EX-2.1 AGREEMENT AND PLAN OF MERGER

 

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                                                                     EXHIBIT 2.1

 

                          AGREEMENT AND PLAN OF MERGER

 

                                      among

 

                           COLONIAL PROPERTIES TRUST,

 

                           CLNL ACQUISITION SUB LLC, and

 

                      CORNERSTONE REALTY INCOME TRUST, INC.

 

                          Dated as of October 25, 2004

 

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                                TABLE OF CONTENTS

 

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ARTICLE 1   THE MERGER................................................................................      2

      1.1       The Merger............................................................................      2

      1.2       Closing...............................................................................      2

      1.3       Effective Time........................................................................      2

      1.4       Effect of Merger on Certificate   of Formation and Operating   Agreement of Colonial

               Merger Sub............................................................................      3

      1.5       Officers and Managers of Colonial Merger Sub; Additional Trustee of Colonial..........      3

      1.6       Effect on Capital Stock and Membership Interest; Colonial Articles Supplementary......      3

      1.7       Colonial Partnership Amendment........................................................      3

      1.8       Merger Consideration..................................................................      4

      1.9       Election   by Holders of   Cornerstone   Common   Shares to   Receive   Colonial   Common

               Shares or Colonial Series E Preferred Depositary Shares...............................      5

      1.10      Proration.............................................................................      7

      1.11      Partner Approval......................................................................      8

      1.12      Appraisal or Dissenters Rights........................................................      8

      1.13      Exchange of Certificates; Pre-Closing Dividends; Fractional Shares....................      8

      1.14      Post-Merger Reorganization............................................................     12

      1.15      Cornerstone LP Acquisition Transaction................................................     12

ARTICLE 2   REPRESENTATIONS AND WARRANTIESS OF

      CORNERSTONE....................................................................................     13

      2.1       Organization, Standing and Power......................................................     13

      2.2       Cornerstone Subsidiaries..............................................................     13

      2.3       Capital Structure.....................................................................     15

      2.4       Other Interests.......................................................................     17

      2.5       Authority; Noncontravention; Consents.................................................     17

      2.6       SEC Documents; Financial Statements; Undisclosed Liabilities..........................     18

      2.7       Absence of Certain Changes or Events..................................................     19

      2.8       Litigation............................................................................     20

      2.9       Properties............................................................................     20

      2.10      Environmental Matters.................................................................     23

      2.11      Related Party Transactions............................................................     24

      2.12      Employee Benefits.....................................................................     25

      2.13      Employee Policies.....................................................................     27

      2.14      Taxes.................................................................................     27

      2.15      No Payments to Employees, Officers or Directors.......................................     29

      2.16      Broker; Schedule of Fees and Expenses.................................................     29

      2.17      Compliance with Laws..................................................................     29

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      2.18      Contracts; Debt Instruments...........................................................     30

      2.19      Opinion of Financial Advisor..........................................................     32

      2.20      State Takeover Statutes...............................................................     32

      2.21      Investment Company Act of 1940........................................................     32

      2.22      Definition of.........................................................................     32

      2.23      Required Shareholder Approval.........................................................     32

ARTICLE 3   REPRESENTATIONS AND WARRANTIES OF COLONIAL

      AND COLONIAL MERGER SUB........................................................................     33

      3.1       Organization, Standing and Power of Colonial..........................................     33

      3.2       Colonial Subsidiaries.................................................................     33

      3.3       Capital Structure.....................................................................     34

      3.4       Other Interests.......................................................................     37

      3.5       Authority; Noncontravention; Consents.................................................     37

      3.6       SEC Documents; Financial Statements; Undisclosed Liabilities..........................     38

      3.7       Absence of Certain Changes or Events..................................................     39

      3.8       Litigation............................................................................     40

      3.9       Properties............................................................................     40

       3.10      Environmental Matters.................................................................     41

      3.11      Employee Benefits.....................................................................     42

      3.12      Taxes.................................................................................     44

      3.13      Brokers; Schedule of Fees and Expenses................................................     45

      3.14      Compliance with Laws..................................................................     45

      3.15      Contracts; Debt Instruments...........................................................     46

      3.16      Opinion of Financial Advisor..........................................................     46

      3.17       State Takeover Statutes...............................................................     46

      3.18      Investment Company Act of 1940........................................................     46

      3.19      Definition of.........................................................................     46

      3.20      Required Shareholder Approval.........................................................     46

ARTICLE 4   COVENANTS.................................................................................     47

      4.1       Conduct of Cornerstone's Business Pending Merger......................................     47

      4.2       Conduct of Colonial's and Colonial Merger Sub's Business Pending Merger...............     50

      4.3       No Solicitation.......................................................................     54

      4.4       Affiliates............................................................................     56

      4.5       Other Actions.........................................................................     57

ARTICLE 5   ADDITIONAL COVENANTS......................................................................     57

      5.1       Preparation    of   the   Form S-4   and   the   Joint   Proxy    Statement;    Cornerstone

                Shareholders Meeting and Colonial Shareholders Meeting................................     57

