limitation on
  Member’s Authority

  	
   

  	
  16

  
	
  Section 4.3

  	
   

  	
  Designated
  Representatives

  	
   

  	
  20

  
	
  Section 4.4

  	
   

  	
  Compensation of
  Members

  	
   

  	
  20

  
	
  Section 4.5

  	
   

  	
  Indemnification
  of Members

  	
   

  	
  20

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 5

  	
   

  	
  DUTIES OF MEMBERS

  	
   

  	
  20

  
	
  Section 5.1

  	
   

  	
  Specified Duties

  	
   

  	
  20

  
	
  Section 5.2

  	
   

  	
  Books and
  Records

  	
   

  	
  21

  
	
  Section 5.3

  	
   

  	
  Reports

  	
   

  	
  21

  
	
  Section 5.4

  	
   

  	
  Tax Returns; Tax
  Elections

  	
   

  	
  22

  
	
  Section 5.5

  	
   

  	
  Tax
  Controversies

  	
   

  	
  22

  
	
  Section 5.6

  	
   

  	
  Budgets/Business
  Plans

  	
   

  	
  23

  
	
  Section 5.7

  	
   

  	
  Notice of Suits

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 6

  	
   

  	
  CONSTRUCTION BUDGET/CAPITAL PLAN

  	
   

  	
  24

  
	
  Section 6.1

  	
   

  	
  Construction
  Budget; Business Plan

  	
   

  	
  24

  
	
  Section 6.2

  	
   

  	
  Management of
  the Property

  	
   

  	
  24

  
	
  Section 6.3

  	
   

  	
  Financing

  	
   

  	
  25

  

 

 i
 

 

 

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 7

  	
   

  	
  TRANSFERS OF COMPANY INTERESTS

  	
   

  	
  25

  
	
  Section 7.1

  	
   

  	
  Interests of
  Members

  	
   

  	
  25

  
	
  Section 7.2

  	
   

  	
  Interests of
  other Members

  	
   

  	
  26

  
	
  Section 7.3

  	
   

  	
  Buy-Sell

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 8

  	
   

  	
  DISSOLUTION AND LIQUIDATION

  	
   

  	
  28

  
	
  Section 8.1

  	
   

  	
  Dissolution

  	
   

  	
  28

  
	
  Section 8.2

  	
   

  	
  Winding up
  Affairs

  	
   

  	
  28

  
	
  Section 8.3

  	
   

  	
  Distribution of
  Non-Liquid Assets

  	
   

  	
  29

  
	
  Section 8.4

  	
   

  	
  Orderly
  Liquidation

  	
   

  	
  29

  
	
  Section 8.5

  	
   

  	
  Deficit Upon
  Liquidation

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 9

  	
   

  	
  MEETINGS OF MEMBERS

  	
   

  	
  29

  
	
  Section 9.1

  	
   

  	
  Meetings

  	
   

  	
  29

  
	
  Section 9.2

  	
   

  	
  Place of
  Meetings

  	
   

  	
  29

  
	
  Section 9.3

  	
   

  	
  Teleconference

  	
   

  	
  30

  
	
  Section 9.4

  	
   

  	
  Action by
  Members Without a Meeting

  	
   

  	
  30

  
	
  Section 9.5

  	
   

  	
  Waiver of Notice

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 10

  	
   

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
  30

  
	
  Section 10.1

  	
   

  	
  Representations
  by MHG

  	
   

  	
  30

  
	
  Section 10.2

  	
   

  	
  Representations
  by SWA

  	
   

  	
  31

  
	
  Section 10.3

  	
   

  	
  Indemnity

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 11

  	
   

  	
  FEES TO MEMBERS

  	
   

  	
  31

  
	
  Section 11.1

  	
   

  	
  Development Fee

  	
   

  	
  31

  
	
  Section 11.2

  	
   

  	
  Marketing Fee

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 12

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  32

  
	
  Section 12.1

  	
   

  	
  Notices

  	
   

  	
  32

  
	
  Section 12.2

  	
   

  	
  Entire Agreement

  	
   

  	
  33

  
	
  Section 12.3

  	
   

  	
  Governing Law

  	
   

  	
  33

  
	
  Section 12.4

  	
   

  	
  No Oral
  Modification

  	
   

  	
  33

  
	
  Section 12.5

  	
   

  	
  Binding Effect

  	
   

  	
  33

  
	
  Section 12.6

  	
   

  	
  Severability

  	
   

  	
  33

  
	
  Section 12.7

  	
   

  	
  Captions

  	
   

  	
  33

  
	
  Section 12.8

  	
   

  	
  Person and
  Gender

  	
   

  	
  33

  
	
  Section 12.9

  	
   

  	
  Further
  Assurances

  	
   

  	
  33

  
	
  Section 12.10

  	
   

  	
  Partition

  	
   

  	
  33

  
	
  Section 12.11

  	
   

  	
  Third-Party
  Beneficiaries

  	
   

  	
  33

  
	
  Section 12.12

  	
   

  	
  Broker

  	
   

  	
  34

  
	
  Section 12.13

  	
   

  	
  WAIVER OF JURY
  TRIAL

  	
   

  	
  34

  
	
  Section 12.14

  	
   

  	
  Costs

  	
   

  	
  34

  
	
  Section 12.15

  	
   

  	
  Publicity

  	
   

  	
  34

  
	
  Section 12.16

  	
   

  	
  Intellectual
  Property

  	
   

  	
  34

  

 

 ii
 

 

 

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 12.17

  	
   

  	
  Bank Accounts

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 13

  	
   

  	
  SPECIAL PURPOSE ENTITY COVENANTS

  	
   

  	
  35

  
	
  Section 13.1

  	
   

  	
  Special Purpose
  Entity Covenants

  	
   

  	
  35

  
	
  Section 13.2

  	
   

  	
  SPE Definitions

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 14

  	
   

  	
  ARBITRATION

  	
   

  	
  37

  
	
  Section 14.1

  	
   

  	
  Initiation

  	
   

  	
  37

  

 

 

 iii

 

 

OPERATING AGREEMENT

OF

1100 WEST HOLDINGS, LLC

THIS OPERATING AGREEMENT of 1100 WEST HOLDINGS, LLC (the ”Company”)
is made as of                     ,
2006, by and between MONDRIAN MIAMI INVESTMENT LLC, a Delaware limited
liability company having an office c/o Morgans Group LLC, 475 Tenth Avenue, New
York, New York, 10018 (“MHG”); and SANCTUARY WEST AVENUE, LLC, a Delaware
limited liability company having an office at c/o Hudson Capital, 4770 Biscayne
Boulevard, Miami, Florida 33137, (“SWA”). 
MHG and SWA are hereinafter collectively referred to as “Members,” and
individually, a “Member.”

RECITALS

WHEREAS the Members, through the
Company, wish to enter into a contract (the “Contract”) for the purchase of the
land and improvements known as the Mirador, located at 1100 West Avenue, Miami
Beach, Florida (the “Property”), from 1100 West Realty LLC;

WHEREAS, the Company intends to
acquire, renovate and redevelop the Property as a 342-key condominium-ownership
hotel (which will include a swimming pool, spa/fitness center, business center,
bar, restaurant(s), dock and other related amenities); and

WHEREAS, the Members desire to form a
limited liability company under and pursuant to the Delaware Limited Liability
Company Act, 6 Del. C. § 18-101, et seq. (as amended from time to time, the “Act”),
for the purposes described above and as set forth in this Agreement;

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

ARTICLE 1

DEFINITIONS

Section 1.1                                      Definitions.  The following terms shall have the meanings
set forth below:

“Act” shall have the meaning set forth in the recitals
hereto.

“Actual Capital” shall mean the sum of Capital Contributions of
Required Capital, Additional Required Capital and Additional Capital.

“Additional
Capital” shall mean Capital
Contributions made by a Member to the Company pursuant to Section 3.1(b).

“Adjusted Capital” shall mean, with respect to any Member, such Member’s
Actual Capital, reduced by all distributions made to such Member under
Section 3.13(b).

 

 

“Adjusted Capital
Account Deficit” shall
mean, with respect to any Member, the deficit balance, if any, in such Member’s
Capital Account as of the end of the relevant Fiscal Year or as of any other
relevant determination date, after giving effect to the following adjustments:

(i)                                     credit to such Capital Account of any amounts which
such Member is obligated to restore (pursuant to the terms of this Agreement or
otherwise) or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Section 1.704-2(g)(1) and Regulations Section
1.704-2(i)(5) after taking into account any net decrease in a Member’s share of
Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain that has
occurred as of the relevant determination date; and

(ii)                                  debit to such Capital Account of the items described in
Regulations Sections 1.704-1 (b)(2)(ii)(d)(4), (5) and (6).

The foregoing definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of
Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.

“Affiliate” shall mean, with respect to a Person, any other Person
directly or indirectly controlling, controlled by or under common control with
such first Person.  As used in this
Agreement, the term “control”
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policy and/or policies of a Person, whether
through ownership of voting securities, by contract or otherwise.

“Affiliate
Agreement” shall mean the
agreements with an Affiliate described in Exhibit B annexed hereto.

“Agreement” shall mean this Operating Agreement of the Company.

“Applicable Law” shall mean, collectively, all federal, state and local
laws, statutes, codes, acts, ordinances, orders, judgments, decrees,
injunctions, rules, regulations, permits, licenses, authorizations, directions
and requirements of and agreements with all courts and governmental
authorities, foreseen and unforeseen, ordinary or extraordinary, applicable to
the Company and/or the Property.

“Building” means the improvements located at the Property.

“Building
Contract” shall mean the
contract or contracts entered into by the Company, or its direct subsidiary,
with the general construction contractor for the supply of construction
services in connection with the Project.

“Business Plan” shall mean a plan for the operation and management of
the Company’s assets as provided in Section 6.1.

“Capital Account” shall mean the account maintained for each Member by
the Company in accordance with Section 3.8.

 2
 

 

 

“Capital
Contribution” shall mean,
with respect to any Member, the amount of money and the initial Gross Asset
Value of any property (other than money) contributed to the Company.

“Capital
Transaction” shall mean any
of the following: (i) a sale, exchange, transfer, assignment or other
disposition of all or a portion of the Company’s direct or indirect interest in
any Property; (ii) any financing or refinancing of any property of the Company;
(iii) any collection by the Company in respect of condemnation or deed in lieu
of condemnation or in respect of property, hazard or casualty insurance or any
damage award, relating to the Property (other than business interruption
insurance); or (iv) any other transaction of the Company the proceeds of which
arise from a capital transaction or the proceeds of which, in accordance with
generally accepted accounting principles, are considered to be capital in
nature.

“Capital
Transaction Proceeds” shall
mean the net proceeds of a Capital Transaction, following reduction for (i) all
indebtedness secured by or directly related to any Property required, or
intended, to be repaid out of such capital proceeds, (ii) all other reasonable
costs and expenses related to such Capital Transaction, (iii) in the event of a
sale, all costs and expenses related to any or all of the Property being sold
which are not assumed by the purchaser, (iv) in the case of a collection
or award under clause (iii) of the definition of “Capital Transaction,” any
funds used to rebuild, restore or repair any or all of the Property, and (v)
any transfer or sales related tax payable in connection with such Capital
Transaction, and less reasonable reserves and holdbacks for contingent
liabilities approved by the Members.

“Code” shall mean the Internal Revenue Code of 1986, as
amended (or any corresponding provision or provisions pf any succeeding law).

“Company” shall mean the limited liability company governed by
this Agreement.

“Company Budget” shall have the meaning ascribed thereto in Section
5.6.

 “Contract” has the meaning in ascribed to such term in the
recitals.

“Construction
Budget”  shall have the meaning ascribed thereto in
Section 6.1.

“Construction
Documents” with respect to
the Project, the architectural, renovation, design, construction and supply
contracts and agreements entered into or to be entered into by the Company, or
its direct subsidiary, for the construction, renovation and design of the
Project and the equipping or furnishing of the Hotel in connection therewith,
including, without limitation, the Building Contract. For purposes hereof, each
Construction Document shall be deemed to include all modifications and
amendments thereto made from time to time, and all documents, drawings,
specifications, conditions, addenda, budgets and other matters produced in
connection therewith or incorporated by reference thereto.

