Document:

ex10-1.htm

EXHIBIT 10.1

 

 

OPTION AGREEMENT

This Option Agreement (“Agreement”) is made and entered into as of the 1st day of December 2011, by and between CADIZ INC., and FENNER MUTUAL WATER COMPANY, on the one hand (collectively, “CADIZ”), and CALIFORNIA WATER (referred to herein as either “Cal Water” or “Optionee”), on the other hand, with reference to the following facts and intentions:

 

RECITALS

 

A.           CADIZ owns and controls approximately 35,000 acres of land located in the Cadiz and Fenner valleys of San Bernardino County (the “Property”).

 

B.           Substantial quantities of percolating groundwater exist within the aquifer system underlying the Property that naturally migrates to the Bristol and Cadiz dry lakes and then is lost to evaporation, such that water that would otherwise be wasted can be conserved and made available for reasonable and beneficial use in accordance with modern sustainable groundwater management practices.

 

C.           Existing and potential aquifer capacity exists within the underlying aquifers that can be prudently used to store conserved and imported water for subsequent beneficial use.

 

D.           The County of San Bernardino has previously approved a Conditional Use Permit in 1993 authorizing the withdrawal of water for agricultural uses on the overlying land and CADIZ has made substantial investments in continuing its agricultural concern on up to 9,600 acres.

 

E.           CADIZ has acquired a 99-year right of way along an active railroad line from the Arizona & California Railroad to construct a pipeline and power line to convey water to and from the Property to the Colorado River Aqueduct (“CRA”).

 

F.           The Parties acknowledge and agree that other public water purveyors within six Southern California counties (Ventura, Los Angeles, Orange, Riverside, San Bernardino and San Diego) are evaluating their potential participation in the Program (as defined below) as potential purchasers of conserved water.

 

G.           The Parties intend to conserve groundwater and manage the available groundwater supply in accordance with the directives stated by the California Supreme Court in City of Los Angeles v. City of San Fernando (1975) 14 Cal.3d 199 thereby withdrawing any temporary surplus required to obtain optimal groundwater water levels and to manage extractions within the long-term safe annual yield.

 

H.           CADIZ will operate the Program on a long-term sustainable basis and in a manner consistent with its covenants to the Natural Heritage Institute so as to avoid unreasonable environmental harm.

 

I.           Prior to the initiation of environmental review, CADIZ will cause the preparation of a watershed analysis and technical evaluation of the water supply availability by a qualified national engineering firm which must demonstrate the potential for recovery of conserved water in quantities sufficient to meet the promised deliveries to the purchasers of conserved water.

 

J.           CADIZ is prepared to reserve up to a maximum of 10% of the conserved water and storage developed from the Property for reasonable and beneficial uses by public water purveyors within San Bernardino County.

 

K.           CADIZ desires to grant an option to the Optionee to acquire certain quantities of conserved water and storage capacity rights, and the Optionee desires to acquire such an option, subject to the terms and conditions of this Agreement.

 

L.           The method of delivery of water from CADIZ to the CRA, the potential that the Program may earn Intentionally Created Surplus Credits (“ICS Credits”) for MWD under federal law, the eligibility of the Program to receive state and federal grants, CADIZ’ offer to grant a portion of the available Storage to MWD, and MWD Local Resources Program (“LRP”), all create opportunities for a direct and dollar-for-dollar reduction in the price of water to be made available by the Program as it is finally delivered to the purchasers of the conserved water.

 

M.           The Parties acknowledge that the final price for water, adjusting for other consideration, cannot be determined until several contingencies to the operation of the Program, including but not limited to the items set forth in Recital L above and as may be learned through environmental review, are satisfied.

 

N.           Notwithstanding the contingencies of environmental review and the availability of third party funding which may impact the as-received price for water to the purchasers of conserved water, CADIZ is willing to grant the rights to the Optionee as set forth in this Agreement.

 

O.           CADIZ intends to facilitate the implementation of this Agreement through the Fenner Mutual Water Company, a private non-profit water company, that may own or control various water, storage, easement and conveyance rights in a manner suitable to implementation of the Program and consistent with the terms hereof.

 

NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

 

ARTICLE 1

THE PROGRAM

 

1.1 Program Summary.  The “Program” is defined and summarized in the attached Exhibit “A” and incorporated by this reference.

 

1.2 Definitions.  The following definitions shall apply.

 

(a)           “Annual Quantity” means the quantity of water that is made available by CADIZ through its intended water conservation program that will optimize groundwater basin management and avoid loss of groundwater to evaporation.  Included within the Annual Quantity shall be the Initial AF referenced herein.

 

(b)           “Carry-Over Storage” means the use of unsaturated soils to store water from year to year for subsequent withdrawal and delivery to Optionee for beneficial use.  Carry-Over Storage may be used to stored imported or foreign water, provided that sufficient pipeline capacity exists to convey water from the CRA to the Property.

 

(c)           “Supplemental Storage” means the use of unsaturated soils to store Conserved Water in the event that CADIZ is unable to or prevented from delivering Conserved Water to the CRA because there is insufficient capacity in the CRA, and is further defined in Section 2.2(d).

 

ARTICLE 2

 

OPTION

 

2.1 Option Consideration.  As consideration for the Option and as a condition precedent to the exercise of the Option, the Optionee hereby agrees to pay the sum of $125,000, to cooperate in the completion of environmental review of the Program and to designate a representative to serve on a technical committee (the “Option Consideration”).

 

(a)           Payment Date.  The Optionee will pay to CADIZ the sum of $125,000 within thirty (30) days following its receipt of written notice from CADIZ indicating more than five hundred thousand dollars ($500,000) have been expended by CADIZ in preparing environmental analysis of the Program.

 

(b)           Management and Administration.  CADIZ will exercise good faith and best efforts in selecting competent professionals and consultants to perform the tasks that are necessary and prudent to implement the environmental review of the Program, such selection to be made with the consent of the Lead Agency.  CADIZ will assume primary responsibility for causing the retention of a qualified expert to prudently prepare an administrative draft of environmental documents, studies, analyses, and reports.  Further, the Parties acknowledge and agree that upon completion of the environmental process, all studies, reports, analyses, and plans shall be the joint property of CADIZ, on the one hand, and the Lead Agency, on the other; provided, however CADIZ will provide copies of all such studies, reports, analyses and plans to the Optionee upon request.

 

2.2 Grant of Option and Exercise Price.  Subject to the Optionee’s performance of its obligations hereunder and agreement to the terms hereof, including but not limited to Section 2.1 above, CADIZ hereby grants to Optionee an option to acquire Conserved Water along with the following interests as set forth in Exhibit “B” (the “Price Schedule”) (collectively, the “Option”):

 

(a)           Conserved Water; Minimum Amount.  The Optionee shall have the option, but not the obligation to acquire up to 5,000 acre-feet per year of conserved water as an Annual Quantity Right, but no less than 200 acre-feet per year (the “Initial AF”) (the “Conserved Water”).  The exercise price for the acquisition of the Initial AF and the timing of such payments are set forth on the Price Schedule.  Upon the Optionee’s exercise of the Option to purchase the Initial AF, CADIZ will make available an additional amount of conserved water as a one-time supply free of charge to the Optionee, such amount being equivalent to the amount of Initial AF actually purchased by the Optionee (“Additional Water”).  The parties will determine a reasonable schedule for delivery of the Additional Water.  The Conserved Water shall be delivered to the Optionee in the CRA each year on a mutually agreed schedule which shall provide for delivery of such water so that it can be used in the Optionee’s service area over a reasonable period of time at flows and rates that are established with the regional wholesale water purveyor within the MWD service area.