      5.2       Access to Information; Confidentiality................................................     60

      5.3       Commercially Reasonable Efforts; Notification.........................................     60

      5.4       Tax Matters...........................................................................     61

      5.5       Public Announcements..................................................................     61

      5.6       Listing...............................................................................     61

      5.7       Transfer and Gains Taxes..............................................................     62

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      5.8       Benefit Plans and Other Employee Arrangements.........................................     62

      5.9       Indemnification.......................................................................     63

      5.10      Declaration of Dividends and Distributions............................................     66

      5.11      Notices...............................................................................     68

      5.12      Resignations and Existing Agreements with Certain Cornerstone Executives..............     68

      5.13      Pre-Closing Reorganization Transactions...............................................     68

      5.14      [Intentionally omitted.]..............................................................     69

      5.15      Redemption of Cornerstone Series A Preferred Shares...................................     69

      5.16      IRS Agreements........................................................................     69

ARTICLE 6   CONDITIONS................................................................................     70

      6.1       Conditions to Each Party's Obligation to Effect the Merger............................     70

      6.2       Conditions to Obligations of Colonial and Colonial Merger Sub.........................     71

      6.3       Conditions to Obligations of Cornerstone..............................................     73

ARTICLE 7   TERMINATION, AMENDMENT AND WAIVER.........................................................     74

      7.1       Termination...........................................................................     74

      7.2        Certain Fees and Expenses.............................................................     76

      7.3       Effect of Termination.................................................................     79

      7.4       Amendment.............................................................................     79

      7.5       Extension; Waiver.....................................................................     79

ARTICLE 8   GENERAL PROVISIONS........................................................................     80

      8.1       Nonsurvival of Representations and Warranties.........................................     80

      8.2       Notices...............................................................................     80

      8.3       Interpretation........................................................................     81

      8.4       Counterparts..........................................................................     81

      8.5       Entire Agreement; No Third-Party Beneficiaries........................................     81

      8.6       Governing Law.........................................................................     81

      8.7       Assignment............................................................................      81

      8.8       Enforcement...........................................................................     81

      8.9       Severability..........................................................................     82

      8.10      Exculpation...........................................................................     82

      8.11      Joint and Several Obligations.........................................................     82

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                                     EXHIBITS

 

Exhibit A    -   Form of Delaware Certificate of Merger

 

Exhibit B    -   Form of Virginia Articles of Merger

 

Exhibit C    -   Form of Colonial Articles Supplementary

 

Exhibit D    -   Form of Nonsolicitation Agreement

 

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                             INDEX OF DEFINED TERMS

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Acquisition Proposal.............................................................................        4.3(a)(i)

Affiliate........................................................................................        2.11

Agreement........................................................................................        Preamble

AICPA Statement..................................................................................        5.1(b)

Alabama REIT Law.................................................................................        1.6

Assumed Option...................................................................................        5.8(c)(i)

Average Closing Price............................................................................        1.8(a)(ii)

Base Amount......................................................................................        7.2

Break-Up Expenses................................................................................        7.2

Break-Up Fee.....................................................................................        7.2

Break-Up Fee Tax Opinion.........................................................................        7.2

CERCLA ..........................................................................................        2.10(a)

Certificate......................................................................................        1.8(b)

Change in Control................................................................................        5.12(b)

CIC Agreements...................................................................................        5.12(b)

Closing .........................................................................................        1.2

Closing Adjustment Amount........................................................................        1.8(a)(ii)

Closing Adjustment Factor........................................................................        1.8(a)(ii)

Closing Date.....................................................................................        1.2

Closing Deficiency Dividend......................................................................        5.10

Closing Deficiency Dividend Amount...............................................................        5.10

Code ............................................................................................        E

Colonial ........................................................................................        Preamble

Colonial Articles Supplementary..................................................................        1.6

Colonial Bylaws..................................................................................        3.1

Colonial Common Share............................................................................         1.8(a)(ii)

Colonial Controlled Group Member ................................................................        3.11

Colonial Counter Proposal........................................................................        4.3(c)

Colonial Declaration of Trust....................................................................        1.6

Colonial Declaration of Trust Amendment..........................................................        5.1(a)