“Consumer Price
Index” or “CPI” mean the
Consumer Price Index (all items) for all wage earners and clerical workers in
the Miami, Florida metropolitan area (1982-1984 = 100) as published by the
United States Department of Labor, Bureau of Labor Statistics.  If the 1982-1984 base of the Consumer Price
Index is hereafter changed, then the new base as so converted 

 3
 

 

 

shall be
used.  In the event that the Bureau
ceases to publish the Consumer Price Index at least once every other month,
then the successor or most nearly comparable index thereto selected by the
Members shall be used.

“Default Loan
Interest Return” shall have
the meaning ascribed thereto in Section 3.1(c).

“Defaulting
Member” shall have the
meaning ascribed thereto in Section 3.1(c).

“Default Member
Loan” shall have the
meaning ascribed thereto in Section 3.1(c).

“Depreciation” shall mean, with respect to any asset of the Company
for each Fiscal Year or other period, the amount of depreciation, amortization
or other cost recovery deduction allowable with respect to such asset for such
Fiscal Year or other period, except that (i) if the Gross Asset Value of an
asset differs from its adjusted basis for federal income tax purposes at the
beginning of any such Fiscal Year or other period, Depreciation with respect to
such asset for such Fiscal Year or other period shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization or other cost recovery deduction for such Fiscal
Year or period bears to such beginning adjusted tax basis, and (ii) if an asset
has a zero adjusted basis for federal income tax purposes, Depreciation shall
be determined under any reasonable method selected by the Members which is in
accord with federal income tax accounting principles applicable to assets of
similar character having a positive adjusted basis for federal income tax
purposes.

“Development
Fee”  shall have the
meaning ascribed thereto in Section 11.1.

“Emergency
Condition” shall be deemed
to exist if, (i) in the reasonable opinion of Hotel Manager or the Members,
immediate action for the protection of a Property, guests, tenants or other
persons is required to remedy a condition presenting imminent risk of injury to
persons or material damage to property, repairs or payment of premiums that are
necessary to avoid the suspension of insurance or to comply with Applicable
Law, a violation of which would expose the Company, a Member or their
respective Affiliates to criminal liability; (ii) moneys are required to cure a
default by the Company, as the landlord under a lease; (iii) real estate taxes
are more than thirty (30) days past due; or (iv) payments due to any lender are
past due and within three (3) business days will accrue at a default or penalty
rate.

“FF&E Reserve” shall have the meaning ascribed to such term in
Section 5.6.

“Fiscal Year” shall mean the calendar year of twelve (12) months
from January 1 to December 31, except that the first fiscal year of the
Company shall be the period from the formation of the Company to December 31 of
the same calendar year, and upon any termination of the Company on a date other
than December 31, the final Fiscal Year of the Company shall be the period from
the end of the immediately preceding Fiscal Year to the date of such
termination.

“Gross Asset
Value” shall mean, with
respect to any asset, the asset’s adjusted basis for federal income tax
purposes, subject to the following:

 4
 

 

 

(a)                                  The initial Gross Asset Value of any asset contributed
by a Member to the Company shall be the gross fair market value of such asset
as reasonably determined in good faith by the Members;

(b)                                 The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values, as determined in
good faith by the Members, as of the following times: (i) the acquisition of an
additional interest in the Company by any new or existing Member in exchange
for more than a de minimis Capital Contribution; (ii) the distribution
by the Company to a Member of more than a de minimis amount of Company
property as consideration for an interest in the Company, in the case of both
(i) and (ii), if the Members reasonably determine in good faith that such
adjustment is necessary or appropriate to reflect the relative economic interests
of the Members in the Company; and (iii) the liquidation of the Company within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);

(c)                                  The Gross Asset Value of any Company asset distributed
to any Member shall be the gross fair market value of such asset on the date of
distribution, as reasonably determined by the Members in good faith; and

(d)                                 The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis
of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only
to the extent that such adjustments are taken into account in determining
Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and
Section 3.9(b)(v) hereof; provided, however, that Gross Asset Values shall not
be adjusted pursuant to this Section (d) if or to the extent that the Members
determine that an adjustment pursuant to Section (b) hereof is necessary or
appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this Section (d).

(e)                                  If the Gross Asset Value of an asset has been
determined or adjusted pursuant to Section (a), (b) or (d) hereof, such Gross
Asset Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Net Income and Net Loss.

 “Hotel” shall mean the condominium hotel to be developed at
the Property.

“Hotel Management
Agreement” shall mean the
hotel management agreement between the Company and Morgans Hotel Group
Management LLC or any successor thereto, as operator.  The Hotel Management Agreement is an
Affiliate Agreement.

“Hotel Manager” shall mean Morgans Hotel Group Management LLC or any
successor in interest thereto or replacement thereof.

“Interests” shall mean the limited liability company interests
issued to the Members pursuant to this Agreement, representing the Members’
aggregate rights in the Company, including, without limitation, the Members’
rights to share in profits and losses of the Company, to receive distributions
from the Company and to vote on matters subject to a vote of the Members, as
provided in this Agreement.

 5
 

 

 

“IRS” shall mean the Internal Revenue Service or any
division thereof or any succeeding or successor agency.

“Lending Member” shall have the meaning ascribed thereto in Section
3.1(c).

“Liquidation” shall mean liquidation of a Member’s interest in the
Company in accordance with Regulations Section 1.704-1(b)(2)(ii)(g).

“Major Decision” shall mean a decision with respect to the Company and
its operations listed in Section 4.2 hereof.

 “MHG” shall mean Mondrian Miami Investment LLC, a Delaware
limited liability company.

“Marketing Fee” shall have the meaning ascribed thereto in Section
11.2.

“Necessary Sums” shall mean funds owed to mortgagees of approved
mortgages, government authorities (for real estate, sales, use and similar
taxes), ground lessors, tenants under leases, brokers, insurance providers and
utility companies.

“Net Cash from
Operations” shall mean, for
any Fiscal Year, or portion thereof, revenues of the Company received in cash
during such taxable year, or portion thereof, and reserves set aside out of
revenues during prior periods and no longer needed for the Company’s business,
but not including Capital Transaction Proceeds, less the sum of (i) operating
and administrative expenses of the Company (excluding amounts paid from
reserves or funds provided by Actual Capital or from Capital Transaction
Proceeds (provided that the Members have specifically approved in writing such
use of the Capital Transaction Proceeds)) paid during such Fiscal Year, or
portion thereof, including without limitation, fees payable under this
Agreement or the Affiliate Agreements, and (ii) reasonable reserves for the
remainder of such Fiscal Year and future periods based on the Company Budget
approved by the Members or otherwise approved by the Members.

“Net Income or
Net Loss” shall mean for
each Fiscal Year or other period, an amount equal to the Company’s taxable
income or loss for such year or period determined in accordance with Code
Section 703(a) (for this purpose, all items of income, gain, loss or deduction
required to be stated separately pursuant to Code Section 703(a)(1) shall be
included in taxable income or loss), with the following adjustments:

(a)                                  Any income of the Company that is exempt from federal
income tax and not otherwise included (net of related expenses not otherwise
deducted) in computing Net Income or Net Loss pursuant to this definition shall
be added to such taxable income or loss;

(b)                                 Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704l(b)(2)(iv)(i), and not otherwise taken
into account in computing Net Income or Net Loss pursuant to this definition,
shall be subtracted from such taxable income or loss;

 6
 

 

 

(c)                                  If the Gross Asset Value of any Company asset is
adjusted pursuant to subsection (b) or (c) set forth within the definition of
Gross Asset Value, the amount of such adjustment shall be taken into account as
gain or loss from the disposition of such asset for purposes of computing Net
Income or Net Loss;

(d)                                 In lieu of the depreciation, amortization and other
cost recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Fiscal Year or
other period; and

(e)                                  Notwithstanding any other provision of this Section,
any items which are specially allocated pursuant to Section 3.9(b) hereof shall
not be taken into account in computing Net Income or Net Loss.

“Nonrecourse
Deductions” shall have the
meaning set forth in Regulations Section 1.704-2(c).

“Opening Date” shall mean the date upon which the Property shall be
open for business as a hotel.

“Partner
Nonrecourse Debt Minimum Gain” shall mean the sum of each Member’s share of the “minimum gain
attributable to the partner nonrecourse debt” as those quoted terms are used in
Regulations Section 1.704-2(i)(2).

“Partner
Nonrecourse Deductions” shall
have the meaning set forth in Regulations Section 1.704-2(i)(2).

“Partnership
Minimum Gain” shall have
the meaning set forth in Regulations Section 1.704-2(b)(2).

“Percentage
Interests” shall mean,
initially, 50% for MHG and 50% for SWA; provided, however, that upon the
contribution of any Additional Capital to the Company, “Percentage Interests”
shall thereafter mean, for each Member, the percentage equal to a fraction, the
numerator of which is the Actual Capital of such Member and the denominator of
which is the aggregate Actual Capital of all the Members, but subject to
adjustment under Section 3.1(g) hereof.

“Person” shall mean an individual, corporation, firm,
partnership, limited liability company, trust or any other form of association
or entity.

“Plans and
Specifications” with
respect to the Project, shall mean the plans, drawings, specifications,
renderings, studies, budgets, forecasts and schedules developed as of the date
hereof, and to be developed from and after the date hereof, as the same may be
modified from time to time.

“Project” a collective term for the acquisition, construction,
rehabilitation, renovation and design of the Building as a 348-key condominium
hotel, to be branded as a “Mondrian Hotel” to include an outdoor swimming pool,
spa/fitness center, business center, bar(s), restarurant(s) and docks.

 7
 

 

 

“Project Costs” with respect to the Project, a collective term for all
direct and indirect costs of the Project incurred through the final completion
of the Project, comprising the following costs: (i) design, including
architectural, mechanical, electrical, structural and civil engineering,
including construction of mock-up rooms (but excluding any costs which fall
within (ii) below), (ii) costs of acquisition and construction, being the sums
paid by Company, or its direct subsidiary, to the contractors pursuant to the
Building Contract and any other relevant Construction Document (but excluding
any costs which fall within (i) above), (iii) the purchase price of all
furniture, furnishings and equipment, including the transportation and the
installation thereof, (iv) financing, including fees and interest, (v) legal
and accounting fees, (vi) taxes and insurance, and (vii) subject to such other
costs falling within the parameters set out in the Construction Budget, any and
all other costs reasonably necessary for the completion of the Project.

“Project Lender” shall mean the lender(s) providing to the Company
financing for the Project.

“Project Manager” shall mean Sanctuary West Management, LLC, an
affiliate of SWA, or any successor thereto under the Project Management
Agreement.

“Project
Management Agreement” shall
mean that certain Project Management Agreement, to be entered into between the
Company and Project Manager with respect to the Property.  The Project Management Agreement is an
Affiliate Agreement.

“Property” shall mean those parcels of land and the improvements
now or hereafter thereon known as the “Mirador” located at 1100 West Avenue,
Miami Beach, Florida, together with all appurtenances, privileges,
entitlements, hereditaments and development rights now and hereafter associated
therewith.

“Regulations” shall mean the final and temporary Income Tax
Regulations promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).

“Required Capital” shall mean the installments of capital to be
contributed to the Company by the Members pursuant to Section 3.1(a).

“SWA” shall mean Sanctuary West Avenue, LLC, a Delaware
limited liability company.

“Tax Returns” shall mean (a) the U.S. Partnership Return of Income
filed by the Company, whether on Form 1065 or such other form as may hereafter
be prescribed by the IRS, and (b) any return or report which the Company is
required to file with the taxing authorities of any State or political
subdivision thereof.

“Tax Matters
Partner” shall have the
meaning ascribed thereto in Section 5.5(a).

“Transfer” shall have the meaning ascribed thereto in Section
7.1(a).

 8
 

 

 

“Unit” shall mean a condominium unit of the Hotel,
established through a plan of condominium ownership.

“Vote of the
Members” shall mean the
approval by the majority of the Interests of the Members.  Wherever this Agreement refers to the consent
or approval of the Members, a Vote of the Members shall be required for such
approval or consent.

ARTICLE 2

COMPANY
FORMATION

Section 2.1                                      Formation.  The Members hereby agree to form the Company
under the Act, for the purposes and upon the terms, covenants and conditions set
forth in this Agreement.

Section 2.2                                      Name.  The Company shall be conducted under the name
“1100 WEST HOLDINGS, LLC”.