 

(b)           Class A Carry-Over Storage.  In the event the Optionee purchases at least the 5,000 acre-feet pursuant to Section 2.2(a), the Optionee shall have the additional option, but not the obligation, to acquire, without charge, up to 5,000 Class A Carry-Over Storage upon purchase of a minimum of 5,000 acre-feet of Class B Carry-Over Storage pursuant to this Agreement.  No losses will be assessed upon water held in a Class A Carry-Over Storage.  The acquisition of Class A Carry-Over Storage shall include the right to transport any acquired Conserved Water through firm pipeline capacity to the CRA, at no extra cost to the Optionee.  Class A Carry-Over Storage is only available where the Optionee has purchased at least 5,000 acre-feet of Class B Carry-Over Storage.  For example, if Optionee purchases 5,000 acre-feet of Class B Carry-Over Storage, Optionee is entitled to 5,000 acre-feet of Class A Carry-Over Storage for a cumulative quantity of 10,000 acre-feet of Carry-Over Storage by paying only for the Class B Carry-Over Storage.

 

(c)           Class B Carry-Over Storage.  The Optionee shall have the option, but not the obligation, to acquire up to 25,000 acre-feet of Class B Carry-Over Storage at the exercise price set forth on, and payable in accordance with, the Price Schedule, provided that the Option be exercised in increments of 5,000 acre-feet, with a minimum of 5,000 acre-feet.  No losses will be assessed upon water held in Class B Carry-Over Storage.  Upon acquisition of Class B Carry-Over Storage, the Optionee shall elect, in writing to CADIZ, whether it wishes to acquire firm or space-available pipeline capacity, which shall enable the Optionee to utilize the purchased Class B Carry-Over Storage in its discretion.  As further provided in Section 2.2(e) below, Class A Carry-Over Storage includes firm pipeline capacity for that 5,000 acre-feet to the CRA.  The Price Schedule sets forth the Optionee’s costs for both “firm” and “space-available” capacity through the Pipeline that delivers water to the CRA.

 

(d)           Supplemental Storage.  In the event that CADIZ is unable to deliver or is prevented from delivering Conserved Water to the CRA on an approved schedule as provided in Section 2.2(a) hereof because there is insufficient capacity to exchange or wheel the Conserved Water for beneficial use within Optionee’s service area, then CADIZ will provide storage capacity in sufficient quantity to retain and store the Conserved Water for the benefit of the Optionee (“Supplemental Storage”).  The Supplemental Storage will be made available free of charge to Optionee on a mutually agreeable schedule, and for as long as there is insufficient capacity in the CRA for Optionee to receive delivery of the Conserved Water stored within the Supplemental Storage.  No losses will be assessed to Conserved Water held in Supplemental Storage.

 

(e)           Pipeline Capacity.  The acquisition of the Initial AF shall include the right to transport the purchased Conserved Water through firm pipeline capacity to the CRA, at no extra cost to the Optionee.  For example, if the Optionee acquires 200 acre-feet pursuant to Section 2.2(a), then the Optionee shall have the right to transport 200 acre-feet through firm pipeline capacity to the CRA, at no extra cost to the Optionee.  Additionally, the acquisition of Class A Carry-Over Storage shall include the right to transport 5,000 acre-feet of any acquired Conserved Water through Class A Firm pipeline capacity to the CRA, at no extra cost to the Optionee.  Upon acquisition of Class B Carry-Over Storage, the Optionee shall elect, in writing to CADIZ, whether it wishes to acquire Class B Firm or Space Available pipeline capacity in accordance with the Price Schedule.  For example, if Optionee acquires 5,000 acre-feet of Class B Carry-Over Storage and does not wish to secure firm capacity for that 5,000 acre-feet of stored Conserved Water, it will still have a firm right to convey 5,000 acre-feet of Conserved Water that may be stored within its Class A Carry-Over Storage.

 

(f)           First Fill Quantity.  CADIZ will exercise reasonable best efforts to sequence the Program construction to initiate the capture of Conserved Water as soon as prudent, and upon the Optionee’s exercise of its option to acquire Carry-Over Storage, CADIZ will dedicate a quantity of conserved water equivalent to the quantity of Class B Carry-Over Storage actually acquired.  For example, if the Optionee elects to acquire 5,000 acre-feet of Class B Carry-Over Storage, then CADIZ will make a one-time dedication of 5,000 acre-feet of conserved water to the applicable storage account for the benefit of the Optionee.  The First Fill Quantity is in addition to the dedication of 5,000 acre-feet of conserved water made available by CADIZ in connection with the Optionee’s acquisition of an Annual Quantity of 5,000 acre-feet.

 

(g)           Administrative Fees.  Upon exercise of the Option (in whole or in part), the Optionee shall pay an annual storage administrative fee to CADIZ in accordance with the Price Schedule for the term of the exercised Option.

 

(h)           No Additional Fees.   CADIZ will not impose, and the Optionee will not be responsible for, any additional fees and costs, other than as expressly set forth in this Agreement and the Price Schedule.

 

(i)           Term of Exercised Option.  Upon exercise, the Conserved Water and Carry-Over Storage rights acquired through the Optionee’s exercise of the Option shall be for a term of fifty (50) years from the date construction of the Program is deemed complete and Conserved Water is made available for delivery to the CRA (the “initial term”).  In the event CADIZ fails to deliver to the Optionee the acquired Conserved Water as requested by the Optionee during the initial term for any reason (other than as a result of a force majeure), the initial term shall be extended by that number of years necessary to fulfill CADIZ’ obligation to deliver the acquired Conserved Water.  This means if the well-field fails to produce sufficient water to meet Optionee’s scheduled delivery request for Conserved Water, regardless of whether the Conserved Water is Annual Quantity or from Carry-Over Storage, the initial term of the Agreement will be extended for so long as necessary to complete the delivery.  Additionally, if Supplemental Storage exists at the end of the 50-year term, the term shall be extended for the purpose of conveying to Optionee such stored water as otherwise herein provided.  In addition, the initial term of the exercised Option may be mutually extended by CADIZ and the Optionee by the Optionee’s transmittal of written notice (delivered no later than 36 months prior to the expiration of the initial term) of its intent to negotiate an extension of the term of an additional thirty (30) years no later than December 31, 2050.  Upon receipt of the written notice, the Parties will exercise good faith and reasonable best efforts to extend the term under mutually agreeable terms.

 

(j)           Cost Off-Sets. The final cost of water, as delivered by CADIZ and as received by the Optionee, may be subject to the resolution of state and federal grants applications, contracts for services, exchanges and other consideration that may be obtained from the state and federal government, MWD and other third parties (collectively “Cost Off-Sets”).  These Cost Off-Sets may substantially reduce the cost of water as delivered by CADIZ and as received by the Optionee.  The Parties recognize and CADIZ expressly agrees that any Cost-Off Sets will be applied as a dollar-for-dollar credit against some or all of the Program costs as may be requested by the Optionee so as to reduce the actual cost of Conserved Water delivered by CADIZ and as received by the Optionee, as more fully detailed in Exhibit “C” attached hereto.  Further, CADIZ acknowledges that the Optionee may elect in its sole discretion to participate in an alternative public financing of some or all of the capital costs attributable to conveying water to and from the Property to the CRA and that the final cost will be incrementally reduced to reflect this decision.

 

(k)           Effective Cost The adjusted cost of Conserved Water and Storage to the Optionee after accounting for the application of any Cost Off-Sets, inclusive of the potential in-kind contributions made by CADIZ as referenced in Section 2.2(b) and 2.2(e) above is the “Effective Cost” and is generally described in Exhibit “C”.  Specifically, following completion of Environmental Review for the Program, Optionee may elect on its own or in coordination with some or all of the other purchasers of conserved water, to assume complete responsibility for the design, financing, construction and operation of the pipeline that conveys water between the CRA and the Property.  The Effective Cost will reflect Optionee’s assumption of these costs.