Colonial Disclosure Letter.......................................................................        Art. 3

Colonial Employee Plan ..........................................................................        3.11

Colonial Financial Statement Date................................................................        3.7

Colonial Material Adverse Effect.................................................................        3.1

Colonial Merger Sub..............................................................................        Preamble

Colonial Merger Sub LLC Units....................................................................        1.6

Colonial Options.................................................................................        3.3(b)

Colonial OP Units................................................................................        1.10(a)

Colonial Other Interests.........................................................................        3.4

Colonial Partner Approval........................................................................        1.11

Colonial Partnership.............................................................................        D

Colonial Partnership Agreement...................................................................        1.7

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Colonial Partnership Amendment...................................................................        1.7

Colonial Pension Plan ...........................................................................        3.11

Colonial Preferred OP Units......................................................................        3.3(e)

Colonial Preferred Shares........................................................................        3.3(a)

Colonial Properties..............................................................................        3.9(a)

Colonial Right...................................................................................        1.8(a)(ii)

Colonial Rights Agreement........................................................................        1.8(a)(ii)

Colonial SEC Documents...........................................................................        3.6

Colonial Series B Preferred OP Units.............................................................        3.3(e)

Colonial Series B Preferred Shares...............................................................        3.3(a)

Colonial Series C Preferred OP Units.............................................................        3.3(e)

Colonial Series C Preferred Shares...............................................................        3.3(a)

Colonial Series D Preferred OP Units.............................................................        3.3(e)

Colonial Series D Preferred Shares...............................................................        3.3(a)

Colonial Series E Preferred Depositary Share.....................................................        1.8(a)(i)

Colonial Series E Preferred OP Units.............................................................        1.7

Colonial Series E Preferred Shares...............................................................        1.8(a)(i)

Colonial Series 1998 Preferred Shares............................................................        3.3(a)

Colonial Shareholder Approval....................................................................        3.5(a)

Colonial Shareholders Meeting....................................................................        5.1(c)

Colonial Subsidiaries............................................................................        3.1

Colonial Welfare Plan ...........................................................................        3.11

Colonial Voting Agreement........................................................................        I

Commitment.......................................................................................        4.1(j)

Common Election..................................................................................        1.9(a)

Common Fraction..................................................................................        1.10(b)

Common Share Conversion Rate.....................................................................        1.8(a)(ii)

Confidentiality Agreement........................................................................        2.18(k)

Controlled Group Member..........................................................................        2.12

Cornerstone......................................................................................        Preamble

Cornerstone Acquisition Agreement................................................................        7.2

Cornerstone Articles.............................................................................        2.1

Cornerstone Bylaws...............................................................................        2.1

Cornerstone Common Share.........................................................................        1.8(a)(i)

Cornerstone Disclosure Letter....................................................................        Art. 2

Cornerstone Financial Statement Date.............................................................        2.7

Cornerstone GP OP Units..........................................................................        2.3(e)

Cornerstone LP Acquisition Transaction...........................................................        1.15

Cornerstone LP OP Units..........................................................................        2.3(e)

Cornerstone Material Adverse Effect..............................................................        2.1

Cornerstone Non-Preferred Units..................................................................        2.3(e)

Cornerstone OP Units.............................................................................        2.3(e)

Cornerstone Other Interests......................................................................        2.4

Cornerstone Partnership..........................................................................        1.13(d)(i)

Cornerstone Partnership Agreement................................................................         1.13(d)(i)

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Cornerstone Preferred Units......................................................................        2.3(e)

Cornerstone Preferred Shares.....................................................................        2.3(a)

Cornerstone Properties...........................................................................        2.9(a)

Cornerstone Rent Roll............................................................................        2.9(e)

Cornerstone Representative.......................................................................        4.3(a)(ii)

Cornerstone SEC Documents........................................................................        2.6

Cornerstone Series A Preferred Shares............................................................        2.3(a)

Cornerstone Series A Redemption Date.............................................................        5.15

Cornerstone Series B Preferred Shares............................................................        2.3(a)

Cornerstone Shareholder Approval.................................................................        2.5(a)

Cornerstone Shareholders Meeting.................................................................        5.1(d)

Cornerstone Space Lease..........................................................................        2.9(e)

Cornerstone Stock Options........................................................................        2.3(b)

Cornerstone Share Rights.........................................................................        2.3(b)

Cornerstone Subsidiaries.........................................................................        2.2(a)

Cornerstone Voting Agreement ....................................................................        H

Corresponding Colonial Dividends and Distributions...............................................        1.13(d)(ii)

Deficiency Dividend..............................................................................        5.10

Deficiency Dividend Amount.......................................................................        5.10