Section 2.3                                      Purpose.  The purpose of the Company shall be, subject
to the limitations set forth in this Agreement, (i) directly or indirectly
acquiring, owning, holding, selling, transferring and exchanging interests in
1100 West Properties, LLC a Delaware limited liability company, (ii) directly
or indirectly owning, holding, selling, transferring, hypothecating and
exchanging interests in the Property and to otherwise construct, reconstruct,
renovate, expand, develop, redevelop, refurbish, improve, operate, finance,
refinance, sell, lease, maintain and/or manage the Property,
(iii) engaging in any other lawful act or activity agreed upon by the
Members, and (iv) engaging in any other lawful act or activity for which
limited liability companies may be formed under the Act that are necessary,
convenient, incidental or appropriate to the foregoing.

Section 2.4                                      Place
of Business.  The Company shall
maintain a registered office in the City of Miami Beach, at the Property.

Section 2.5                                      Duration.  The Company has commenced and shall continue
in perpetuity unless terminated in accordance with the provisions of this
Agreement or as otherwise provided by Applicable Law.

Section 2.6                                      Management.  Subject to provisions of this Agreement,
including Article IV, the management of the business and affairs of the Company
shall be vested in the Members.

ARTICLE 3

CAPITAL; ALLOCATIONS;
DISTRIBUTIONS

Section 3.1                                      Capital
Contributions.  (a)  Upon execution of this Agreement, the Members
have contributed to the Company the sums set forth opposite their names on Exhibit
A annexed hereto.  It is anticipated
that the budget for the Project shall provide capitalization of the Company of
$30,000,000 for the acquisition and redevelopment of the Property (such amount
being the “Required Capital”), covering all hard and soft costs, including all
permits and fees, all furnishing, fixtures and equipment, and
contingencies.  In accordance with the
Construction 

 9
 

 

 

Budget approved by the
Members, the Members shall contribute, on a 50-50 basis, their respective
shares of the Required Capital.  Either
Member may, at any time Required Capital is required to pay for (i) costs and expenses
approved in the Construction Budget or Company Budget, or (ii) for Project
Costs, call for an advance by the Members of their respective shares of
Required Capital to the extent not already advanced by such Members.

(b)                                 To
the extent that at any time the Members determine that additional capital
(exclusive of any amounts to be contributed pursuant to Section 3.1(a)) is
required by the Company (“Additional Capital”), the same shall be advanced by
the Members, in equal portions, (50%-50%) (provided that following a
reallocation as provided in Section 3.1(g) hereof, such Additional Capital
shall be contributed by the Members, pro rata, in proportion to their
respective Percentage Interests). 
Notwithstanding the foregoing, either Member may, acting alone, make a
call for Additional Capital (i) up to $10,000,000 for the completion of the
construction and development of the Project as provided under Paragraph 6.1 of
this Agreement, (ii) to the extent required to cure any Emergency Condition,
(iii) to the extent required to pay debt service on any approved financing
of the Company (or the Property), (iv) to the extent required to pay real
estate taxes, (v) to the extent required to pay insurance premiums, or (vi)
otherwise for any expense set forth in either the Construction Budget or an
approved Company Budget.

(c)                                  If
any Member (hereinafter a “Defaulting Member”) shall fail to contribute all or
any portion of its Required Capital or Additional Capital called for pursuant
to Section 3.1(a) or 3.1(b) within ten (10) days (or in the event that the
Additional Capital is required by virtue of an Emergency Condition, then within
three (3) business days), then the non-Defaulting Member shall be entitled, but
not required, to loan to the Defaulting Member the amount of the Additional
Capital which the Defaulting Member failed to contribute by funding to the
Company the amount of the Additional Capital so failed to be contributed.  Any Additional Capital so funded pursuant to
this Section 3.1 (hereinafter a “Default Member Loan” and the contributing
Member making such Default Member Loan, hereinafter, the “Lending Member”)
shall be deemed to be a loan to the Defaulting Member and shall bear interest
at a rate equal to fifteen (15%) percent per annum, but in no event to exceed
the highest permissible legal rate of interest (interest due on any such
Default Member Loan shall be payable monthly and shall be hereinafter referred
to as the “Default Loan Interest Return”). 
Interest shall accrue on Default Member Loans from the date the funds
are actually received by the Company until the date that the Default Member
Loans are repaid in full.

(d)                                 Notwithstanding
anything to the contrary contained in this Agreement, at any time when any
portion of a Default Member Loan (including accrued and unpaid Default Loan
Interest Return) shall remain outstanding, any distributions otherwise payable
to or on account of a Defaulting Member shall be paid to the Lending Members
who have funded the applicable Default Member Loan as provided for in Section
3.1(c) of this Agreement, and such distribution shall be applied first to the
Default Loan Interest Return and then in reduction of the Default Member
Loan.  In this regard, such Defaulting
Member hereby assigns its right to receive all distributions from the Company
to the Lending Members until such time as the Default Loan Interest Return and
Default Member Loan have been paid in full. 
If more than one Default Member Loan is outstanding, the Default Member
Loans senior in time shall be paid in 

 10
 

 

 

full prior to any other
Default Member Loans.  A Default Member
Loan may be prepaid at any time without penalty or premium but with interest to
date of payment.

(e)                                  Notwithstanding
the provisions of this Section 3.1, a Defaulting Member shall not have any
personal liability to the Company or to the Members for repayment of a Default
Member Loan or Default Loan Interest Return, except to the extent of its
Interest in the Company.

(f)                                    In
the event a Default Member Loan is not paid within one hundred fifty (150) days
after it is made, the Lending Members may, at any time thereafter, send a
notice to the Company and the Defaulting Member stating that the Lending
Members have elected to exercise a reallocation right (the “Reallocation Notice”).

(g)                                 If
a Defaulting Member shall fail to repay the Default Member Loan (including all
accrued and unpaid Default Loan Interest Return) within thirty (30) business
days of receipt of the Reallocation Notice, then the Percentage Interest of the
Defaulting Member shall automatically and without further act on the part of
any party, be reduced and the Percentage Interest of the Lending Member(s) (pro
rata if there be more than one Lending Member) shall automatically and without
further act on the part of any party be increased by the product of 1.5 times
the percentage equal to a fraction, the numerator of which is the principal
amount of the Default Member Loan (together with all accrued and unpaid Default
Loan Interest Return) and the denominator of which is the sum of the Default
Member Loan (together with all accrued and unpaid Default Loan Interest Return)
and all other Capital Contributions made (and not repaid) to the Company, which
reallocation shall discharge the obligation under the Default Member Loan.  The outstanding amount of the Default Member
Loan funded by the Lending Member and all interest thereon shall, from and
after the increase in the Lending Members Percentage Interest provided in this
Section 3.1(g), be deemed a contribution of Additional Capital by the Lending
Member and shall no longer be treated as a Default Member Loan.

(h)                                 In
reference to the first $5,000,000 of the Additional Capital to be advanced by
the Members under Section 3.1 (b)(i) (or such portion thereof as required to
advanced by them), in the event a Member fails to contribute such Member’s pro
rata share of such Additional Capital within ten (10) days following a call for
such advance, such Member shall not have the right to vote on any matters for
which such Member’s vote or consent is required hereunder for so long as such
Member’s share of such Additional Capital has not been funded by them.  In reference to the remaining $5,000,000 or
any other sum required to be advanced by the Members under 3.1(b)(ii) through
3.1(b)(vi), the failure of a Member to advance such amount shall not result in
the loss of any voting or consent rights unless a reallocation of the Members’
interests shall occur as provided above.

Section 3.2                                      No
Withdrawal of Capital Contributions. 
Except upon dissolution and liquidation of the Company or as otherwise
set forth herein, no Member shall have the right to withdraw, reduce or demand
the return of its Capital Contributions, or any part thereof, or any
distribution thereon.  Except as
otherwise provided herein, no Member shall have the right to receive assets
other than cash in connection with a distribution or return of capital.

 11

 

 

Section
3.3                                      Return
of Capital Contributions.

(a)                                  No
Fixed Time.  Except as specifically
provided for herein and upon dissolution and liquidation of the Company, there
is no agreement, nor time set, for the return of any Capital Contribution to
any Member.

(b)                                 No
Personal Liability of Member.  Except
as otherwise required by the Act, the Members shall not be personally liable
for the return or repayment of any Capital Contribution.

Section 3.4                                      Liability
of Members and Their Affiliates. 
Except as otherwise provided by Applicable Law, the debts, obligations
and liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company; no
Member or Affiliate of a Member shall be obligated personally for any such
debt, obligation or liability of the Company solely by reason of being a Member
or being an Affiliate of a Member.

Section 3.5                                      No
Priority.  Except as otherwise
expressly provided for in this Agreement, no Member shall have priority over
another Member as to return of Capital Contributions, loans or allocations of
income, gain, profits, losses, credits or deductions or as to distributions.

Section 3.6                                      No
Interest.  Except as expressly
provided for in this Agreement, no interest shall be paid on all or any part of
a Member’s Capital Contributions.

Section 3.7                                      No
Obligation to Restore Negative Balances in Capital Accounts.  No Member shall have an obligation, at any
time during the term of the Company or upon its liquidation, to pay to the
Company or any other Member or third party an amount equal to the negative
balance in such Member’s Capital Account.

Section 3.8                                      Capital
Accounts.  (a)  The Company shall maintain a separate capital
account (“Capital Account”) for each Member.

(b)                                 The
Capital Account of each Member shall be maintained in accordance with Section
1.704-1(b) of the Regulations as in effect on the date of this Agreement and
shall be interpreted and applied in a manner consistent with such Regulations.

(c)                                  Each
Member’s Capital Account shall be adjusted in accordance with the following
provisions:

(i)                                     To
each Member’s Capital Account there shall be credited (A) the amount of any
cash Capital Contributions made, and the Gross Asset Value of any property
contributed (net of liabilities secured by such property), by such Member to
the Company, and (B) such Member’s allocable share of Net Income; and

(ii)                                  To
each Member’s Capital Account there shall be debited (A) the amount of cash and
the Gross Asset Value of any Company property distributed 

 12
 

 

 

to such Member pursuant
to any provision of this Agreement (net of any liabilities secured by such
property), and (B) such Member’s allocable share of Net Loss.

(d)                                 In
the event of a transfer of a Member’s Interests or any portion thereof in
accordance with the terms of this Agreement, whether or not the purchaser,
assignee or successor-in-interest is then a Member, the Person so acquiring
such Interest or any portion thereof shall acquire the Capital Account or
portion thereof of the Member formerly owning such Interest, adjusted for
distributions of Net Cash From Operating Income made pursuant to Section 3.13
hereof and allocations of Net Profits and Net Losses made pursuant to Section
3.9 hereof.

Section 3.9                                      Allocation
of Net Income and Net Loss.  (a)  Except as provided in Section 3.9(b), items
of Net Income and Net Loss in each Fiscal Year shall be allocated among the
Members in a manner such that the Capital Account of each Member, immediately
after giving effect to such allocation, is, as nearly as possible, equal
(proportionately) to the amount of the distribution that would be made to such
Member if (i) the Company were dissolved and terminated, (ii) the affairs of
the Company were wound up and each Company asset was sold for cash equal to its
fair market value (except that any Company asset actually sold during the
current year shall be treated as sold for the actual proceeds of the sale),
(iii) all Company liabilities were satisfied and (iv) the net assets of the
Company were distributed to the Members in accordance with Section 3.13
immediately after giving effect to such allocation.  To the extent that any loss or deduction
otherwise allocable to a Member would cause such Member to have an Adjusted
Capital Account Deficit as of the end of the Fiscal Year to which such loss or
deduction relates, such loss or deduction shall instead be allocated to the
other Member(s) in proportion to positive Capital Account balances, until their
Capital Accounts are all reduced to zero, then the remainder shall be allocated
by Percentage Interest.

(b)                                 Prior
to making any allocations pursuant to Section 3.9(b), items of Company income
and loss shall be allocated in the following order and priority:

(i)                                     if
there is a net decrease in Partnership Minimum Gain during any Fiscal Year,
there shall be allocated to each Member (before any other allocation provided
by this Article 3 is made) items of Company income and gain for such year (and,
if necessary, subsequent years) in an amount equal to such Member’s share of
the net decrease in Partnership Minimum Gain, determined in accordance with
regulations Sections 1.704-2(g)(1) and (2). 
The items to be so allocated shall be determined in accordance with
Regulations Section 1.704-2(f).  This
Section 3.9(b)(i) is intended to comply with the minimum gain chargeback
requirement in Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.