 

2.3 Exercise Period.  The Option for acquiring the Conserved Water pursuant to Section 2.2(a) shall be exercisable for a period commencing upon the date of execution of this Agreement and continuing until 5:00 p.m. PST on the 60th day following the satisfaction of the condition precedent set forth in Section 2.4(b) (the “Exercise Period”).  Upon timely exercise and satisfaction of the obligations hereunder, the parties shall enter into an agreement reflecting the provisions hereof intended to survive exercise of the Option.  Such agreement shall be negotiated and executed in good faith, consistent with the terms of this Agreement.  This Option, this Agreement and any rights accrued to the Optionee shall terminate immediately as to the Optionee, without further notice, if the Optionee does not timely fulfill its obligations under Section 2.1 hereof.

 

2.4 Conditions Precedent to Exercise of Option.  The obligations of the Parties shall be conditioned as follows:

 

(a)           Option Exercise.  The obligations of CADIZ under this Article 2 are conditioned upon the Optionee’s timely exercise of the Option pursuant to this Article 2 and performance of its obligations under Section 2.1 hereof.

 

(b)           Environmental Review and Approval.  The obligations of the Parties under this Article 2 are conditioned upon the completion of environmental review, as may be required under federal and state environmental resource protection laws and regulations and compliance with all other applicable law.  The parties acknowledge that the environmental impact report shall include the Optionee’s involvement in the Program, although there may be other third-party responsible agencies as well.  In the event litigation is commenced following the completion of the environmental review process, the Parties will meet and confer to determine whether the condition of environmental review and approval has been satisfied and whether to toll any applicable time periods under the Option while the litigation is unresolved.  CADIZ may terminate this Agreement if it makes a good faith determination that either: (a) the projected environmental mitigation costs will exceed $10 million, subject to CADIZ providing written notice to Optionee for purposes of exploring potential cost-sharing arrangements between and among the parties for the environmental mitigation costs; or (b) the Project is infeasible.  In either case CADIZ shall provide written notice of termination to all Parties and reimburse the Parties for the amounts paid by them not otherwise reimbursed or credited pursuant to Section 2.7(g), up to the date of termination.

 

(c)           ICS Credit. CADIZ and Optionee will make application for an ICS Credit, which if obtained, shall be shared equally (50/50) on a per acre-foot basis.  CADIZ and Optionee will coordinate their efforts in support of an application and will exercise good faith and reasonable best efforts to secure ICS Credits.

 

           (d)           LRP Credit.  Optionee may, in its discretion, apply for an LRP Credit from MWD by and through a MWD member agency and the value of the LRP Credit is presently estimated at $250 per acre-foot.  Upon request by Optionee, CADIZ will provide good faith assistance in support of Optionee’s application.  If the Optionee applies for the LRP Credit and it is not granted, or if at any time such LRP Credit is terminated or substantially modified, at the Optionee’s option, it may terminate this Agreement (or the Agreement referenced in Section 2.3) with no further liability thereafter.

 

2.5 Exercise of Option.  Provided the Optionee has satisfied its obligations under this Agreement, the Optionee may exercise the Option, in whole or in part as set forth above, in its sole and complete discretion by providing written notice to CADIZ within the Exercise Period.  If any part of the Option is not timely exercised or this Agreement is terminated, then CADIZ, in its sole and complete discretion and without notice to or approval from the Optionee, may allocate the unexercised portion of the Conserved Water, Carry-Over Storage rights, and pipeline (firm or space-available) capacity to any other person or entity.

 

2.6 Reversion.  In the event the Optionee withdraws from participation in the Program, all rights and interests previously held by the Optionee under the Option (exercised or otherwise) shall revert to CADIZ and the Optionee shall have no rights hereunder.  For purposes of this Section 2.6, “withdrawal” shall mean any of the following:  (i) the Optionee’s failure to timely pay the Option Consideration when due; (ii) any of the events triggering the reimbursement of the Option Consideration pursuant to Section 2.7(g)(i).

 

2.7 Other Covenants.  The Parties hereby agree further to the following covenants:

 

(a)           Conveyance and Distribution System.  The Parties intend to coordinate their efforts and to work constructively with Metropolitan Water District (“MWD”) and MWD member agencies to determine the most efficient method to achieve their objectives and to obtain access to the MWD conveyance and distribution system.  The Parties may coordinate their proposed conservation efforts with MWD to facilitate the generation of Intentionally Created Surplus Credits (ICS Credits) for the benefit of MWD.  In addition, in its complete discretion, CADIZ may offer an “in kind” contribution to MWD in the form of available storage capacity within the CADIZ Program for the purpose of reducing the cost of conveying and exchanging water or otherwise reducing the cost of water delivered by CADIZ or as received by the Optionee.  If CADIZ makes such an “in kind” offer of storage capacity within the CADIZ Program and MWD accepts, the Parties will exercise best efforts to negotiate equitable remuneration for CADIZ that fairly reflects the benefit that has been conferred by CADIZ on the other Parties.

 

(b)           Cooperation.  The Parties shall cooperate with each other and with other contracted purchasers of conserved water for the purpose of obtaining all regulatory approvals, including, without limitation, an environmental review and compliance analysis and other state and federal approvals required to satisfy conditions necessary to implement the Program.

 

(c)           Suppliers and Contractors.  CADIZ will exercise good faith and best efforts to select companies based primarily within the Inland Empire to provide the materials and services that will be required to construct and operate any water related projects on the Property.

 

(d)           Environmental Betterment.  The Parties acknowledge the goal of a general “environmental betterment” whereby the Property and the operation of the groundwater bank will be evaluated for use in connection with providing water to beneficial environmental uses.  The Optionee hereby agrees to meet to-be-determined demand management strategies which it approves and adopts that will indirectly reduce stress on the San Francisco / San Joaquin Bay-Delta.

 

(e)           Solar and Geothermal Power.  CADIZ agrees to exert reasonable best efforts to provide solar and geothermal power to operate the Program facilities.  The Program will be evaluated using both solar and geothermal power and, in the event solar and geothermal power is not available in sufficient quantity to operate the Program, then traditional forms of energy.

 

(f)           Most Favored Nation.  Notwithstanding any other provision of this Agreement, the Optionee has, in its sole and complete discretion, the right to elect the same price terms offered to any other purchaser of Conserved Water or Storage made available by CADIZ from the date of execution of this Agreement, subject to Program capacity.  Notwithstanding the foregoing, this clause shall not apply to that certain agreement between CADIZ and Santa Margarita Water District for the quantity for Fill Water and First Fill Storage the latter receives at no additional cost, and agreements with public interest environmental groups in furtherance of the Program.

 

 

(g)           Option Consideration Reimbursement or Credit.

 

(i)           Reimbursement.  The Optionee will be entitled to full reimbursement of the Option Consideration if:  (a) the CPUC has not approved the Optionee’s participation for Conserved Water purchased pursuant to Section 2.2(a) within two hundred seventy (270) days of the latter of (i) the approval of the Program by the Lead Agency, or (ii) the completion of the environmental review, including an administrative law judge decision, or an order of the CPUC, that imposes any terms or conditions that is reasonably expected to have a material adverse affect on Optionee without requiring Optionee to appeal any such decision or order, or (iii) written notification by Cadiz to the Optionee of the annual cost of water (that is, the actual cost of conserved water which shall be calculated in accordance with the listed categoris on Exhibit C) (“Notice of Cost of Water”), or (b) MWD or any member agency of MWD has not approved the transportation of water to Optionee for beneficial use and provided funding for local resources supply development under the MWD Local Resources Program (“LRP”) or another form of equivalent MWD funding under economic terms acceptable to Optionee as may be determined in its discretion, or (c) the Lead Agency has failed to complete environmental review, or (d) for a period of thirty (30) days following the Notice of Cost of Water, the Optionee shall have the right to terminate this Agreement based on a good faith belief that the CPUC will not approve the Optionee’s participation in the Program based on the actual annual cost of water as defined above fully allowed in rates.

 

(ii)           Credit.  If the CPUC approves Optionee’s participation in the Program, and Optionee exercises its Option hereunder, the Option Consideration paid by Optionee shall be credited towards Optionee’s purchase of water or storage in the Program pursuant to this Agreement.