Delaware Certificate of Merger ..................................................................        B

Delaware Secretary...............................................................................        1.3

DE LLC Act.......................................................................................        1.1

Depositary Receipts..............................................................................        1.8(a)(i)

Effective Time...................................................................................        1.3

Election ........................................................................................        1.9(a)

Election Date....................................................................................        1.9(d)

Employee Plan....................................................................................        2.12

Employment Agreements............................................................................        5.12(b)

Encumbrances.....................................................................................        2.9(a)

Environmental Law................................................................................        2.10(a)

Environmental Mitigation.........................................................................        2.9(d)

Environmental Permits............................................................................        2.10(b)(iii)

ERISA     ........................................................................................        2.12

Exchange Act.....................................................................................        2.6

Exchange Agent...................................................................................        1.13(a)

Exchange Fund....................................................................................        1.13(b)

Final Cornerstone Dividend.......................................................................        1.13(d)(i)

Final Cornerstone Partnership Distribution.......................................................        1.13(d)(i)

Former Colonial Properties ......................................................................        3.10(a)

Former Cornerstone Properties....................................................................        2.10(b)(i)

Form of Election.................................................................................        1.9(b)

Form S-4 ........................................................................................        5.1(a)

GAAP       ........................................................................................        2.6

Governmental Entity..............................................................................        2.5(b)

Hazardous Materials..............................................................................        2.10(a)

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HSR Act .........................................................................................        2.5(b)

Indebtedness.....................................................................................        2.18(b)

Indemnified Parties..............................................................................        5.9(a)

Indemnifying Parties.............................................................................        5.9(a)

IRS Agreement....................................................................................        5.16(a)

Joint Proxy Statement............................................................................        5.1(a)

Knowledge of Colonial............................................................................        3.19

Knowledge of Cornerstone.........................................................................        2.22

Laws ............................................................................................        2.5(b)

Liens ...........................................................................................        2.2(b)

Maximum Amount...................................................................................        7.2

Maximum Preferred Depositary Share Adjustment Amount.............................................        1.10(b)

Maximum Preferred Depositary Share Amount........................................................        1.10(b)

Merger Consideration.............................................................................        1.13(a)

Merger    ........................................................................................        A

Net Cornerstone Option Shares....................................................................        1.8(a)(ii)

Non-Electing Shares..............................................................................        1.10(a)

NYSE ............................................................................................        1.8(a)(ii)

Outside Date.....................................................................................        7.1(l)

Payor ...........................................................................................        7.2

Pension Plan.....................................................................................        2.12

Permitted Title Exceptions.......................................................................        2.9(a)

Person    ........................................................................................        2.2(a)

Post-Merger Reorganization.......................................................................        1.14

Pre-Closing Reorganization Transactions..........................................................        5.13(d)

Preferred Depositary Share Conversion Rate.......................................................        1.8(a)(i)

Preferred Election...............................................................................        1.9(a)

Preferred Fraction...............................................................................        1.10(b)

Property Restrictions............................................................................        2.9(a)

Qualifying Income................................................................................        7.2

Recipient........................................................................................        7.2

REIT ............................................................................................        2.14(b)

REIT Requirements................................................................................        7.2

Release .........................................................................................        2.10(a)

Rule 145 Affiliates..............................................................................        4.4

SEC .............................................................................................        2.5(b)

Section 5.16 Expenses............................................................................        5.16(b)

Section 5.16 Expenses Amount.....................................................................        5.16(b)

Section 5.16 Interest/Penalties..................................................................        5.16(c)

Section 5.16 Interest/Penalties Amount...........................................................        5.16(c)

Securities Act...................................................................................        2.3(g)

Shareholder Approvals............................................................................        3.5(a)

Subsidiary.......................................................................................        2.2(a)

Superior Acquisition Proposal....................................................................        4.3(d)

Takeover Statute.................................................................................        2.20

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Taxes ...........................................................................................        2.14(a)

Tax Protection Agreement.........................................................................        2.18(j)

Third Party Provisions...........................................................................        8.5

Top-Up Amount....................................................................................        7.1(j)

Top-Up Notice....................................................................................        7.1(j)

Trading Day......................................................................................        1.8(a)(ii)

Transfer ........................................................................................        4.3(a)(i)

Transfer and Gains Taxes.........................................................................        5.7

Virginia Articles of Merger......................................................................        C

Virginia Commission..............................................................................        1.3

Virginia Corporation Act.........................................................................        1.1

Voting Agreements................................................................................        I

Welfare Plan.....................................................................................        2.12

1940 Act ........................................................................................        2.21

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                          AGREEMENT AND PLAN OF MERGER

 

      THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October

25, 2004, by and among COLONIAL PROPERTIES TRUST, an Alabama real estate

investment trust ("Colonial"), CLNL ACQUISITION SUB LLC, a Delaware limited

liability company ("Colonial Merger Sub"), and CORNERSTONE REALTY INCOME TRUST,

INC., a Virginia corporation ("Cornerstone").