(ii)                                  if
there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Fiscal Year, there shall be allocated to each Member (before any other
allocation provided by this Article 3 is made, other than an allocation made
pursuant to Section 3.9(b)(i) above) items of Company income and gain for such
year (and, if necessary, subsequent years) in an amount equal to such Member’s
share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable
to such Partner Nonrecourse Debt (as defined in the Regulations), determined in
accordance with Regulations Section 1.704-2(i). 
The items to be so allocated 

 13
 

 

 

shall be determined in
accordance with Regulations Section 1.704-2(i). 
This Section 3.9(b)(ii) is intended to comply with the minimum gain
chargeback requirement in Regulations Section 1.704-2(i) and shall be interpreted
consistently therewith.

(iii)                               In
the event in any Fiscal Year any Member has an Adjusted Capital Account Deficit
resulting from an unexpected adjustment, allocation or distribution described
in Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, items of
Company income and gain (consisting of a pro rata portion of each item
of Company income, including gross income, and gain for such Fiscal Year) shall
be specially allocated to such Member in an amount and manner sufficient to
eliminate as quickly as possible such Member’s Adjusted Capital Account Deficit
without creating or increasing an Adjusted Capital Account Deficit of any other
Member.  If more than one of the Members
has an Adjusted Capital Account Deficit resulting from such unexpected
adjustment, allocation or distribution described in Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, items of Company income
and gain shall be allocated to the Members having Adjusted Capital Account
Deficits in proportion to their respective Adjusted Capital Account
Deficits.  This Section 3.9(b)(iii) is
intended to constitute a “qualified income offset” under Regulations Section
1.704I(b)(2)(ii)(d).

(iv)                              In
the event any Member has a deficit Capital Account at the end of any Company
Fiscal Year which is in excess of the sum of (i) the amount such Member is
obligated to restore pursuant to any provision of this Agreement and (ii) the
amount such Member is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5),
each such Member shall be specially allocated items of Company gross income and
gain in an amount and manner sufficient to eliminate such excess as quickly as
possible.

(v)                                 To
the extent that an adjustment to the adjusted tax basis of any Company asset
pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be allocated to the Members in a manner consistent with the
manner in which their Capital Accounts are required to be adjusted pursuant to
such Regulations Section.

(vi)                              Nonrecourse
Deductions for any Fiscal Year or other period shall be allocated to the
Members in the same ratio as Net Income for such Fiscal Year or other period is
allocated among the Members.

(vii)                           Partner
Nonrecourse Deductions for any Fiscal Year or other period shall be allocated
to the Members who bear the economic risk of loss with 

 14
 

 

 

respect to the loan to
which such item of deduction is attributable. 
This Section 3.9(b)(vii) is intended to comply with the provisions of
Regulations Section 1.704-2(i) and shall be interpreted in accordance
therewith.

(viii)                        To
the extent that any Company expenditure, including, but not limited to, any
management or other fee paid to an Affiliate of MHG or SWA, is disallowed as a
deduction for purposes of computing the Company’s taxable income under Code
Section 704 and instead is treated as a distribution to the payee pursuant to
Code Section 731(a), then there shall be a special allocation of Company items
of income to the payee (of an Affiliate thereof) in an amount equal to the
amount of the payments received so treated as a distribution pursuant to
Section 731(a).

Section 3.10                                Other
Allocation Rules.  (a)  For purposes of determining the Net Income,
Net Loss or any other items allocable to any period, Net Income, Net Loss and
other items shall be determined on a daily, monthly, or other basis, as
determined by the Members, using any permissible method under Code Section 706
and the Regulations thereunder.

(b)                                 Credits,
or income resulting from the recapture of Credits, shall be allocated among the
Members in accordance with the Code, Regulations and Applicable Law.

(c)                                  Whenever
items of income or loss of the Company allocable hereunder consist of items of
different character for tax purposes i.e., ordinary income, long-term
capital gain, depreciation recapture, interest expense, etc.), the items of
income or loss of the Company allocable to each Member shall include, to the
extent possible, his pro rata share of each such item.

(d)                                 The
Members are aware of the income tax consequences of the allocations made by
this Article 3 and hereby agree to be bound by the provisions of this Article 3
in reporting their shares of Company income and loss for income tax purposes.

Section 3.11                                Tax
Allocations.  In accordance with Code
Section 704(c) and the Regulations thereunder, income, gain, loss and deduction
with respect to any property contributed to the capital of the Company shall,
solely for tax purposes, be allocated among the Members so as to take account
of any variation between the adjusted basis of such property to the Company for
federal income tax purposes and its initial Gross Asset Value.

If the Gross Asset Value of any
Company asset is adjusted as provided in the definition thereof, subsequent
allocations of income, gain, loss and deduction with respect to such asset
shall, solely for federal income tax purposes and pursuant to Regulations
Section 1.704-1(b), take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its Gross Asset Value in the
same manner as under Code Section 704(c) and the Regulations thereunder.

Section 3.12                                State
and Local Items.  Items of income,
gain, loss, deduction, credit and tax preference for state and local income tax
purposes shall be allocated to and among the Members in a manner consistent
with the allocation of such items for federal income tax 

 15
 

 

 

purposes in accordance
with the foregoing provisions of this Article 3 unless otherwise required by
Applicable Law.

Section 3.13                                Distributions.  (a) 
The Company shall distribute all available Net Cash from Operations and
Capital Transaction Proceeds in accordance with this Section 3.13.

Subject to Sections 3.1(c) and (d),
Net Cash from Operations and Capital Transactions Proceeds of the Company shall
be distributed monthly to the Members in accordance with their Percentage
Interests.

(b)                                 The
Members intend that the Company Budgets for the Company shall include as an
expense item reserves to be fixed by the Members from time to time, and the
Members agree that distributions to the Members according to this Agreement
will not be made if such distributions have the effect of impairing reserves.

(c)                                  Notwithstanding
any other provision to the contrary, the Company may withhold from any
distribution otherwise payable to a Member, any taxes payable by the Company
with respect to amounts allocable or distributable to such Member.  Any amounts so withheld shall be paid by the
Company to the appropriate taxing authority and shall be treated as amounts
distributed to the Member.

(d)                                 In
accordance with Section 3.1(d) hereof and notwithstanding anything in this
Section 3.13 to the contrary, any amounts distributable pursuant to Section
3.13(a) to a Member who is a Defaulting Member shall not be paid to such
Defaulting Member, but shall instead be paid to the Lending Member in payment
of accrued and unpaid Default Loan Interest Return, if any, and in repayment of
the principal of the Default Member Loan. 
Any such amounts paid to the Lending Member shall be treated for all
purposes of this Agreement as if distributed to the Defaulting Member pursuant
to Section 3.13(a) hereof, and then paid by the Defaulting Member to the
Lending Member pursuant to the terms of the Default Member Loan.  In the event of more than one Lending Member
with respect to a particular Default Member Loan, such amounts shall be paid to
the Lending Members pro rata in accordance with their Percentage Interests.

ARTICLE 4

MANAGEMENT

Section 4.1                                      Management
of the Company.  Subject to the
provisions of this Agreement (including this Section 4.1 and Section 4.2), the
management of the company shall be by the Members.  MHG and SWA shall each use their respective
best efforts to carry out the business of the Company as set forth in
Section 2.3.  Simultaneously with
the execution of this Agreement, the Company shall consent to or shall enter
into the Hotel Management Agreement with the Hotel Manager, an Affiliate of
MHG, for the management and operation of the Hotel.

Section 4.2                                      Limitation
on Member’s Authority.  Except as
otherwise expressly set forth herein, SWA and MHG shall jointly act for and
bind the Company, and third persons dealing with the Company may fully rely
upon any action taken or instrument executed on behalf of the Company jointly
by SWA and MHG.

 16
 

 

 

In furtherance and not in limitation
of the foregoing, before the Company, or any Member on behalf of the Company,
undertakes any of the following (a “Major Decision”), a Vote of the Members
must approve the same in writing:

(a)                                  The
changing of the capital structure of the Company, including, without
limitation, the creation, issuance or allotment by the Company of any
membership interests or any right or instrument convertible into membership
interests in the Company, or the creation of options for new membership
interests;

(b)                                 The
modifying of this Agreement or any formation documents of the Company;

(c)                                  The
appointing of or changing of auditors or investments bankers of the Company;

(d)                                 The
obtaining or modifying of any borrowings, financings or refinancings by the
Company;

(e)                                  The
entering into of any joint venture or partnership by the Company or any
subsidiary of the Company;

(f)                                    The
purchasing, selling, leasing or disposing of any fee or leasehold real property
(other than the sale of Units in accordance with the Business Plan);

(g)                                 The
approving of the Construction Budget and the Business Plan and any
modifications thereto;

(h)                                 The
approving of any Company Budget subsequent to the Construction Budget;

(i)                                     Any
voluntary bankruptcy filing, winding up, dissolution or receivership of the
Company or any subsidiary of the Company;

(j)                                     The
creating of any indebtedness for borrowed money or any other financing by the
Company;

(k)                                  The
voluntary creation of any lien on the Property not contemplated by financing
approved by the Members or contesting the validity, amount or enforceability of
any lien;

(l)                                     Subject
to Section 5.7, the commencing or threatening of any litigation, legal proceeding,
casualty or condemnation of any type on behalf of the Company and the direction
of any such proceeding, including, without limitation, the settling,
compromising or taking any other material action with respect to any
litigation, legal proceeding, casualty or condemnation of any type by, against,
or involving the Company or the Property;

(m)                               The
mortgaging, pledging or other hypothecation of any assets of the Company,
including the Property;

 17
 

 

 

(n)                                 The
causing of the Company, or any Member to be obligated as a surety, guarantor or
accommodation party (except with regard to SWA, as applicable, under the
Completion Guaranty);

(o)                                 The
lending of funds belonging to the Company to any Person, or the extension of
credit to any Person on behalf of the Company;

(p)                                 The
confessing of judgment on behalf of the Company or any Member;

(q)                                 The
changing of the purpose of the Company;

(r)                                    The
merging or consolidating of the Company with another entity; or the
incorporating or other changing of the nature of the Company from a limited
liability company formed under Delaware law;

(s)                                  The
hiring of, or transacting of any business with or entering into any Occupancy
Agreements with, any Person in which either Member owns, directly or
indirectly, an economic or beneficial interest (other than public companies),
provided that the Members hereby approve the Affiliate Agreements;

(t)                                    The
modifying or terminating of any Affiliate Agreement;

(u)                                 The
agreeing to the settlement of any condemnation proceeding or insurance claim;

(v)                                 The
selling, leasing or other disposing of all or substantially all of any Property
or all or substantially all of the assets of the Company;

(w)                               The
deciding whether to repair or rebuild in case of a material damage to the
Property arising out of a casualty or condemnation, subject to the terms of
existing mortgages, leases and other agreements previously approved by the
Members;

(x)                                   The
admitting of additional Members;

(y)                                 The
selection and hiring of any architect, engineer or other professional to provide
professional services to the Company in connection with the Project;

(z)                                   The
selection and hiring of general contractors, construction managers and
subcontractors with contracts worth in excess of $100,000, in connection with
the renovation of the Building;

(aa)                            The
selection and hiring on behalf of the Company of accountants, attorneys,
auditors and other consultants;

(bb)                          The
approval and filing of a plan of condominium ownership for the Property;

(cc)                            The
approval, amendment or termination of the Construction Documents;

 18
 

 

 

(dd)                          The
approval of the Plans and Specifications, and any modifications or amendments
thereto;

(ee)                            The
commencement of any legal action or proceedings, arbitration, and real estate
tax certiorari proceedings challenging over-assessment of the Property;

(ff)                                Notwithstanding
the above, any decisions with respect to an Affiliate Agreement or any matter
pertaining to an Affiliate, shall be made solely by the “non-affiliated”
Member, and all action pursued pursuant to such decision shall be directed and
controlled by said Member;

(gg)                          Any Member shall promptly give the other Members notice
of any Major Decision that is proposed to be undertaken.  The other Member shall have ten (10) business
days to approve or disapprove of any Major Decision (other than approval of the
Construction Budget and Business Plan, which are to be approved as provided
below, and pursuant to Section 6.1, for the initial Construction Budget and
Business Plan, and Section 5.6 as to any modifications to the Construction
Budget or subsequent Business Plan). 
Notwithstanding the foregoing time periods for response to a notice of
Major Decision, if the notifying Member shall, in such notice for a Major
Decision, state that such Major Decision is needed to handle or resolve an
Emergency Condition, the other Members shall approve or disapprove the Major
Decision proposed by such Member within three (3) business days.  If a Member shall fail to disapprove a
request for approval or shall fail to give its consent during the appropriate
time period, that Member shall be deemed to have approved of the proposed
action.  Any notice of disapproval shall
set forth with reasonable specificity the reasons therefor.  Notwithstanding the foregoing, with respect
to leasing matters, the Members may grant or withhold their consent to any
proposed lease, license or concession agreement in their absolute and sole
discretion.