 

ARTICLE 3

 

REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties by the Parties.  Each Party hereby makes the following covenants, representations and warranties to each other Party:

 

(a)           Authority.  It has the authority to enter into this Agreement and perform as set forth herein and therein.  This Agreement has been duly authorized by all required action.

 

(b)           No Violations.  The execution of this Agreement and performance of its obligations under this Agreement will not violate any contract, transaction, option, covenant, condition, obligation of undertaking of such Party, nor to the best of its knowledge, will it violate any law, ordinance, statute, order or regulation.

 

(c)           Enforceability.  This Agreement and all documents required hereby to be executed by such Party are and shall be valid, legally binding obligations enforceable against such Party in accordance with their terms.

 

ARTICLE 4

 

GENERAL PROVISIONS

 

4.1 Interpretation.  The provisions of this Agreement should be liberally interpreted to effectuate its purposes.  The language of this Agreement shall be construed simply according to its plain meaning and shall not be construed for or against either Party, as each Party has participated in the drafting of this Agreement and has had the opportunity to have their counsel review it.  Whenever the context and construction so requires, all words used in the singular shall be deemed to be used in the plural, all masculine shall include the feminine and neuter, and vice versa.  The word “including” means without limitation, and the word “or” is not exclusive.  Unless the context otherwise requires, references herein: (i) to Articles, Sections and Exhibits mean the Articles and Section of and the Exhibits attached to this Agreement; (ii) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement; and (iii) to a statute means such statute as amended from time to time and includes any successor legislation thereto.

 

4.2 Notice.  All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be conclusively deemed to have been duly provided: (i) when transmitted via e-mail; (ii) seventy-two (72) hours after the writing is deposited in the mail system of the United States Postal Service prepaid for standard or certified mail return receipt requested; or (iii) at 4:59 p.m. PDST on the Business Day after the writing is deposited with a national overnight delivery service, e.g., Federal Express, DHL Worldwide Express or United Parcel Service, postage prepaid, with next-business-day delivery guaranteed, provided that the sending Party receives a confirmation of delivery from the delivery service provider.  Notices shall be directed as indicated below, or as may be changed or supplemented from time to time by the recipient Party by giving the other Party written notice in the manner stated above.

 

	
If to CADIZ:

	
CADIZ, Inc.

550 S. Hope Street, Suite 2850

Los Angeles, CA 90017

(213) 271-1600

(213) 271-1614 (facsimile)

Attn:  Scott Slater

sslater@bhfs.com

 

	
If to Optionee:

	
Cal Water

1720 North First Street

San Jose, CA  95112

(408) 367-8200

(408) 367-8430 (facsimile)

Attn:  Francis S. Ferraro

sferraro@calwater.com

 

	
With cc:

	
One Market Street, Suite 2000

San Francisco, CA 94105-1104

(415) 957-3000

(415) 957-3001 (facsimile)

Attn: Thomas Berliner

tmberliner@duanemorris.com

4.3 Date and Delivery of Agreement.  The Parties intend that this Agreement, upon execution, shall be deemed effective, executed and delivered for all purposes under this Agreement, subject to the conditions precedent set forth in Section 2.4.

 

4.4 Good Faith.  The Parties agree to exercise their commercially reasonable best efforts and good faith to effectuate all the terms and conditions of this Agreement.

 

4.5 Other Instruments.  Each Party shall cause to be executed any further documents reasonably necessary in the opinion of the requesting Party.  The requesting Party shall pay the cost of the further documents, except that each Party shall pay its own attorney fees.

 

4.6 Successors and Assigns.  This Agreement shall be binding on and shall inure to the benefit of the Parties and their respective successors and permitted assigns, except as restricted by this Agreement.  Notwithstanding the foregoing, the Option and Optionee’s rights hereunder shall not be assignable to any other person or entity without the express prior written consent of CADIZ, which shall be exercised in its sole discretion.

 

4.7 No Third-Party Rights.  Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the Parties to this Agreement and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liability of any third persons to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement.

 

4.8 Dispute Resolution.  The Parties shall seek to resolve any dispute concerning the interpretation or implementation of this Agreement through good faith negotiation, involving, as and when appropriate, the general manager or chief executive officer of each of the Parties.  Any dispute that remains unresolved thirty (30) days after notice of the dispute is made to the Parties, shall be resolved by a single arbitrator with substantial experience on the matter or matters in dispute, conducted in accordance with JAMS.  If the Parties cannot agree on a single arbitrator within ten (10) days of the written election to submit the matter to arbitration, either Party may request JAMS to appoint a single, neutral arbitrator.  The Parties shall use their reasonable best efforts to have the arbitration proceeding concluded within ninety (90) business days of selection of the arbitrator.  In rendering the award, the arbitrator shall determine the rights and obligations of the Parties according to the substantive and procedural laws of California.  All discovery shall be governed by the CCP with all applicable time periods for notice and scheduling provided therein being reduced by one-half.  The arbitrator may establish other discovery limitations or rules.  The arbitrator shall have the authority to grant provisional remedies and all other remedies at law or in equity, but shall not have the power to award punitive or consequential damages.  The decision of the arbitrator shall be final, conclusive and binding upon the Parties, and either Party shall be entitled to the entry of judgment in a court of competent jurisdiction based upon such decision.  The losing Party shall pay all costs and expenses of the arbitration; provided, however, if neither Party is clearly the losing Party, then the arbitrator shall allocate the arbitration costs between the Parties in an equitable manner, as the arbitrator may determine in his or her sole discretion.

 

4.9 Default.  The failure by either Party to perform its obligations under this Agreement, which continues for more than thirty (30) days after receipt of written notice from the other Party stating the existence and nature of such default (unless the default cannot be cured in said thirty (30) days, and in that event, if the defaulting Party fails to continuously and diligently remedy the default) shall constitute a default, which default shall entitle the other Party to terminate this Agreement at its option by notification to the defaulting Party.  Said termination option shall be in addition to, not in lieu of, other rights and remedies of the nondefaulting Party under this Agreement and by law.

 

4.10 Waiver.  No waiver of any provision or consent to any action shall constitute a waiver of any other provision or consent to any other action, whether or not similar.  No waiver or consent shall constitute a continuing waiver or consent or commit a Party to provide a waiver in the future except to the extent specifically stated in writing.  Any waiver given by a Party shall be null and void if the Party requesting such waiver has not provided a full and complete disclosure of all material facts relevant to the waiver requested.  No waiver shall be binding unless executed in writing by the Party making the waiver.

 

4.11 Attorney Fees.  Subject to Section 4.8 above, if any legal action or any arbitration or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing Party shall be entitled to recover reasonable attorney fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled.

 

4.12 Entire Agreement.  This Agreement and its exhibits is the entire understanding of the Parties. There are no other promises, representations, agreements or warranties by any of the Parties.  This Agreement may be only be amended or supplemented by a writing signed by all Parties.  Each Party waives its right to assert that this Agreement was affected by oral agreement, course of conduct, waiver or estoppel.

 

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

 

4.14 Authorizations.  All individuals executing this and other documents on behalf of the respective Parties certify and warrant that they have the capacity and have been duly authorized to so execute the documents on behalf of the entity so indicated.  Each signatory shall also indemnify the other Parties to this Agreement, and hold them harmless, from any and all damages, costs, attorney fees and other expenses, if the signatory is not so authorized.

 

4.15 Public Announcements.  Except as and to the extent required by law, neither Party shall issue any statement or communication to any third party (other than to its respective agents) regarding the subject matter of this Agreement or the transactions contemplated hereby, without the prior written consent of the other Party, which shall not be unreasonably withheld.

 

 

[signatures contained on next page]

 

IN WITNESS WHEREOF, the Parties have set forth their signatures as of the date first written above.

 

	
“OPTIONEE”

	
CAL WATER

By: /s/ Tom Smegal

Title:  Vice President, Regulatory Affairs

By: /s/ Martin A. Kropelnicki

Title: Chief Financial Officer

	
“CADIZ”

	
CADIZ INC.