 

                                 R E C I T A L S:

 

      A. The Board of Trustees of Colonial and the Board of Directors of

Cornerstone deem it advisable and in the best interests of their respective

shareholders, upon the terms and subject to the conditions contained herein,

that Cornerstone shall merge with and into Colonial Merger Sub, a wholly owned

subsidiary of Colonial that is disregarded as an entity separate from Colonial

for federal income tax purposes (the "Merger").

 

      B. Upon the terms and subject to the conditions set forth herein, Colonial

Merger Sub and Cornerstone shall execute a Certificate of Merger (the "Delaware

Certificate of Merger") in substantially the form attached hereto as Exhibit A

and shall file such Delaware Certificate of Merger in accordance with Delaware

law to effectuate the Merger.

 

      C. Upon the terms and subject to the conditions set forth herein, Colonial

Merger Sub and Cornerstone shall also execute Articles of Merger (the "Virginia

Articles of Merger") in substantially the form attached hereto as Exhibit B and,

concurrently with the filing of the Delaware Certificate of Merger, shall file

such Virginia Articles of Merger in accordance with Virginia law to effectuate

the Merger.

 

      D. Immediately following consummation of the Merger, Colonial shall

contribute to Colonial Realty Limited Partnership, a Delaware limited

partnership ("Colonial Partnership"), in exchange for additional interests

therein, all of the outstanding limited liability company membership interests

in Colonial Merger Sub, with the result that Colonial Merger Sub will become a

wholly owned subsidiary of Colonial Partnership that is disregarded as an entity

separate from Colonial Partnership for federal income tax purposes.

 

      E. For federal income tax purposes, it is intended that the Merger shall

qualify as a reorganization under Section 368(a)(1)(A) of the Internal Revenue

Code of 1986, as amended (the "Code"), with Cornerstone being treated as having

merged into Colonial for federal income tax purposes, and that this Agreement

shall constitute a plan of reorganization under Section 368(a) of the Code.

 

      F. Colonial and Cornerstone have each received a fairness opinion

relating to the transactions contemplated hereby as more fully described herein.

 

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      G. Colonial, Colonial Merger Sub and Cornerstone desire to make certain

representations, warranties, covenants and agreements in connection with the

Merger.

 

      H. As an inducement to Colonial and Colonial Merger Sub to enter into this

Agreement, Glade M. Knight and certain entities controlled by Glade M. Knight

have entered into a voting agreement (the "Cornerstone Voting Agreement"),

pursuant to which such person or entity has agreed, among other things, to vote

his or its Cornerstone Common Shares (as defined herein) to approve this

Agreement, the Merger and any other matter which requires his or its vote in

connection with the transactions contemplated by this Agreement.

 

      I. As an inducement to Cornerstone to enter into this Agreement, Thomas H.

Lowder and certain entities controlled by Thomas H. Lowder have entered into a

voting agreement (the "Colonial Voting Agreement," and together with the

Cornerstone Voting Agreement, the "Voting Agreements"), pursuant to which such

person or entity has agreed, among other things, to vote his or its shares of

beneficial interest of Colonial to approve this Agreement, the Merger and any

other matter which requires his or its vote in connection with the transactions

contemplated by this Agreement.

 

            NOW, THEREFORE, in consideration of the premises and the mutual

representations, warranties, covenants and agreements contained herein, the

parties hereto hereby agree as follows:

 

                                    ARTICLE I

 

                                   THE MERGER

 

            1.1 The Merger. Upon the terms and subject to the conditions set

forth in this Agreement, and in accordance with Title 6, Chapter 18 of the

Delaware Code Annotated, as amended (the "DE LLC Act") and Title 13.1, Chapter 9

of the Code of Virginia, as amended (the "Virginia Corporation Act"),

Cornerstone shall be merged with and into Colonial Merger Sub, with Colonial

Merger Sub surviving as a limited liability company.

 

            1.2 Closing. The closing of the Merger (the "Closing") will take

place commencing at 9:00 a.m., local time, on the date to be specified by the

parties, which shall be no later than the third business day after satisfaction

or waiver of the conditions set forth in Article 6 (the "Closing Date"), at the

offices of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth Street, NW

Washington D.C. 20004, unless another date or place is agreed to in writing by

the parties; provided that, in the event that Cornerstone has delivered a notice

of termination pursuant to Section 7.1(j), the "Closing Date" shall be the third

business day after delivery of the Top-Up Notice (as defined herein), if any,

pursuant to Section 7.1(j).