(hh)                          In the event the Members have not approved the
Construction Budget, the Business Plan, any subsequent Company Budget, or any
modification thereto that requires the approval of Members within (x) 30 days
from the date of the initial submission for the approval of the Members in the
case of the initial Construction Budget or Business Plan or (y) 15 days for any
subsequent Company Budget or modification to an approved Construction Budget or
Business Plan, any Member may submit such dispute to arbitration as provided in
Article 13 hereof.  Until such time as
such dispute is resolved (either by consensus or arbitration) the following
shall control:

(i)                                     With
respect to any Company Budget subsequent to the Company Budget for the first
fiscal year of the Company, each line item shall be increased by the greater of
the increase in Consumer Price Index over the prior year or four percent (4%)
over the prior year Company Budget except with respect to line items for
Necessary Sums which line items may be increased without the Members’ consent
by the actual amount of any increase;

(ii)                                  With
respect to any mid-year modification to a subsequent Company Budget which
requires the approval of the Members, there shall be no increase above 1 % of
such budget; and

 19
 

 

 

(iii)                               With
respect to the approval of the Construction Budget, the initial Business Plan,
or any modifications thereto no such budget or plan shall be approved until
resolved by the Members or by arbitration pursuant to Article 13.

Section 4.3                                      Designated
Representatives.  SWA hereby
designates Abraham A. Galbut as its authorized representative with whom MHG and
its representative may deal in connection with any decisions or actions
requiring input or approval from SWA. 
MHG hereby designates Marc Gordon as its authorized representatives with
whom SWA and its representatives may deal in connection with any decisions or
actions requiring input or approval from MHG. 
Either Member may change its designated representatives upon written
notice to the other Member.

Section 4.4                                      Compensation
of Members.  Except as expressly
provided herein, the Members, as such, shall not receive any compensation for
their services to the Company; provided, however, that to the extent approved
by the Members in the Construction Budget, any Company Budget or the Members
and the appointed officers, if any, may charge to the Company and pay out of
Company funds, as and when available, all reasonable, actually incurred, direct
out-of-pocket expenses incurred by them in performing such Member’s duties
hereunder; and provided, further, that nothing herein contained shall affect
the right of the Hotel Manager to receive fees and reimbursements provided for
under the Hotel Management Agreement.

Section 4.5                                      Indemnification
of Members.  No Member shall be
liable, in damages or otherwise, to the Company or to any of the Members for
any act or omission performed or omitted by such Member pursuant to authority
granted by this Agreement, except to the extent such act or omission results
from the Member’s willful misconduct or bad faith or gross negligence.  The Company shall indemnify, defend and hold
harmless the Members and their respective officers, directors, partners,
members, agents, representatives and Affiliates, and each of them, from and
against any claim or liability of any nature whatsoever, including, without
limitation, reasonable attorneys’ fees and expenses, arising out of or in
connection with the assets or business of the Company, except where
attributable to the willful misconduct or bad faith or gross negligence of such
Member.  Each of the Members shall be
entitled to rely on the advice of counsel or certified public accountants, and
any act or omission of a Member in good faith reliance on such advice shall in
no event subject such Member to liability to the Company or any Member.

ARTICLE 5

DUTIES OF MEMBERS

Section 5.1                                      Specified
Duties.

(a)                                  MHG
shall, in conformance with Section 4.1, and to the extent not delegated to the
Hotel Manager pursuant to the Hotel Management Agreement, or otherwise provided
in this Article 5, from and after the Opening Date oversee day-to-day
operations of the Property;

(b)                                 SWA
shall, in conformance with Section 4.1, and to the extent not delegated to or
performed by the Project Manager under the Project Management Agreement or 

 20
 

 

 

otherwise provided in
this Article 5, oversee the day-to-day operation of the Property prior to the Opening
Date.

(c)                                  Notwithstanding
anything contained in this Agreement to the contrary, SWA, without the approval
of MHG, shall have the sole right to act for and on behalf of the Company in
connection with enforcing compliance by the Hotel Manager with the terms of the
Hotel Management Agreement, and is authorized to exercise remedies, including,
without limitation, the right of termination pursuant to the applicable terms
of the Hotel Management Agreement.

(d)                                 Notwithstanding
anything contained in this Agreement to the contrary, MHG, without the approval
of SWA, shall have the sole right to act for and on behalf of the Company in
connection with enforcing compliance by the Project Manager with the terms of
the Development Agreement.  MHG is
authorized to exercise remedies of the Company as against the Project Manager,
including, without limitation, the right of termination pursuant to the
applicable terms of the Development Agreement.

Section 5.2                                      Books
and Records.  The Members hereby
designate MHG to perform, or cause to be performed, all general and
administrative services on behalf of the Company and in pursuance thereof MHG
shall maintain complete and accurate books of the Company with respect to its
operations at the Company’s principal office at the Project showing the
interests of the Members, all receipts and expenditures, assets and
liabilities, profits and losses, and all other records necessary for recording
the Company’s business and affairs, including the maintenance of a Capital
Account for each Member.  No Member shall
be entitled to any fee for performing any such general and administrative
services.  The books of the Company and
the Owner shall be kept on the cash basis in accordance with generally accepted
accounting principles, consistently applied, and shall be open to inspection
and examination by each Member at all reasonable times.  SWA shall provide to MHG financial
information for the Property with respect to the period prior to the Opening
Date necessary for the preparation of the above described books of the Company.

Section
5.3                                      Reports.  The Members hereby designate MHG, to,
provide:

(a)                                  as
promptly as practicable and in any event within twenty (20) days after the
close of each month, a balance sheet, a statement of profit and loss of the
Company, a statement of Net Cash from Operations of the Company, and a
statement of each Member’s Capital Account, Adjusted Capital and Actual
Capital, all for such period;

(b)                                 as
promptly as practicable and in any event within thirty (45) days after the
close of each quarter, a balance sheet, a statement of profit and loss of the
Company, a statement of Net Cash from Operations of the Company, and a
statement of each Member’s Capital Account, Adjusted Capital and Actual
Capital, all for such period;

(c)                                  as
promptly as practicable and in any event within ninety (90) days after the end
of each Fiscal Year, a balance sheet of the Company as of the end of such year
showing its net worth and containing a statement of each Member’s Capital
Account, Adjusted Capital and Actual Capital and statements of profit and loss,
Net Cash from Operations, of the net and 

 21
 

 

 

distributable proceeds
received from each Capital Transaction, and the sources and applications of
funds of the Company for such year;

(d)                                 promptly
upon receipt thereof, one copy of each other report submitted to the Company by
the Company’s accountants in connection with any annual, interim or special
audit made by them of the books or records of the Company;

(e)                                  as
promptly as possible following the end of each Fiscal Year (but no later than
April 1 of such Fiscal Year), a copy of the Company’s federal, state and
local (if any) returns of income for said Fiscal Year, with Schedule K-1
attached to the federal return, prepared by the Company’s accountants, together
with a statement of such accountants showing the amount of Net Income, Net
Loss, capital gain and other items allocable to each Member for federal, state
and local income tax purposes; and

(f)                                    from
time to time and with reasonable promptness, such further information in
respect of the business, affairs and financial condition of the Company as any
of the Members may reasonably request.

SWA shall provide to MHG financial information for the
Property (and the Project) with respect to the period prior to the Opening Date
necessary for the timely preparation of the above-described financial reports
and returns.

No Member shall be entitled to any fee
for performing any of the duties set forth in this Section 5.3.

Section 5.4                                      Tax
Returns; Tax Elections.  MHG shall
cause to be prepared and filed, at the expense of the Company, all required
state and federal informational tax returns for the Company on or before the
date that such returns are due, and shall cause to be prepared and delivered to
the other Member, by March 15 of each year, all completed informational returns
due to the Members, including without limitation, K-1 forms.  All expenses incurred in connection with the
above shall be borne by the Company. 
Except as otherwise expressly provided herein, MHG, subject to the
consent of SWA (which consent shall not be unreasonably withheld) shall make
all applicable elections, determinations and other decisions under the Code (or
any other federal or state law), including without limitation, the deductibility
of a Company’s tax return, and shall approve, subject to the consent of SWA
(which consent shall not be unreasonably withheld) the settlement or compromise
of all audit matters raised by the Internal Revenue Service or other taxing
authority affecting the Members generally. 
The Members each shall take reporting positions on their respective
federal, state and local income tax returns consistent with the positions
determined for the Company in accordance with the foregoing consent
requirements.

Section 5.5                                      Tax
Controversies.  (a)  The Members hereby designate MHG as tax
matters partner (the “Tax Matters Partner”) as defined in Section 6231(a)(7) of
the Code, and the Members will take such actions as may be necessary,
appropriate, or convenient to effect the designation of such Tax Matters
Partner.  The Tax Matters Partner and the
other Members shall use their best efforts to comply with the responsibilities
outlined in this section and in Section 6231 of the Code (including any
Regulations promulgated thereunder).

 22
 

 

 

(b)                                 The
Members shall furnish the Tax Matters Partner with such information as the Tax
Matters Partner may reasonably request.

(c)                                  The
Tax Matters Partner shall not enter into an agreement with the IRS to extend
the period of assessment regarding Company and the Owner items (as defined in
Section 6231(a)(3) of the Code, but substituting the term “Company” and the
term “Owner” for the term “partnership”) without the written consent of the
Members.

(d)                                 No
Member shall file, pursuant to Section 6227 of the Code, a request for an
administrative adjustment of Company items for any taxable year of the Company
and the Owner without first notifying the other Members.  If the other Member agrees with the requested
adjustment, the Tax Matters Partner shall file the request for administrative
adjustment on behalf of the Company and the Owner.  If the Members do not reach agreement within
thirty days or within the period required to timely file the request for administrative
adjustment, if shorter, any Member may file a request for administrative
adjustment on its own behalf.  If, under
Section 6227 of the Code, a request for administrative adjustment which is to
be made by the Tax Matters Partner must be filed on behalf of the Company and
the Owner, the Tax Matters Partner shall also file such a request on behalf of
the Company and the Owner under the circumstances set forth in the preceding
sentence.

(e)                                  If
an audit of any of the Company’s or Owner’s Tax Returns shall occur, the Tax
Matters Partner shall, at the expense of the Company or Owner, as applicable,
notify the Members thereof, participate in the audit and subject to paragraph
(g) of this Section 5.5, contest, settle or otherwise compromise assertions of
the auditing agent which may be adverse to the Company or the Owner.  The Tax Matters Partner may, if it determines
that the retention of accountants and/or other professionals would be in the
best interests of the Company or the Owner, as applicable, retain such
accountants and/or other professionals to assist in such audits.

(f)                                    If
any Member intends to file a petition under Sections 6226 or 6228 of the Code
with respect to any Company item or Owner or other tax matter involving the
Company or the Owner, the Member so intending shall notify the other Members of
such intention and the nature of the contemplated proceeding.  Such notice shall be given in a reasonable
time to allow the other Members to participate in the choosing of the forum in
which such petition will be filed.  If
the Members do not agree on the appropriate forum, the petition shall be filed
with the United States Tax Court.  If any
Member intends to seek review of any court decision rendered as a result of the
proceeding instituted under the preceding part of this subsection, such party
shall notify the others of such intended action.

(g)                                 The
Tax Matters Partner shall not bind any Member to a settlement agreement without
the approval of such Member.  If any
Member enters into a settlement agreement with the Secretary of the Treasury with
respect to any partnership items, as defined by Section 6231(a)(3) of the Code,
it shall notify the other Members of such settlement agreement and its terms
within thirty days from the date of settlement.