By: /s/ Scott S. Slater

Title:  President and General Counsel

FENNER MUTUAL WATER COMPANY

By: /s/ Scott S. Slater

Title:  President and General Counsel

	  	  

 

Exhibit A:                      Program Summary

Exhibit B:                      Price Schedule

Exhibit C:                      Example of Effective Cost Range

 

EXHIBIT A

 

PROGRAM SUMMARY

 

A groundwater banking operation on the Cadiz Property for the purpose of conserving water that is presently lost through evaporation from the Cadiz and Bristol Dry-Lakes and conjunctively managing imported surface water that is spread and stored for recovery.  The proposed project would make new and reliable water available for irrigation, solar, municipal water supply, environmental and other beneficial uses.

This Program may conserve, store and deliver to public water systems: (a) native groundwater water conserved by reducing controllable losses from the aquifer system and implementing prudent groundwater management strategies, and (b) water imported from outside the property (probably from the Colorado River) and percolated to actively recharge the aquifer.  The Program will be conducted consistent with prevailing groundwater management methodology governed by three primary principles: (a) Recharge and extraction of native and imported water within the Property will be conducted in a manner that achieves and then maintains optimal, long-term, safe (sustainable) yield and conjunctive use of water; (b) Management of the groundwater levels will not result in harm to the aquifers, or cause material adverse changes in water quality, differential land subsidence, or impairment of habitats dependent upon near-surface expressions of groundwater (such as phreatophytic vegetation, wetlands or surface stream flows); and (c) The banked water will directly and indirectly result in restoration of unrelated aquatic ecosystems currently impaired by water development.

The Program is intended to achieve environmental restoration benefits through the banking of imported water for active recharge and its use for environmental restoration purposes.

All native and imported water, whether conserved or stored, will be recovered and conveyed between the Cadiz Property and the CRA along an active railroad line right-of-way that Cadiz has acquired from the Arizona & California Railroad.

The proposed well-field and pipeline will be sized to accommodate the expected long-term recoverable yield of conserved water from the Fenner Valley and Orange Blossom Watersheds and foreign water that is stored in wet years and recovered in dry-years.

The initial term of the Program will be 50 years.

EXHIBIT B

 

PRICE SCHEDULE

 

A.           Conserved Water                                                                 For Initial AF - $775.001 per afy2

 

The price per acre-foot per year is the complete and final cost for the delivery of water to the CRA.  There are no added costs for this service.

B.           Supplemental Storage                                                                                                                      $0

CADIZ will provide Supplemental Storage to the Optionee without charge.  Supplemental Storage will be provided for the benefit of the Optionee in the event CADIZ is unable to deliver or is prevented from delivering water to the CRA because there is insufficient capacity in the CRA to accept the Conserved Water.

C.           ICS Credits

CADIZ and the Optionee will share the benefit of any ICS Credits that are obtained equally (50/50) on a per acre-foot basis.  This means that if an ICS Credit is earned for the 5,000 acre-feet purchased by the Optionee, CADIZ and the Optionee will equally share the compensation attributable or fairly apportioned to that 5,000 acre-feet.

D.           Price Reductions

Further reductions in the price of Conserved Water may occur from applications from state and federal grants applications, contracts for services, exchanges of storage, conserved water and other consideration that may be obtained from the state and federal governments, MWD and other third parties (collectively, “Cost Off-Sets”).  These Cost Off-Sets may reasonably reduce the cost of water as delivered by CADIZ to the CRA as provided in Exhibit “C” as well as further reductions in cost being obtained and applied for the benefit of the Optionee after the delivery of water to the CRA and prior to the Conserved Water being received by the Optionee.  The Parties recognize and CADIZ expressly agrees that any Cost Off-Sets will be applied as a credit against some or all of the Program costs as may be requested by the Optionee so as to reduce the actual cost and the purchase price of Conserved Water delivered by CADIZ and as received by the Optionee.  (See Exhibit “C”).

 

E.           Carry-Over Storage

 

	  	
1.  Class A (5,000 acre-feet) 

	
** 3   

	  	
2.  Class B (5,000 acre-feet) 

	
$1,500.00 4 per af 

	  	
3.  Supplemental 

	
No Charge 5   

F.           Pipeline Capacity 6

 

	  	
1.  Class A Firm (5,000 acre-feet) 

	
 ** 7

	  	
2.  Class B Firm (5,000 acre-feet) 

	
2,400.00 8 per af 9

	  	
3.  Space Available Use   

	
TBD 10

G.           Annual Storage Administration Fee

 

	  	
1.  Class A and B Carry-Over Storage Capacity  

	
$20.00 11 per af

	  	
2.  Supplemental Storage    

	
$0

EXAMPLE

If Optionee exercises its option to purchase 5,000 acre-feet per year of Conserved Water and elects to purchase 5,000 acre-feet of Class B Carry-Over Storage, it will receive 5,000 acre-feet of Class A Carry-Over Storage without paying additional compensation.  Optionee would then make an election as to whether it wished to purchase additional Firm capacity or elect to move a portion of its Conserved Water on a Space Available basis.

	
Conserved Water – Initial AF

	
Paid Upon Delivery of Water to Canal or Carry-Over Storage

	
$775 Per AFY subject to a 5% cap on annualized escalation (see fn 1 and 2) prior to Cost Off-Sets.

	
Supplemental Storage

	
No Charge

	
No Charge

	
Class A Carry-Over Storage

	
No Charge

	
$0

	
Class B Carry-Over Storage

	
Paid Upon Project Approval12

	
$7.5 million13 per 5,000 af of storage capacity

	
First Fill Water equivalent to quantity of Class B Carry-Over Storage acquired (i.e., 5,000 acre-feet)

	
Dedicated upon acquisition of Class B Carry-Over Storage

	
$0

	
Class A Pipeline Capacity

	
Paid Upon Project Approval

	
$0

	
Class B “Firm” Pipeline Capacity

	
Paid Upon Project Approval

	
$12 million14 per 5,000 af of storage

	
Class B “Space Available” Pipeline Capacity

	
Paid Upon Actual Use of Pipeline Capacity

	
Buyer pays actual incremental cost to Cadiz plus a share of pro-rated capital to reimburse the costs of those parties holding firm capacity.

 

 

Accordingly, by way of example and without commitment, if the purchaser exercised its option for 5,000 acre-feet of the Initial AF Conserved Water, 10,000 acre-feet of Carry-Over Storage (i.e., 5,000 Class B acquired plus 5,000 Class A at no cost) and 10,000 acre-feet of Firm Capacity (i.e., 5,000 Class A Firm at no cost plus 5,000 Class B Firm acquired), the total up-front cost for the Program would be $19.5 million with an annual charge of $775 for the water and an ongoing maintenance charge of $20 per acre-foot or $200,000 annually.   The decision to purchase Space Available Pipeline Capacity would reduce the upfront costs by $12 million so that a total of $7.5 million would be due and payable for the purchase of Carry-Over Storage.  However, the purchaser would then pay both CADIZ’ incremental cost in transporting the water, if any, and a share of pro-rated capital costs.  Note all dollar amounts are stated in April 2010 dollars.