 

            1.3 Effective Time. On the Closing Date, Colonial Merger Sub and

Cornerstone shall execute and file the Delaware Certificate of Merger, executed

in accordance with the DE LLC Act, with the Office of the Secretary of State of

the State of Delaware (the "Delaware Secretary"), and the Virginia Articles of

Merger, executed in accordance with the Virginia Corporation Act, with the State

Corporation Commission of the Commonwealth of

 

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Virginia (the "Virginia Commission") and shall make all other filings and

recordings required under the DE LLC Act and the Virginia Corporation Act. The

Merger shall become effective (the "Effective Time") at such time as Colonial

and Cornerstone shall agree should be specified in the Delaware Certificate of

Merger and the Virginia Articles of Merger (not to exceed thirty (30) days after

the Delaware Certificate of Merger is accepted for record by the Delaware

Secretary). Unless otherwise agreed, the parties shall cause the Effective Time

to occur on the Closing Date.

 

             1.4 Effect of Merger on Certificate of Formation and Operating

Agreement of Colonial Merger Sub. The Articles of Organization, as amended, of

Colonial Merger Sub and the Limited Liability Company Operating Agreement, as

amended, of Colonial Merger Sub, as in effect immediately prior to the Effective

Time of the Merger, shall continue in full force and effect after the Merger

until further amended in accordance with applicable Delaware law.

 

            1.5 Officers and Managers of Colonial Merger Sub; Additional Trustee

of Colonial. The officers and members of the Board of Managers of Colonial

Merger Sub following the Merger shall consist of the officers and members of the

Board of Managers of Colonial Merger Sub immediately prior to the Effective Time

of the Merger, who shall continue to serve for the balance of their unexpired

terms or their earlier death, resignation or removal. Colonial shall cause Glade

M. Knight to be appointed as an additional member of the Board of Trustees of

Colonial, effective as of midnight on the Closing Date. Colonial then shall

include and recommend Glade M. Knight in the management slate of nominees for

election to the Board of Trustees of Colonial at each annual meeting or special

meeting of Colonial until at least the third anniversary of the Effective Time.

 

            1.6 Effect on Capital Stock and Membership Interest; Colonial

Articles Supplementary. The effect of the Merger on the shares of capital stock

of Cornerstone shall be as provided in the Delaware Certificate of Merger, the

Virginia Articles of Merger and in Section 1.8. The Merger shall not change the

shares of beneficial interest of Colonial outstanding immediately prior to the

Effective Time of the Merger. At the Effective Time of the Merger, the 100%

limited liability company membership interest of Colonial Merger Sub outstanding

immediately prior to the Effective Time of the Merger (all of which shall be

owned by Colonial at such time) shall be converted into a number of units of

limited liability company membership interest of Colonial Merger Sub ("Colonial

Merger Sub LLC Units") equal to the number of Cornerstone Common Shares

outstanding immediately prior to the Effective Time of the Merger. Prior to or

as of the Effective Time, the Declaration of Trust, as amended, of Colonial (the

"Colonial Declaration of Trust") shall be amended, in accordance with Title 10,

Chapter 3 of the Alabama Code, as amended (the "Alabama REIT Law"), and the

terms of the Colonial Declaration of Trust, by the adoption of articles

supplementary substantially in the form set forth on Exhibit C (the "Colonial

Articles Supplementary") to provide for the creation of the Colonial Series E

Preferred Shares (as defined herein).

 

            1.7 Colonial Partnership Amendment. Prior to or as of the Effective

Time, the Third Amended and Restated Agreement of Limited Partnership, as

amended, of Colonial Partnership (the "Colonial Partnership Agreement") shall be

amended, in accordance with Title 6, Chapter 17 of the Delaware Code Annotated,

as amended, and the terms of the Colonial

 

                                       3

<PAGE>

 

Partnership Agreement, by the adoption of an amendment in accordance with

Section 4.2.B thereof (the "Colonial Partnership Amendment") to provide for the

creation of 7.62% Series E Preferred Units of Colonial Partnership to be owned

by Colonial and having terms substantially similar to the Colonial Series E

Preferred Shares (as defined herein)) (the "Colonial Series E Preferred OP

Units").