Section 5.6                                      Budgets/Business
Plans.  (a)  The Construction Budget shall be prepared in
accordance with Section 6.1 hereof.

 23

 

 

(b)                                 The
budget for the operations of the Company (the “Company Budget”) shall be
prepared jointly by the Members no later than sixty (60) days prior to the
start of each Fiscal Year, except that the Company Budget for the initial
Fiscal Year shall be prepared within thirty (30) days from the date hereof.

Section 5.7                                      Notice
of Suits.  Any Member obtaining
knowledge of the commencement of any suit or legal proceeding against the
Company, Owner or a Property shall promptly notify the other Members thereof,
and will forward with such notice copies of the summons, complaints and other
pertinent documents relating to such action or proceeding, including a copy of
all pleadings.  The Members shall
thereafter control the defense of all suits and proceedings that are covered by
insurance or are of the type that would customarily arise in the hospitality
industry in the ordinary course of operating a hotel open to the general public
(the “Ordinary Course Litigation”).  The
control and management of any suits and proceedings that are not Ordinary
Course Litigation shall be determined on a case by case basis by the Members.

ARTICLE 6

CONSTRUCTION
BUDGET/CAPITAL PLAN

Section 6.1                                      Construction
Budget; Business Plan.  Following
acquisition of the Property, the Members shall cooperate in preparing an
initial plan (the “Business Plan”) and budget for the financing and development
of the Property (the “Construction Budget”). 
SWA shall within 120 days of the date hereof prepare and submit for the
Members’ review and approval a preliminary Construction Budget, which shall
include a renovation and development schedule identifying the projected dates
for the commencement and completion of the improvements to the Property at
various stages of renovation and development, and shall set forth all revenues
and expenses, including, without limitation, all costs, fees and expenses
required for the construction and renovation of the Property.  The Members shall jointly prepare a Business
Plan, which shall be prepared in a manner consistent with a market standards
applicable to facilities similar to the Project, and shall set forth the
parameters, guidelines and assumptions pursuant to which the Company will
effectuate the performance of the purposes of the Company, including, without
limitation, the proposed terms and timing of the condominium conversion, the
proposed terms of any condominium unit sale price, preparation and release of
promotional and advertising materials relating to the Project (subject to
Section 12.15 hereof) and financing of the costs and expenses to be incurred by
the Company in connection with the Project. 
The Members shall cooperate in providing to each other such supporting
documentation, reports and other supporting documents as may be reasonably
requested by them for review of the proposed Construction Budget and Business
Plan, including projected gross income, projected gross and net proceeds from
the sale of Units, operating expenses, projected reserves of working capital,
replacements and other cash requirements. Following approval of the
Construction Budget, SWA shall be primarily responsible for implementation and
development of the Property consistent with the budgetary limitations of the
Construction Budget and the terms of the Project Management Agreement.

Section 6.2                                      Management
of the Property.  Commencing on the
Opening Date, Hotel Manager, an affiliate of MHG, will manage the Property
pursuant to the Hotel Management Agreement.

 24
 

 

 

Section 6.3                                      Financing.  The Company intends to obtain construction
financing in connection with the redevelopment of the Property.  The Members will each use their best efforts
to satisfy, or cause to be satisfied, all the conditions to such financing
which are within its control and shall use good faith, diligent, reasonable
efforts to satisfy, or cause to be satisfied, all conditions to such financing
which are not within its control.

ARTICLE 7

TRANSFERS
OF COMPANY INTERESTS

Section 7.1                                      Interests
of Members.  (a)  Without the prior written consent of a the
Members, (i) no Member shall sell, assign, pledge, encumber, otherwise dispose
of or hypothecate, by operation of law or otherwise (collectively referred to
as a “Transfer”), its Interests in the Company or any part thereof, or withdraw
from or seek to terminate the Company; and (ii) except as expressly permitted
below, no Person which is, or which holds, directly or indirectly, an interest
in any entity which is, one of the Persons comprising the Members shall
Transfer all or any portion of such indirect Company interest.

Notwithstanding the foregoing, but subject to any
agreements of the Company or its Members in connection with the financing of
the Project, a Member may at any time Transfer 100% (but not less than 100%) of
its Interests in the Company to a Person that is wholly-owned by such Member
(or the parent of such Member).

(b)                                 Notwithstanding
Section 7.1 (a) or anything contained in this Agreement to the contrary, the
prior written consent of the Members shall not be required for the following
Transfers (each, a “Permitted Transfer”) provided the same shall not be or
cause a default under the terms of any financing obtained by the Company in
connection with the Project:

(i)                                     a
Transfer by the initial ultimate beneficial owners of an initial Member,
directly or indirectly, to a transferee so long as at all times (a) with
respect to SWA, Abraham Galbut and his family members (or a transferee(s)
pursuant to clause (ii) below) owns and holds, directly or indirectly, 51% of
the ultimate beneficial ownership of SWA and Abraham Galbut controls the day to
day operations and management of SWA and makes all decisions for SWA, and (b)
with respect to MHG, Morgans Group LLC (or a transferee(s) pursuant to clause
(ii) below) own and hold, directly or indirectly 51% of the ultimate beneficial
ownership of MHG and control the day-to-day operations and management of MHG;
provided, however, that, with respect to SWA (or a transferee(s) pursuant
hereto or to clause (ii) below), any transferee of such an interest shall not
be a Person who engages, through itself or through an Affiliate, as its
principal business, in the ownership, operation or management of hotels or
other hospitality facilities and with respect to both SWA and MHG, no such
transferee shall impair the ability of the Company, the Hotel Manager or its
Affiliates to obtain or retain a liquor license for the hotel or any
restaurant, bar or lounge in the Property;

 25
 

 

 

(ii)                  any
Transfer by any Person which holds, directly or indirectly, a beneficial
interest in a Member, to a trust, family partnership or other similar device
established by or for the benefit of immediate family members of the ultimate
beneficial owners of the Members as of the date hereof; provided, however, that
any transferee of such an interest shall not be a Person who would impair the
ability of the Company, the Hotel Manager or its Affiliates to obtain or retain
a liquor license for the hotel or any restaurant, bar or lounge in the
Property.

(c)                                  Any
Transfer permitted by this Article 7 shall be effected only by a written
instrument of assignment and assumption, provided that for any Transfer the
instrument of transfer provides for the assumption of the assignor’s
liabilities and obligations hereunder and has been duly executed by the
assignor of such interest and by the assignee/transferee (or any party having
an interest therein).  The Member making
a Transfer shall notify the other Members of any permitted Transfer of any
beneficial interest in a Member which occurs without a transfer of record
ownership.  No Transfer of a Member’s
Interests in the Company (including the transfer of any rights to receive or
share in profits, losses, income or the return of contributions) shall be
effective unless and until written notice (including the name and address of
the proposed purchaser, transferee, or assignee and the date of such transfer)
has been provided to the Members.  In
addition, in the event of the death of any person owning a direct or indirect
beneficial interest in the Company, such interest may be sold, transferred or
assigned pursuant to the decedent’s will.

(d)                                 At
no time may a Member Transfer less than 100% of its respective direct Interests
in the Company.  No permitted transferee
of any indirect interest in a Member shall have any rights to vote or
participate in any management of the Company.

(e)                                  Notwithstanding
anything in this Agreement to the contrary, no Transfer of any Interest shall
be made if counsel for the Company shall be of the opinion that such transfer
or assignment would (i) be in violation of the Securities Act of 1933 Act, as
amended, or any securities or “blue sky” laws of any applicable state, or (ii)
cause the Company to be treated as a corporation for federal income tax
purposes.

(f)                                    Any
Transfer in contravention of any of the provisions of this Article 7 hereof
shall be void and ineffective and shall not bind or be recognized by the
Company.

Section 7.2                                      Interests
of other Members.  The Company shall
not be dissolved by the bankruptcy of any Member, or by the liquidation,
dissolution, other cessation to exist as a legal entity or bankruptcy of any
Members, but the representative or successor of such Member may be admitted to
the Company as a substitute Member upon executing such documents as the
remaining Members may reasonably require to evidence such person’s agreement to
be bound by this Agreement.

Section 7.3                                      Buy-Sell.  (a) 
From and after the date that is the earlier of (i) three (3) years
from the Opening Date or (ii) five (5) years from the date hereof, SWA, on
the one hand, or MHG, on the other hand, may, subject to the provisions of the
documents underlying or securing a financing of the Property, elect to make a
purchase offer pursuant to the provisions of 

 26
 

 

 

this Section 7.3. 
The Member desiring to exercise such right (the “Offeror”) shall do so
by giving written notice of such election (the “Notice of Election”) to the
other Member (the “Offeree”).  The Notice
of Election shall state the aggregate dollar amount (the “Valuation Amount”)
which the Offeror would be willing to pay for the assets of the Company as of
the Closing Date (hereinafter defined), free and clear of all liabilities, and
shall set forth a calculation of the amounts which the Offeror and the Offeree
would receive, respectively, from the sale of their Interests, after applying
the subsequent provisions of this Section 7.3. 
The provisions of this Section 7.3 shall apply notwithstanding anything
to the contrary contained elsewhere in this Agreement.

(b)                                 After
receipt of the Notice of Election, the Offeree shall either (i) sell all of its
Interests to the Offeror for an amount equal to the amount which the Offeree
would have been entitled to receive if the Company had sold all of its assets
for the Valuation Amount on the Closing Date and the Company had immediately
paid all Company liabilities and the Company distributed the net proceeds of
sale it would be entitled to receive to the Members in satisfaction of their
Interests in the Company pursuant to Article 8, or (ii) purchase all of the
Interests of the Offeror for an amount equal to the amount which the Offeror
would have been entitled to receive if the Company had sold all of its assets
for the Valuation Amount on the Closing Date and the Company had immediately
paid all Company liabilities and the Company distributed the net proceeds of
sale it would be entitled to receive to the Members in satisfaction of their
Interests in the Company pursuant to Article 8, but without reserves for
contingent liabilities.  The Offeree
shall have sixty (60) days after the receipt by the Offeree of the Notice of
Election in which to exercise either of the foregoing options by giving written
notice (the “Exercise Notice”) of such election to the Offeror.  If the Offeree does not exercise the option
to purchase set forth in clause (b) above by giving written notice of such
election within such time period, then the Offeree shall be deemed to have
elected to sell its Interests to the Offeror. 
Within sixty (60) Business Days after the Offeree has exercised its
option, the Member thereafter obligated to acquire the Interests of the selling
Member shall deposit in escrow with such selling Member a non-refundable
(except in the event of the selling Member’s failure to consummate the
transaction other than due to a default by the acquiring Member) earnest money
deposit equal to ten percent (10%) of the amount which the selling Member is
entitled to receive for its Interests pursuant to this Section 7.3, which
amount shall be applied to the purchase price at closing.  If the acquiring Member should thereafter
fail to consummate the transaction, such amount shall be retained by the
selling Member, free of all claims of the acquiring Member, as the selling
Member’s sole and exclusive remedy and as liquidated damages for such failure,
provided, however, that the selling Member shall also have the option,
exercisable by written notice to the defaulting acquiring Member within thirty
(30) days of such default to acquire the Interest of the defaulting acquiring
Member at ninety-five percent (95%) of the amount the defaulting acquiring
Member would receive at the Valuation Price.

(c)                                  The
closing of an acquisition pursuant to this Section 7.3 shall be held at the
principal place of business of the Company on a mutually acceptable date (the “Closing
Date”) not later than ninety (90) days after the date of the Offeree’s Exercise
Notice (whether deemed or otherwise) or after the exercise of the selling
Member’s option to purchase the defaulting acquiring Member’s Interest, as the
case may be, under this Section 7.3.  At
the closing, the following shall occur:

 27
 

 

 

(i)                                     The
selling Member shall transfer and assign to the acquiring Member, free and
clear of all liens, claim and encumbrances, with covenants of general warranty,
the Interests being disposed of, and shall execute and deliver to the acquiring
Member all documents which may be reasonably required to give effect to the
acquisition of such Interests;

(ii)                                  The
acquiring Member shall pay to the selling Member the consideration therefore in
cash;

(iii)                               If
any selling Member (or any Affiliate thereof) is personally liable (whether by
virtue of being a guarantor or otherwise) for any liabilities or obligations of
the Company, the obligation of the selling Member to deliver the documents of
transfer referred to in clause (i) of this Section 7.3(c) shall be subject to
the condition precedent that the selling Member (and any such Affiliate with
personal liability) shall have received (x) a written release with respect to
all such liabilities and obligations, in form and substance reasonably
satisfactory to the selling Member (and any such Affiliate), from the party or
parties to whom such liabilities and obligations are owed, or (y) an
indemnification with respect to all such liabilities and obligations, in form
and substance satisfactory to the selling Member (and any such Affiliate) in
its sole discretion (acting reasonably), from the acquiring Member or a
creditworthy Affiliate; and

(iv)                              Any
and all required consents to such transaction from the Company’s lenders shall
have been obtained and delivered by the Offeror to the Offeree.