 

  

1 April 2010 dollars.

  

2 Subject to a 5% cap on average annualized escalation.

  

3 Made available upon purchase of Class B Carry-Over Storage.

  

4 April 2010 dollars.

  

5 Made available.

  

6 Charges may be subject to Cost Off-Sets as provided in C. and D. above.

  

7 Made available.

  

8 April 2010 dollars.

  

9 LOI quotes at $12 million per 5,000 af.

  

10 Actual incremental cost plus a reasonable share of pro-rated capital.

  

11 April 2010 dollars

  

12 The approval of the Project by the Lead Agency and the CPUC’s approval of participation by Optionee.

  

13 April 2010 dollars.

  

14 April 2010 dollars.

EXHIBIT C

 

EXAMPLE OF EFFECTIVE COST RANGE

 

(In April 2010 dollars)

 

	
COST OF INITIAL 5K AF 

	 	$	775	 
	  	 	 	 	 
	
ICS Credits 

	 	$	(200	)
	  	 	 	 	 
	
Sub Net 

	 	$	575	 
	  	 	 	 	 
	
LRP Funding 

	 	$	(250	) 
	  	 	 	 	 
	
Net of Combined Credits 

	 	$	325	 
	  	 	 	 	 
	
COST OF WHEELING 

	 	$	314	 

 

RANGE OF AS DELIVERED PRICE TO MWD MEMBER AGENCY: $639-$1089ex_10-1.htm

10172 Linn Station Road

Louisville, Kentucky 40223

 

Proposed Terms

 

of Purchase Agreement

 

for Fawn Lake Development

 

Spotsylvania, Virginia

 

December 7, 2011

To:         Board of Directors of NTS Mortgage Income Fund

c/o Allan T. Slagel,  Shefsky & Froelich, Ltd.,111 E. Wacker Drive, Suite 2800, Chicago,

IL 60601 and Eric Ison, Greenebaum Doll & McDonald PLLC, 3500 National City

Tower, 101 South Fifth Street, Louisville, Kentucky  40202-3140

 

On behalf of NTS Development Company, a Kentucky corporation, and/or its affiliate, designee, or assignee (“NTS”), this letter of intent (“Letter”) sets forth the terms and conditions pursuant to which NTS would be willing to negotiate the terms of a definitive and binding purchase agreement(s) (the “Agreement”) for the purchase and sale of certain of the assets of NTS Mortgage Income Fund, a Delaware corporation (“MIF”) (referred to herein as the “Seller”), and/or its subsidiaries as the case may be (also referred to as a “Seller”), which Agreement shall be entered into by NTS (also referred to herein as the “Purchaser”), and

(a)           NTS/Virginia Development Company (“NTS/VA”) a Virginia corporation (a wholly-owned subsidiary of MIF) (NTS/VA and MIF may sometimes be referred to herein collectively as “Seller”), the owner of the property known as Fawn Lake subdivision, for the sale by NTS/VA and the purchase by Purchaser of all of the remaining land at Fawn Lake owned by NTS/VA (the “Property”), including:

    (i)   eighteen (18) lots which lots have been developed and which comprise the remaining unsold Fawn Lake inventory of lots (the “Section 21 Lots”);

    (ii)   approximately one hundred sixty-six (166) lots listed on the attached Schedule B, which lots have been approved, but not developed (the “Section 15 Lots”); REMOVE IF SECTION 15 PURCHASED BY M/I HOMES, LLC OR OTHER PURCHASER PRIOR TO CLOSING ON AGREEMENT;

    (iii)   the undeveloped land upon which approximately two hundred fifty-seven (257) lots are approved, but not developed (the “Residential Land”); and

  

  

  

 

    (iv)   the commercially-zoned property located at the entrance to the subdivision which is described on the attached Schedule C as the “Neighborhood Support Parcel” (the “Commercial Land”);

(b)           NTS Mortgage Income Fund, a Delaware corporation, owner of fifty percent (50%) of the partnership interests in Orlando Lake Forest Joint Venture, a Florida joint venture (“OLFJV”), for the sale by MIF and the purchase by Purchaser of one hundred percent (100%) of MIF’s partnership interests in OLFJV (the “OLFJV Interests”). The sole asset of OLFJV is an 11 acre parcel of land at the front entrance of the Lake Forest subdivision in Orlando, Florida (the “Florida Land”).

BUT EXCLUDING: (x) any and all of the designated and currently existing Common Areas (as defined in the Declaration) of the Fawn Lake development being transferred to the Fawn Lake Community Association (“FLCA”) pursuant to the terms of the Declaration for Fawn Lake dated July 16, 1990 by NTS/Virginia Development Company as Declarant, as amended and supplemented; (y) Section 27 of Fawn Lake which is owned by Cedar Creek Virginia, LLC); and (z) any and all of the land upon which the Fawn Lake Country Club golf course is located which was deeded to Asset Management, L.L.C. on November 4, 2010.

The Property and the OLFJV Interests may sometimes be referred to hereinafter collectively as the “Assets.” NTS/VA and MIF may sometimes be referred to herein collectively as “Seller.”

Purchaser Rights Concerning NTS/VA

ALTERNATIVELY, AT THE SOLE OPTION OF PURCHASER, PURCHASER MAY, BY PROVIDING NOTICE TO SELLER OF SUCH ELECTION AT ANY TIME PRIOR TO THE EXECUTION OF THE AGREEMENT, ELECT TO PURCHASE ONE HUNDRED PERCENT OF THE ISSUED AND OUTSTANDING STOCK OF NTS/VA INSTEAD OF PURCHASING THE PROPERTY. IN SUCH EVENT, THE AGREEMENT SHALL INCLUDE, IN ADDITION TO THE PROVISIONS CONTAINED HEREIN, SUCH PROVISIONS AS REQUIRED BY PURCHASER TO EXCLUDE THE ASSUMPTION OF LIABILITIES ARISING PRIOR TO THE CLOSING DATE.

Purchaser and Seller agree to negotiate exclusively (except with respect to the Section 15 Lots) and in good faith for the timely execution of the Agreement for the purchase and sale of the Property and the OLFJV Interests. In addition to the asset purchases contemplated herein, in the event Purchaser consummates the asset purchases contemplated hereby, Seller shall also grant to Purchaser the right to purchase all of the issued and outstanding common stock in NTS/VA at any time after the Closing Date but prior to April 30, 2017, and Seller agrees to assign all of such outstanding stock to Purchaser within thirty (30) days of written notice that Purchaser elects to exercise its right to purchase such stock, and Purchaser shall not be required to pay any amount for such assignment in addition to the consideration recited below.

  

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Both Purchaser and Seller agree that the Agreement shall be upon mutually agreeable terms and conditions, and each of Seller and Purchaser agree to use its reasonable efforts to complete the negotiation and execution of such Agreement by April 30, 2012.  The Agreement shall include the following provisions:

1.           PURCHASE PRICE/CONSIDERATION.  The aggregate Purchase Price/Consideration for the Assets shall be in the following total amounts and shall be paid in accordance with the following:

(a)           Purchaser shall assume the total amount of the indebtedness owed by Seller and/or its subsidiaries to NTS and/or its affiliates as of the date of Closing on these transactions (as defined below), which indebtedness (as of November 10, 2011) is in the aggregate amount of approximately Seven Million Six Hundred Seventy Six Thousand Dollars ($7,675,000.00) (the “NTS Debt”);

(b)           Purchaser shall, subject to the approval of PNC Bank, National Association (“PNC”), assume the outstanding principal amount of the indebtedness owed by MIF and/or its subsidiaries to PNC as of the date of Closing, in accordance with terms and conditions mutually acceptable to NTS and PNC, which indebtedness is, as of November 30, 2011, in the approximate amount of Two Million Six Hundred Ninety Eight Thousand Dollars (($2,698,000.00) (the “PNC Loan”);

(c)           Purchaser shall pay, or shall cause Residential Management Company, a Kentucky corporation (“Residential Management”) to waive, the three and three-quarters percent (3.75%) disposition fee (the Service Fee”) due to Residential Management upon the sale of the Assets under and pursuant to the terms of that certain Services and Development Agreement between Residential Management and MIF, effective as of January 1, 2009, as amended (the “Services Agreement”);

(d)           Purchaser shall pay to or fund, at Seller’s election, prior to any deadline therefor, the cost of tail coverage for the liability insurance policy covering the MIF’s current and former directors and officers. The cost of the tail coverage is currently estimated to be Four Hundred Twenty Thousand Dollars ($420,000.00) (the “Tail Premium”);

(e)           Purchaser shall fund the total amount of the  accounts payable due from MIF and/or its subsidiaries to third parties until the earlier of the Closing Date or April 30, 2012, for which the current estimate is Eight Hundred Ninety Four Thousand Dollars ($894,000.00);