 

            1.8 Merger Consideration.

 

                  (a) Merger Consideration. (i) Each common share, no par value,

of Cornerstone ("Cornerstone Common Share") issued and outstanding immediately

prior to the Effective Time of the Merger, which under the terms of Section 1.10

is to be converted solely into Depositary Shares of Colonial (each having a

liquidation preference of $25.00 per Depositary Share) (each a "Colonial Series

E Preferred Depositary Share") representing 1/100th of a 7.62% Series E

Cumulative Redeemable Preferred Share of Beneficial Interest, $.01 par value per

share, of Colonial (each having a liquidation preference of $2,500.00 per share)

(each a "Colonial Series E Preferred Share"), shall be converted into the right

to receive a number of validly issued, fully paid and nonassessable Colonial

Series E Preferred Depositary Shares (evidenced by Depositary Receipts of

Colonial ("Depositary Receipts")) equal to the Preferred Depositary Share

Conversion Rate (as defined herein). As used herein, "Preferred Depositary Share

Conversion Rate" shall mean (I) 0.4200 multiplied by (II) an amount equal to the

difference obtained by subtracting (x) one (1) minus (y) the Closing Adjustment

Factor (as defined herein).

 

                  (ii) Each Cornerstone Common Share issued and outstanding

immediately prior to the Effective Time of the Merger (other than Cornerstone

Common Shares to be converted into the right to receive Colonial Series E

Preferred Depositary Shares pursuant to Section 1.8(a)(i) and Section 1.10)

shall be converted into the right to receive (A) a number of validly issued,

fully paid and nonassessable common shares of beneficial interest, $.01 par

value per share, of Colonial (each a "Colonial Common Share") equal to the

Common Share Conversion Rate (as defined herein) (with each such Colonial Common

Share being issued with the related Colonial Right (as defined herein)) and (B)

if (and only if) a Top-Up Notice shall have been delivered pursuant to Section

7.1(j), (y) if the Top-Up Amount is payable all or in part with Colonial Common

Shares, an additional number of validly issued, fully paid and nonassessable

Colonial Common Shares equal to the product of the Common Share Conversion Rate

times a fraction, the numerator of which is the portion of the Top-Up Amount

(expressed in dollars) payable in Colonial Common Shares (as specified in the

Top-Up Notice) and the denominator of which is the Average Closing Price (as

defined herein) (with each such Colonial Common Share being issued with the

related Colonial Right), or (z) if the Top-Up Amount is payable all or in part

in cash, an amount of cash equal to the product of the Common Share Conversion

Rate times the portion of the Top-Up Amount (expressed in dollars) payable in

cash. As used herein, "Common Share Conversion Rate" shall mean (I) 0.2584

multiplied by (II) an amount equal to the difference obtained by subtracting (x)

one (1) minus (y) the Closing Adjustment Factor. "Closing Adjustment Factor"

shall mean a fraction obtained by dividing (I) the Closing Adjustment Amount by

(II) the product of (x) the sum of the total number of Cornerstone Common Shares

outstanding immediately prior to the Effective Time plus the total number of Net

Cornerstone Option Shares (as defined herein) determined based on the

Cornerstone Stock Options (as defined herein) outstanding immediately

 

                                       4

<PAGE>

 

prior to the Effective Time and (y) $10.80. "Closing Adjustment Amount" shall

mean the sum of (I) the Closing Dividend Deficiency Amount (as defined herein),

(II) the Section 5.16 Expenses Amount (as defined herein) (but not to exceed

$2,000,000), and (III) the Section 5.16 Interest/Penalties Amount (as defined

herein). "Average Closing Price" shall mean the average of the closing prices as

reported in The Wall Street Journal for each of the 20 consecutive Trading Days

(as defined herein) in the period ending ten Trading Days prior to the Closing

Date. "Trading Day" shall mean a day on which the New York Stock Exchange

("NYSE") is open for trading. "Colonial Right" shall mean a "Right" issued

pursuant to Colonial's Rights Agreement, dated November 2, 1998 (the "Colonial

Rights Agreement"), between Colonial and BankBoston, N.A., as Rights Agent. "Net

Cornerstone Option Shares" shall be equal to (x) the number of Cornerstone

Common Shares issuable under Cornerstone Stock Options outstanding immediately

prior to the Effective Time with exercise prices of less than $10.80 minus (y)

the number of Cornerstone Common Shares that could be purchased at a price of

$10.80 per share using the aggregate proceeds that would be received by

Cornerstone if all of the in-the-money Cornerstone Stock Options described in

clause (x) were exercised in full.