ARTICLE 8

DISSOLUTION
AND LIQUIDATION

Section 8.1                                      Dissolution.  The Company shall be dissolved and its
affairs wound up upon the occurrence of any of the following events:

(a)                                  The
sale, transfer or other disposition of the Property;

(b)                                 The
written agreement of all of the Members to dissolve the Company; or

(c)                                  The
entry of a decree of judicial dissolution under the Act.

Section 8.2                                      Winding
up Affairs.  Upon dissolution of the
Company, the assets of the Company shall be distributed in the following order
of priority:  (a) the debts and
liabilities, if any, of the Company other than debts and liabilities to Members
shall be paid in the order of priority provided by law; (b) then there shall be
set aside such sum as is necessary as a reserve for contingent liabilities of
the Company, including, without limitation, expenses for dissolution (which
sum, if not needed or used, shall be added to the balance to be distributed as
hereinafter provided); (c) then the remaining debts and liabilities, if any, of
the Company to the Members shall be paid in the order of priority provided by
law; (d) then to the Members in accordance with the provisions of Section
3.13.  In the, event such liquidation
constitutes a dissolution of the 

 28
 

 

 

Company, in the discretion of the Members, by
unanimous agreement, a pro rata portion of the distributions that would
otherwise be made to the Members pursuant to this Section 8.2 may be
distributed to a trust established for the benefit of the Members, by unanimous
agreement, for the purposes of liquidating Company assets, collecting amounts
owed to the Company, and paying any contingent or unforeseen liabilities or
obligations of the Company or of the Members arising out of or in connection
with the Company.  The assets of any such
trust shall be distributed to the Members from time to time, in the reasonable
discretion of the Members, in the same proportions as the amount distributed to
such trust by the Company would otherwise have been distributed to the Members
pursuant to this Agreement.  The Members
shall cause final accounting reports and income tax filings on the Company and
each Member’s interest to be prepared after audit, and in accordance with
generally accepted accounting principles, consistently applied, and to be
delivered to each Member.  Such
accounting reports shall be prepared as promptly as practicable and shall
include at least the reports and materials required under Section 5.3 for the
Company’s annual reports.

Section 8.3                                      Distribution
of Non-Liquid Assets.  If any assets
of the Company are to be distributed in kind, such assets shall be distributed
on the basis of the Gross Asset Value thereof and any Member entitled to an
interest in such assets shall receive such interest therein as a
tenant-in-common with all other Members so entitled after the Capital Accounts
of the Members have been adjusted to reflect the manner in which the unrealized
income, gain, loss, and deduction inherent in such assets (that has not
previously been reflected in the Capital Accounts of the Members) would have
been allocated among the Members if there were a taxable disposition of such
assets for their fair market value (taking into account Section 7701(g) of the
Code) on the date of distribution.  The
Gross Asset Value of such assets shall be determined by an appraiser selected
by a the Members.  If there then be more
than one Member and if, in the judgment of the Members, unanimously exercised,
it shall not be feasible to distribute to each Member an adequate share of each
asset, the Members may allocate and distribute specific assets to one or more
Members as tenants-in-common as the Members shall determine to be fair and
equitable.

Section 8.4                                      Orderly
Liquidation.  A reasonable time shall
be allowed for the orderly liquidation of the assets of the Company and the
discharge of liabilities to creditors so as to minimize the losses normally
attendant upon a liquidation.

Section 8.5                                      Deficit
Upon Liquidation.  Upon liquidation
no Member shall be liable to the Company for any deficit in such Member’s
Capital Account.

ARTICLE 9

MEETINGS
OF MEMBERS

Section 9.1                                      Meetings.  The Company shall not be required to hold
meetings of the Members annually. 
Meetings of the Members, for any purpose or purposes, unless otherwise
prescribed by statute, may be called by the Members at any time.

Section 9.2                                      Place
of Meetings.  The Members may
designate any place, either within or without Florida, as the place for any
meeting of the Members.  If no
designation is made, or if 

 29
 

 

 

a special meeting be otherwise called, the place of
meeting shall be the principal office of the Company.

Section 9.3                                      Teleconference.  Members may participate in any Members’
meeting through the use of any means of conference telephones or similar
communications equipment as long as all Members participating can hear one
another.  A Member so participating shall
be deemed to be present in person at the meeting.

Section 9.4                                      Action
by Members Without a Meeting.

(a)                                  Action
required or permitted to be taken at a meeting of Members may be taken without
a meeting, without prior notice and without a vote of the Members if the action
is evidenced by one or more written consents describing the action taken,
signed by Members whose Interests represent the percentage required for the
taking of such action.

(b)                                 In
the event that the action that is consented to is such as would have required
the filing of articles or a certificate under any Section of the Act, if such
action had been voted on by Members at a meeting thereof, such articles or
certificate filed under such Section shall state, in lieu of any statement
required by such Section concerning any vote of Members, that written consent
has been given as provided in the Act.

Section 9.5                                      Waiver
of Notice.  When any notice is
required to be given to any Member, a waiver of the notice in writing signed by
the person entitled to the notice, whether before, at, or after the time stated
therein, shall be equivalent to the giving of the notice.  The attendance by any Member at any meeting
of Members, in person or by proxy, without protesting prior to the conclusion
of the meeting the lack of notice of the meeting, shall constitute a waiver of
notice by such Member of such meeting.

ARTICLE
10

REPRESENTATIONS
AND WARRANTIES

Section 10.1                                Representations
by MHG.  MHG represents and warrants
that (a) MHG is duly organized, validly existing and qualified and empowered to
conduct its business, and has full power and authority to enter into and fully
perform and comply with the terms of this Agreement; (b) MHG has the legal
authority and ability to execute this Agreement and all documents in connection
herewith; (c) neither the execution and delivery of this Agreement nor its
performance by MHG will conflict with or result in the breach of any contract,
agreement, law, rule or regulation to which it or any of its members is a party
or by which it is bound; and (d) this Agreement is valid and enforceable
against MHG in accordance with its terms and each instrument to be executed by
MHG pursuant to this Agreement or in connection herewith will, when executed
and delivered, be valid and enforceable against MHG in accordance with its
terms, subject to the effect of (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors generally, and (ii) the application of general principles of equity
(regardless of whether enforcement is considered in proceedings at law or in
equity).

 30
 

 

 

Section 10.2                                Representations
by SWA.  SWA represents and warrants
that (a) SWA is duly organized, validly existing and qualified and
empowered to conduct its business, and has full power and authority to enter
into and fully perform and comply with the terms of this Agreement; (b) SWA has
the legal authority and ability to execute this Agreement and all documents in
connection herewith; (c) neither the execution and delivery of this Agreement
nor its performance by SWA will conflict with or result in the breach of any
contract, agreement, law, rule or regulation to which it or any of its members
is a party or by which it is bound; (d) this Agreement is valid and
enforceable against SWA in accordance with its terms and each instrument to be
executed by SWA pursuant to this Agreement or in connection herewith will, when
executed and delivered, be valid and enforceable against SWA in accordance with
its terms, subject to the effect of (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors generally, and (ii) the application of general principles of equity
(regardless of whether enforcement is considered in proceedings at law or in
equity).

Section 10.3                                Indemnity.  Each of the Members hereby agrees to
indemnify and hold the other harmless from and against any and all losses,
liabilities, costs, claims, suits, actions, damages, penalties, charges and
expenses, including reasonable attorneys’ fees and disbursements, arising in
connection with any representation or warranty contained herein being untrue in
any material respect.

ARTICLE
11

FEES TO
MEMBERS

Section 11.1                                Project
Management Fee.  SWA shall be paid a
project management fee pursuant to and on the terms set forth in a separate
project management agreement (the “Project Management Agreement”) between SWA
and 1100 West Properties, LLC.

Section 11.2                                Marketing
Fee.  From the proceeds realized by
the Company from the sales of each Unit:

(a)                                  Project
Manager shall receive a marketing fee as provided in the Project Management
Agreement for the supervising of the sales and marketing of the Units.  The aforesaid marketing fee consists of a
Base Marketing Fee and an Incentive Marketing Fee (as both such terms are
defined in the Project Management Agreement).

(b)                                 Hotel
Manager shall receve a franchise fee as provided in the Hotel Management
Agreement.  The aforesaid franchise fee
consists of a Base Franchise Fee and an Incentive Franchise Fee (both as
defined in the Hotel Management Agreement).

The fees described above shall be
payable as each Unit closing occurs.  In
the event that the Project Lender shall not permit sufficient closing proceeds
to be retained by the Company to pay all of the Incentive Marketing Fee or the
Incentive Franchise, the same shall be paid to parties pro rata to extent of
available sales proceeds. Any fees deferred hereunder shall be paid from
available funds when payment of the same is no longer prohibited by the Project
Lender.

 31
 

 

 

ARTICLE
12

MISCELLANEOUS

 

Section 12.1                                Notices.  All notices, requests, approvals, consents,
statements and other communications required or permitted to be given or
furnished hereunder to any Member (collectively, a “notice”) shall be made in
writing and shall be deemed to have been properly given or made if (a)
delivered personally or (b) sent by reputable overnight courier prepaid,
addressed to the Member to receive same at his or its address set forth below
or at such other address as such Member may from time to time designate by
notice to the other Members given in accordance with this Section 11.1, which
courier notice shall be deemed sufficiently given or made three business days
after the time the same is delivered to a respectable overnight courier.  The current addresses of the Members are:

	
  MHG:

  	
   

  	
  c/o Morgan Hotel Group Co.

  475 Tenth Avenue

  New York, New York 10018

  Attention: 
  Marc Gordon

  Telephone: 
  212-277-4140

  Facsimile: 
  212-277-4270

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  McDermott Will & Emery LLP

  340 Madison Avenue

  New York, New York 10017

  Attention:  Keith M. Pattiz, Esq.

  Telephone:  212-547-5379

  Facsimile:  212-547-5444

  
	
   

  	
   

  	
   

  
	
  SWA:

  	
   

  	
  c/o Sanctuary Holdings

  4770 Biscayne Boulevard

  Miami, Florida 33137

  Attention: Abraham
  Galbut

  Telephone:  305-674-4848

  Facsimile: 305-531-6987

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Greenberg Traurig, P.A.

  1221 Brickell Avenue

  Miami, Florida 33131

  Attention: 
  Steven E. Goldman

  Telephone: 
  305-579-0561

  Facsimile:  
  305-961-5561

  

 

 32
 

 

 

Section 12.2                                Entire
Agreement.  This Agreement contains
the entire understanding and agreement among the Members with respect to the
subject matter hereof and supersedes any prior written or oral understandings
or agreements between them with respect thereto.

Section 12.3                                Governing
Law.  This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
and the Act.  In the event of any
conflict between any provisions of this Agreement and any non-mandatory
provisions of the Act, the provisions of this Agreement shall control and take
precedence.  Venue for any action arising
under this Agreement shall be in Miami-Dade County, Florida and the parties
submit to the jurisdiction of the state and (to the extent permitted by Florida
law) federal courts in the State of Florida, situated in Miami-Dade County,
Florida, for purposes of any such action.

Section 12.4                                No
Oral Modification.  This Agreement
may not be changed, terminated, amended or modified orally or in any manner
other than by a writing signed by the Member to be charged.

Section 12.5                                Binding
Effect.  This Agreement shall be
binding upon and inure to the benefit of the Members, their respective
permitted successors and assigns, and their respective heirs, executors and
representatives.

Section 12.6                                Severability.  Each provision of this Agreement is intended
to be severable and the invalidity or illegality of any portion of this
Agreement shall not affect the validity or legality of the remainder hereof.