(f)           Purchaser shall pay an amount necessary to fund a beginning cash reserve account to be transferred to and used by the MIF’s liquidating trustee in the performance of such trustee’s duties, estimated to be in the approximate amount of Three Hundred Thousand Dollars ($300,000.00) (the “Trustee’s Reserve”);

(g)           Purchaser shall pay the amount necessary to fund the Sellers’ costs of liquidation and asset sales in connection therewith, estimated to be an amount equal to Three Hundred Thousand Dollars ($300,000.00) (“Closing Costs”);

  

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(h)           Purchaser agrees to fund, if and when necessary, the amount necessary to cover any retention or deductible applicable to any liability claims made against the current and former directors and officers as of the date of the Closing (prior to transfer of remaining MIF assets to the liquidating trust), which amount is currently estimated to be Two Hundred Fifty Thousand Dollars ($250,000.00);

(i)           Purchaser shall provide the funds necessary to complete the required roadway work necessary to release the bonds on the remaining roadways in Lake Forest subdivision in Louisville, Kentucky (owned by NTS-Lake Forest II Residential Corporation, a wholly-owned subsidiary of MIF(“NTS Lake Forest”)) so that all bonds for such work may be released prior to December 31, 2011. The estimated cost of such work is One Hundred Seventy Five Thousand Dollars ($175,000.00);

(j)           For any Section 15 Lots sold and closed from the date of the closing until April 30, 2017, Purchaser and Seller shall share net profits on a 50/50 basis, provided in no event shall the Seller be paid less than Two Thousand Dollars ($2,000.00) per Section 15 Lot sold. The Amount due to Seller hereunder shall be paid to Seller within ninety (90) days after each such Lot is closed. For any Section 15 Lots not closed by April 30, 2017, Seller shall be paid an amount equal to the aggregate net present value (using a then-current market rate discount factor to be determined by mutual agreement between Purchaser and MIF’s liquidating trustee) of the Seller’s assumed 50% share of the projected net profit for such unsold lots, based upon a projected lot sales velocity similar to the actual velocity of sales per annum over the 2012-2017 period;

(k)           As to the Residential Land, as the remaining 257 undeveloped lots are developed for sale (“Remaining Lots”), for any Remaining Lots sold and closed from the date of the Closing through April 30, 2017, Purchaser and Seller shall share net profits on a 80/20 basis (with Purchaser retaining 80% of the net profits and Seller being entitled to 20% of the net profits), provided in no event shall the Seller be paid less than Five Thousand Dollars ($5,000.00) per Remaining Lot sold. The Amount due to Seller hereunder shall be paid to Seller within ninety (90) days after each such Remaining Lot is closed. For any Remaining Lots not closed by April 30, 2017, Seller shall be paid an amount equal to the aggregate net present value (using a then-current market rate discount factor to be determined by mutual agreement between Purchaser and the MIF’s liquidating trustee) of the Seller’s assumed 20% share of the projected net profit for such unsold lots, based upon a projected lot sales velocity similar to the actual velocity of sales per annum over the 2012-2017 period;

(l)           As additional consideration for the Seller’s agreement to sell and transfer the Assets to Purchaser, Purchaser agrees:

    (i)   To provide to MIF’s liquidating trustee, at no charge, bookkeeping, tax preparation and investor services, to be performed by employees of Purchaser, as may be reasonably necessary to assist the Seller’s liquidating trustee in carrying out the services required of the trust, the value of such services estimated to be Sixty Five Thousand Dollars ($65,000.00) per year; provided if the Seller’s liquidating trustee desires not to engage the Purchaser to provide such services, Purchaser shall have no obligation to provide any such services nor to provide any cash in lieu thereof;

  

4

  

    (ii)           MIF (and MIF’s liquidating trustee) shall retain for sale the Lake Forest Country Club (“LFCC”) memberships owned by NTS Lake Forest, and to collect all initiation fees/sales proceeds which may be due from Lake Forest Country Club upon the sale of any such memberships to fund on-going liquidating trust expenses.  Purchaser agrees to assist MIF and the MIF liquidating trustee in the discussions and negotiations with LFCC concerning the memberships as they deem necessary and appropriate. The estimated average proceeds from the sale of the Lake Forest Country Club memberships is Fifty Thousand Dollars ($50,000.00) per year for calendar years 2012-2017. At April 30, 2017, Purchaser will purchase any remaining unsold memberships for their estimated residual value of One Hundred Thousand Dollars ($100,000.00), discounted to net present value (using a then-current market rate discount factor to be determined by mutual agreement between Purchaser and the MIF’s liquidating trustee) based upon a projected sales velocity similar to the actual velocity of sales of such memberships over the 2012-2017 period; and

    (iii)   To advance up to One Hundred Thousand Dollars ($100,000.00) per year annually, commencing on April 30, 2012 until April 30, 2017, to fund the costs and expenses of the liquidating trust, provided that any amounts received by the trustee for the sale of LFCC memberships and/or the sale of Section 15 Lots and/or the sale of the Residential Land/Remaining Lots shall be applied to such costs and expenses prior to Purchaser’s obligation to provide any such advances; and

(m)           NTS Guaranty Corporation, a Kentucky corporation (“Guaranty Corp”), joins in this Letter solely for the purposes contained in this subparagraph (m). Upon execution of the Agreement and closing of the transactions, Guaranty Corp shall agree, as additional consideration for the sale of the Assets to Purchaser, to begin payment on its obligations to the stockholders of MIF under the “Purchase Price Guaranty” (as such term is defined in that certain Guaranty Agreement dated as of March  31, 1989 (the “Guaranty”) between Guaranty Corp and MIF), prior to the complete liquidation of MIF and the distribution of the proceeds from the sale of its assets (projected to be in calendar year 2017), as is currently required pursuant to the terms of the Guaranty. The Agreement shall provide that Guaranty Corp shall pay to the MIF stockholders: (i) on December 31, 2013, the aggregate sum of Five Hundred Thousand Dollars ($500,000.00); (ii) on December 31, 2014, the aggregate sum of One Million Five Hundred Thousand Dollars ($1,500,000.00); (iii) on December 31, 2015, the aggregate sum of  One Million Five Hundred Thousand Dollars ($1,500,000.00); (iv) on December 31, 2016, the aggregate sum of One Million Five Hundred Thousand Dollars ($1,500,000.00); and (v) on December 31, 2017, the aggregate sum of Five Million Dollars ($5,000,000.00). In the event any such payment is not made when due, the due dates of the remaining payments shall be accelerated by one year and shall be due and payable (along with any amounts due and unpaid) upon such accelerated schedule.

2.           TITLE AND SURVEY.  Within forty-five (45) days after the full execution of the Agreement, Purchaser may obtain, at Purchaser’s sole cost and expense, an ALTA form title insurance commitment for the Property and the Florida Land issued by a national title insurance company of Purchaser’s selection (the “Title Company”) and containing no exceptions to title other than those acceptable to Purchaser.  Within forty-five (45) days after the full execution of the Agreement, Purchaser may obtain, at Purchaser’s sole cost and expense, a current ALTA/ACSM survey of the Property and the Florida Land, in form and content acceptable to

  

5

  

Purchaser and Title Company so as to permit the Title Company to remove the survey exception from the owner’s and owner’s mortgagee title insurance policy or policies.

3.           STUDY PERIOD.  The Agreement will provide for a forty-five (45) day Study Period to commence upon full execution of the Agreement during which Purchaser shall examine the Property and the books and records pertaining thereto to determine the feasibility of purchasing the Property. For such purposes, Seller shall grant Purchaser, its agents, representatives, employees and consultants (Purchaser’s Agents) access to the Property and its books and records, and shall cause Seller, its employees, accountants and other agents and representatives (Seller’s Agents) to cooperate fully with the Purchaser and Purchaser’s Agents in connection with its acquisition review and feasibility investigation of the Property, including a right of entry on the Property to obtain an appraisal and to perform engineering and environmental tests and such other studies necessary or desired in connection with Purchaser’s evaluation of the Property. Any invasive tests or soil borings shall require Seller’s prior written consent. Purchaser shall indemnify and hold Seller harmless from any damages, injury (including death) or other loss caused by Purchaser’s inspection and evaluation of the Property (except for those relating to the mere discovery of any problem or issue with the Property), including any damage or loss caused by Purchaser’s Agents. In addition, Purchaser shall review zoning and other governmental regulations affecting the Property.  In the event the Purchaser determines prior to the end of the Study Period, that it is unsatisfied with the outcome of its due diligence and feasibility investigation of the Property, the Purchaser may terminate the Agreement for any reason whatsoever by so notifying the Seller in writing prior to the expiration of the Study Period, the Agreement will terminate, and the parties will have no further obligations to each other, except for those obligations which expressly survive such termination including Purchaser’s indemnification obligations under this paragraph 3.  In order to facilitate Purchaser’s due diligence investigation and analysis, Seller agrees to furnish to Purchaser within five (5) business days after full execution of the Agreement, access to, the following, to the extent in Seller’s possession:

(a)           Any and all contracts, leases, service contracts or other agreements relating to the Property;

(b)           The most recently issued Owner’s title insurance policies for the  Property and Florida Land;

(c)           Existing as-built surveys and legal descriptions of the Property and the Florida Land;

(d)           Real estate tax bills for the Property and the Florida Land for the years 2009 and 2010;

(e)           Existing environmental, engineering or other physical condition reports of the Property and Florida Land;

(f)           Operating statements for MIF, NTS/VA and OLFJV for 2009, 2010 and year to date 2011;

(g)           An inventory of personal property at the Property;

  

6

  

(h)           Site plans, plans and specifications and other plans and drawings related to the Property and the Florida Land; and

(i)           A complete copy of the minute book for OLFJV.

4.           CLOSING.  Closing shall occur on or before April 30, 2012 (the “Closing Date”). Time shall be of the essence in this transaction.

5.           PRECONDITIONS OF CLOSING.  The Purchaser’s obligation to proceed to closing under the Agreement shall be contingent on the following preconditions being met and upon such other customary terms and conditions to be specifically set forth in the Agreement:

(a)           Seller shall assign to the Purchaser and the Purchaser shall assume: (i) Seller’s membership interests in Fawn Lake Community Association, a Virginia non-stock corporation; and (ii) Seller’s position as Declarant under the Declaration for Fawn Lake dated July 16, 1990, as amended and supplemented, all pursuant to terms and conditions mutually acceptable to Seller and Purchaser;

(b)           Seller shall have transferred to the FLCA all of the designated and currently existing Common Areas (as defined in the Declaration) of the Fawn Lake development pursuant to the terms of the Declaration for Fawn Lake dated July 16, 1990 by NTS/Virginia Development Company as Declarant, as amended and supplemented; and

(c)           All of the transactions referred to herein shall have been approved by the independent members of the Board of Directors of MIF, and all documents and other instruments necessary to carry out the transactions contemplated herein shall have been executed and delivered in accordance with the terms of the Agreement.

6.           BROKERAGE COMMISSION.  Purchaser and Seller acknowledge and agree that there are no brokers involved in this transaction, and Purchaser and Seller each agree to indemnify the other against any and all claims for any broker commission or fee claiming through such party.

7.           CLOSING COSTS.  Closing Costs customarily paid by sellers, including recording fees and transfer or stamp taxes for the transfer documents, tangible and intangible property taxes, and closing costs customarily paid for by purchasers, including, without limitation, the title commitment and the owner’s and lender’s title policies and required or desired endorsements, the survey, and any environmental, engineering or other third-party reports obtained by Purchaser in connection with its due diligence are being funded by Purchaser in accordance with the terms of this Letter.

8.           SELLER REPRESENTATIONS AND WARRANTIES.  Seller shall warrant that Seller has no knowledge of (a) any presence, disposal, release or threatened release of hazardous substances or hazardous wastes on, from or under the Property or Florida Land, (b) any violation of any applicable building, zoning, environmental or other laws, ordinances, statutes, regulations or directives relating to the Property or Florida Land, (c) any structural defect, physical condition or other fact relating to the Property or Florida Land which would

  

7

  

prevent Purchaser from using and operating the Property or the Florida Land in accordance with its current use or contemplated use, (d) any litigation pending or threatened against Seller which would adversely affect the ability of the Seller to sell the Assets, or (e) any condemnation proceeding pending or threatened against the Property or the Florida Land. “Seller’s knowledge” or terms to such effect shall mean the actual current knowledge of Ralph DeRosa without any further inquiry. Such warranties shall survive for a period of six (6) months following the Closing.

9.           NOTICES.  All notices to Purchaser shall be addressed to: NTS Development Company, 10172 Linn Station Road, Louisville, Kentucky 40223, Attention: Brian F. Lavin; all notices to Seller shall be addressed to the Board of Directors of NTS Mortgage Income Fund, c/o Allan T. Slagel, Esq., Shefsky & Froelich, 111 E. Wacker Drive, Suite 2800, Chicago, IL 60601, and Eric Ison, Greenebaum Doll & McDonald PLLC, 3500 National City Tower, 101 South Fifth Street, Louisville, Kentucky 40202-3140.

10.           CONFIDENTIALITY.  Prior to the Closing and except to the extent required to be disclosed by Purchaser to its employees, directors, officers, agents, representatives, attorneys, lenders, accountants and/or advisors (“Purchaser Representatives”), and/or to the extent required by law or order of a court of competent jurisdiction, Purchaser shall not disclose or use and Purchaser shall cause the Purchaser Representatives not to disclose or use any Confidential Information (as such term is defined below) with respect to the Assets furnished or to be furnished by Seller or its representatives to Purchaser or Purchaser Representatives in connection herewith at any time or in any manner other than in connection with its evaluation of the transactions proposed in this Letter.  For purposes of this paragraph, “Confidential Information” means the fact of the proposed sale and any information about the Property disclosed by Seller, except for information which Purchaser can reasonably demonstrate is generally available to or known by the public other than as a result of improper disclosure by Purchaser.  The provisions of this paragraph 10 shall be binding on the Purchaser.

The terms and provisions set forth in this Letter, together with other terms and provisions relating to this transaction, shall be set forth more completely in the definitive Agreement(s) to be negotiated upon and entered into between the parties described herein.  In the event the Agreement is not agreed upon by the parties hereto for any reason whatsoever, neither party shall have any liability to the other and each party shall bear its own expenses incurred in connection with the transactions described herein, it being understood that this letter of intent is merely an expression of understanding between the parties hereto as to the terms and conditions which will form the basis for negotiating a definitive and binding Agreement.

The parties intend to obtain updated appraisals of the Assets before the Closing. In the event the updated appraisals of the Assets reflect material changes in the value of such Assets from those reflected in the most current appraisals, each of Seller and Purchaser reserve the right to change any of the terms and conditions contained in this Letter. This Letter is non-binding and shall not have the effect of a contract between the parties, except for the indemnification provisions of paragraph 3 and the provisions of paragraph 10 entitled “Confidentiality,” which shall constitute a binding agreement.

  

8

  

 

	 	
Very truly yours,

NTS DEVELOPMENT COMPANY

 

 

By: /s/ Gregory A. Wells         

 

Title: Executive Vice President      

 

                                                                         

The terms and conditions sets forth in this Letter accurately reflect the terms and conditions upon which we would be willing to negotiate a definitive Agreement.

THE INDEPENDENT MEMBERS OF THE BOARD OF DIRECTORS OF NTS MORTGAGE INCOME FUND

 

 

	 	
/s/ Robert A. Guimbarda      

ROBERT A. GUIMBARDA

 

/s/ Robert M. Day         

ROBERT M. DAY

 

 

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