Section 12.7                                Captions.  Sections and paragraph captions contained in
this Agreement are inserted only as a matter of convenience and for reference
and in no way define, limit, extend or describe the scope of this Agreement or
the intent of any provision hereof.

Section 12.8                                Person
and Gender.  As used in this
Agreement, the neuter gender shall include the masculine and feminine genders
and the masculine gender shall include the feminine and neuter genders, and the
singular shall include the plural.

Section 12.9                                Further
Assurances.  Each Member agrees to do
all acts and things, and to make, execute and deliver such written instruments,
as shall from time to time be reasonably required to carry out the terms and
provisions of this Agreement.

Section 12.10                          Partition.  Each Member does hereby waive any right to
partition or the right to take any other action that might otherwise be
available to such Member outside of the provisions of this Agreement for the
purpose of severing his or her relationship with the Company or such Member’s
interest in the property held by the Company from the interests of the other
Members until the dissolution and completion of the liquidation of the Company.

Section 12.11                          Third-Party
Beneficiaries.  None of the
provisions of this Agreement shall be for the benefit of or enforceable by any
of the creditors (other than persons entitled to exculpation or indemnification
hereunder), of the Company or any creditors of any Member or any other Person
not a party hereto.  No creditor that
makes a non-recourse loan to the Company shall have or acquire, at any time as
a result of making the loan, any direct or indirect interest in the profits,
capital or property of the Company other than as a secured creditor.

 33
 

 

 

Section 12.12                          Broker.  Each Member, represents to the other that it
has had no dealings, negotiations, or consultations with any broker,
representative, employee, agent or other intermediary in connection with this
Agreement, the acquisition of the Company’s interest in the Owner or the
acquisition of the Property.  Each Member
agrees that each will indemnify, defend and hold the other and the Company free
and harmless from the claims of any broker(s), representative(s), employee(s),
agent(s) or other intermediary(ies) claiming to have represented such Member
respectively, or otherwise to be entitled to compensation in connection with
this Agreement or in connection with the conveyance of the Project, which
indemnities shall survive the date hereof.

Section 12.13                          WAIVER
OF JURY TRIAL.  EACH OF THE MEMBERS
HEREBY WAIVES TRIAL BY JURY IN ANY ACTION ARISING OUT OF MATTERS RELATED TO
THIS AGREEMENT, WHICH WAIVER IS INFORMED AND VOLUNTARY.

Section 12.14                          Costs.  Except as otherwise provided in this
Agreement, or in an approved Business Plan then in effect, the Company shall be
responsible for paying, and shall pay, whether incurred before or after the
date hereof, all costs and expenses related to the organization of the Company
(including legal fees and expenses of the Members in connection with the
preparation and negotiation of this Agreement), all costs and expenses related
to the business of the Company, and of acquiring, holding, owning, developing,
serving, collecting upon and operating the Property (including, without
limitation, the cost of obtaining any reports of engineers, environmental
engineers, architects and similar reports obtained in connection with the
acquisition of the Property and any financing obtained for such acquisition,
and legal fees incurred in connection with the negotiation and execution of the
Contract, the Development Agreement, the Hotel Management Agreement and all
fees and expenses incurred in connection with any financing obtained for the
acquisition and/or redevelopment of the Property).  In no event, however, shall the Company have
any obligation to pay or reimburse a Member for any general overhead expense of
such Member.

Section 12.15                          Publicity.  MHG and SWA shall agree on all publicity with
respect to the announcement of this Agreement and the transactions contemplated
hereby.  All subsequent press releases,
marketing and related materials shall be produced at the direction of MHG and
be subject to the approval of SWA.

Section 12.16                          Intellectual
Property.  Notwithstanding any
contrary provision of this Agreement, MHG and its affiliates shall retain all
rights to all service names, trade names, trade marks and copyrights used in
connection with the Hotel, any such use being permitted by a separate written
license agreement, which agreement shall be revocable at any time by Morgans
Hotel Management LLC upon (i) the termination of the Hotel Management Agreement
or (ii) the consent of the Members. 
Notwithstanding any contrary provision of this Agreement, SWA and its
affiliates shall retain all rights to all service names, trade names,
trademarks and copyrights, if any, that is owned by SWA or its affiliates and
used in connection with the Project.

Section 12.17                          Bank
Accounts.  Subject to the terms of
any agreements for the financing of the acquisition and redevelopment of the
Property and the Hotel Management Agreement, the Company may, from time to
time, establish one or more accounts (collectively, the “Company Accounts”)
into which funds collected or received under this Agreement, which are not
required 

 34
 

 

 

to be held (whether as a reserve or otherwise) in an
operating account maintained by the Hotel Manager, shall be deposited.  MHG and SWA shall each designate signatures
and each account shall require two signatures, one from MHG and the other from
SWA.  Furthermore, the Members may
establish specific operating accounts that may only require a single signature.

ARTICLE
13

SPECIAL
PURPOSE ENTITY COVENANTS

Section 13.1                                Special
Purpose Entity Covenants. 
Notwithstanding any provision hereof or of any other document governing
the formation, management or operation of the Company to the contrary, the
following shall govern: For so long as any mortgage lien exists on the
Property, in order to preserve and ensure its separate and distinct identity,
in addition to the other provisions set forth in this Agreement, the Company
shall conduct its affairs in accordance with the following provisions:

(i)                                     maintain
its own separate books and records and bank accounts;

(ii)                                  at
all times hold itself out to the public and all other Persons as a legal entity
separate from any Member and any other Person;

(iii)                               file
its own tax returns, if any, as may be required under applicable law, to the
extent (1) not part of a consolidated group filing a consolidated return or
returns or (2) not treated as a division for tax purposes of another taxpayer,
and pay any taxes so required to be paid under applicable law;

(iv)                              not
commingle its assets with assets of any other Person;

(v)                                 conduct
its business in its own name and strictly comply with all organizational
formalities to maintain its separate existence;

(vi)                              maintain
separate financial statements;

(vii)                           pay
its own liabilities only out of its own funds;

(viii)                        maintain
an arm’s-length relationship with its affiliates and each Member;

(ix)                                pay
the salaries of its own employees, if any;

(x)                                   not
hold out its credit or assets as being available to satisfy the obligations of
others;

(xi)                                allocate
fairly and reasonably any overhead for shared office space;

(xii)                             use
separate stationery, invoices and checks;

 35
 

 

 

(xiii)                          not
pledge its assets for the benefit of any other Person;

(xiv)                         correct
any known misunderstanding regarding its separate identity;

(xv)                            maintain
adequate capital in light of its contemplated business purpose, transactions
and liabilities;

(xvi)                         observe
all Delaware limited liability company formalities;

(xvii)                      not
acquire any securities of any Member;

(xviii)                   cause
the agents and other representatives of the Company to act at all times with
respect to the Company consistently and in furtherance of the foregoing and in
the best interests of the Company;

(xix)                           guarantee
any obligation of any Person, including any affiliate;

(xx)                              engage,
directly or indirectly, in any business other than the actions required or
permitted to be performed under Section 2.3, or this Section 12;

(xxi)                           incur,
create or assume any indebtedness;

(xxii)                        make
or permit to remain outstanding any loan or advance to, or own or acquire any
stock or securities of, any Person;

(xxiii)                     to
the fullest extent permitted by law, engage in any dissolution, liquidation,
consolidation, merger, asset sale or transfer of ownership interests; or

(xxiv)                    form,
acquire or hold any subsidiary (whether corporate, partnership, limited
liability company or other);

provided
that failure of the Company, or the Member on behalf of the Company, to comply
with any of the foregoing covenants or any other covenants contained in this
Agreement shall not affect the status of the Company as a separate legal entity
or the limited liability of the Member.

Section
13.2                                SPE
Definitions.

For
purpose of this Article 12, the following terms shall have the following
meanings:

“affiliate” means any person controlling or controlled
by or under common control with the Company including, without limitation (i)
any person who has a familial relationship, by blood, marriage or otherwise
with any partner or employee of the Company, or any affiliate thereof and (ii) any
person which receives compensation for administrative, legal or accounting
services from this limited liability company, or any affiliate.  For purposes of this definition, “control”
when used with respect to any 

 36
 

 

 

specified person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms “controlling”
and “controlled” have meanings correlative to the foregoing.

“person” means any individual, corporation,
partnership, limited liability company, joint venture, association, joint stock
company, trust (including any beneficiary thereof), unincorporated
organization, or government or any agency or political subdivision thereof.

ARTICLE
14

ARBITRATION

Section 14.1                                Initiation.  Except as provided in Article 13, whenever
this Agreement provides for the determination of any matter by arbitration, the
same shall be settled and finally determined by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (“AAA”)
(which by this reference are incorporated herein), subject to provisions of
this Article 13.  In the event of a
dispute required or permitted to be submitted to arbitration pursuant to the
terms of this Agreement, upon the expiration of such other time period provided
herein for the resolution of any dispute, the Members shall have fifteen (15)
days from the day which immediately follows the expiration of the applicable
period to appoint a neutral and independent arbitrator, who shall have no less
than ten years experience in the hotel market in which the Property is located,
to serve as arbitrator.  If any party
fails to timely appoint an arbitrator, the dispute shall be determined by the
single arbitrator who is timely appointed. 
If both parties select the same arbitrator, both parties shall have an
additional five (5) days to select a different arbitrator.  If neither party elects to select a different
arbitrator, then the single arbitrator selected by both parties shall resolve
the dispute.  If each party has selected
a different arbitrator, then within ten (10) days of the appointment of the
second arbitrator, the two arbitrators shall agree on a third arbitrator who
shall serve as chairperson of the arbitrators. 
Failing agreement as to such third arbitrator within twenty (20) days
after the appointment of the second arbitrator, then, at the request of any
party, such arbitrator shall be appointed by the AAA.  If there is one arbitrator, such arbitrator
shall issue a written determination of its resolution of the dispute within
fifteen (15) days of its appointment. 
Such determination shall be final and binding on the parties.  If there are three arbitrators, then within
fifteen (15) days of the appointment of the third arbitrator, each arbitrator
shall issue such a written determination. 
The determination of the arbitrator most different from the other two
shall be discarded and the determination calculated as the average of the determinations
of the remaining two arbitrators shall be binding on the parties.  The fees and expenses of the Arbitrators
shall be shared equally by the parties. 
All arbitration, proceedings hereunder shall be conducted at the Project
or at such other location as the Members may agree.  If the AAA shall cease to provide arbitration
for commercial disputes in the State of Florida, the second or third
arbitrator, as the case may be, shall be appointed by any successor organization
providing substantially the same services, and in the absence of such an
organization, by a court of competent jurisdiction.  The judgment upon the award rendered in any
such arbitration shall be final and binding upon the parties and may be entered
in any court having jurisdiction thereof. 
All fees and expenses of the arbitrators and all 

 37
 

 

 

other expenses of the arbitration shall be shared by
the Members in proportion to their respective Percentage Interests.

The arbitrators shall be compensated in accordance
with the standards recommended by the Miami-Dade office of the AAA, or, any
successor organization.

[Remainder of Page
Intentionally Blank]

 38
 

 

 

IN WITNESS WHEREOF, the Members have
duly executed this Agreement the day and year first above written.

	
  

  	
  Members:

  
	
   

  	
   

  
	
   

  	
  MONDRIAN MIAMI
  INVESTMENT LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: MORGANS
  GROUP LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
    Name:

  
	
   

  	
   

  	
    Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SANCTUARY WEST
  AVENUE LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
    Name:

  
	
   

  	
   

  	
    Title:

  

 

 39
 

 

 

EXHIBIT
A

	
  Name and Address of Member

  	
   

  	
  Initial

  Percentage

  Interest

  	
   

  	
  Capital

  Contribution

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MHG: 475 Tenth
  Avenue, New York, New York 10018

  	
   

  	
  50

  	
  %

  	
  $

  	
  15,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SWA: 4770
  Biscayne Boulevard Miami, Florida 33137

  	
   

  	
  50

  	
  %

  	
  $

  	
  15,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  100

  	
  %

  	
  $

  	
  30,000,000

  	
   

  

 

 40
 

 

 

EXHIBIT
B

AGREEMENTS WITH AFFILIATES

Hotel Management Agreement between 1100 West
Properties LLC, as owner, and Morgan Hotel Group Management LLC, as operator.

 41

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