 

                  (b) Cancelled Status of Cornerstone Common Shares. Each

Cornerstone Common Share, when so converted as provided in Section 1.8(a)(i) or

(ii) or Section 1.10(b), shall no longer be outstanding and shall automatically

be cancelled and retired and shall cease to exist, and each holder of a

certificate (a "Certificate") theretofore representing such Cornerstone Common

Share shall cease to have any rights with respect thereto, except the right to

receive, upon the surrender of such Certificate in accordance with Section

1.13(c), as applicable, (A) any dividends and other distributions in accordance

with Section 1.13(d), (B) certificates representing the Colonial Common Shares

into which such Cornerstone Common Shares are converted pursuant to Section

1.8(a)(ii) or Section 1.10(b) (if any), (C) Depositary Receipts representing the

Colonial Series E Preferred Depositary Shares into which such Cornerstone Common

Shares are converted pursuant to Section 1.8(a)(i) or Section 1.10(b), and (D)

any cash, without interest, in lieu of fractional Colonial Common Shares or

Colonial Series E Preferred Depositary Shares to be issued or paid in

consideration for Cornerstone Common Shares upon the surrender of such

Certificate in accordance with Sections 1.13(c) and 1.13(g) or payable as part

of any Top-Up Amount pursuant to Section 1.8(a)(ii).

 

            1.9 Election by Holders of Cornerstone Common Shares to Receive

Colonial Common Shares or Colonial Series E Preferred Depositary Shares. Each

holder of Cornerstone Common Shares shall have the right to submit a Form of

Election (as defined herein) specifying the number of Cornerstone Common Shares

which such holder desires to have converted into the right to receive Colonial

Common Shares in the Merger pursuant to Section 1.8(a)(ii) and the number which

such holder desires to have converted into the right to receive Colonial Series

E Preferred Depositary Shares in the Merger pursuant to Section 1.8(a)(i) in

accordance with the following procedures:

 

                  (a) Each holder of Cornerstone Common Shares may specify in a

request made in accordance with the provisions of this Section 1.9 (an

"Election") (i) the number of such Cornerstone Common Shares which such holder

desires to have converted into the right to receive Colonial Series E Preferred

Depositary Shares in the Merger pursuant to Section 1.8(a)(i) (a "Preferred

Election") and (ii) the number of such Cornerstone Common

 

                                       5

<PAGE>

 

Shares which such holder desires to have converted into the right to receive

Colonial Common Shares in the Merger pursuant to Section 1.8(a)(ii) (a "Common

Election").

 

                  (b) Colonial and Cornerstone shall prepare, for use by holders

of Cornerstone Common Shares in surrendering Certificates representing

Cornerstone Common Shares, a form of election (the "Form of Election") pursuant

to which each holder of Cornerstone Common Shares may make Elections. The Form

of Election shall be mailed to holders of record of Cornerstone Common Shares as

of the record date for the Cornerstone Shareholders Meeting (as defined herein)

and shall accompany the Joint Proxy Statement (as defined herein).

 

                  (c) Cornerstone shall use commercially reasonable efforts to

make the Form of Election available to all Persons (as defined herein) who

become holders of record of Cornerstone Common Shares during the period between

such record date and the Election Date (as defined herein).

 

                  (d) An Election shall have been properly made only if the

Exchange Agent (as defined herein) shall have received, by 5:00 p.m., Eastern

Time, on the second business day (such time on such day being referred to herein

as the "Election Date") preceding the date of the Cornerstone Shareholders

Meeting, a Form of Election properly completed and signed (and not revoked) and

accompanied by the Certificate or Certificates representing Cornerstone Common

Shares to which such Form of Election relates, duly endorsed in blank or

otherwise in form acceptable for transfer on the books of Cornerstone (or by an

appropriate guarantee of delivery of such Certificate or Certificates as set

forth in such Form of Election from a member of any registered national

securities exchange or of the National Association of Securities Dealers, Inc.

or a commercial bank or trust company having an office or correspondent in the

United States, provided such Certificate or Certificates are in fact delivered

by the time set forth in such guarantee of delivery).

 

                  (e) Any holder of record of Cornerstone Common Shares may at

any time prior to the Election Date change such holder's Election by written

notice received by the Exchange Agent at or prior to the Election Date

accompanied by a properly completed Form of Election. Colonial and Cornerstone

shall have the right in their sole discretion and by mutual agreement to permit

changes in Elections after the Election Date.

 

                  (f) Any holder of record of Cornerstone Common Shares may at

any time prior to the Election Date revoke such holder's Election by written

notice received by the Exchange Agent at or prior to the Election Date or by

withdrawal prior to the Election Date of such holder's Certificates previously

deposited with the Exchange Agent. Any revocation of an Election may be

withdrawn by notice of such withdrawal delivered at or prior to the Election

Date. Any such holder who shall have deposited Certificates with the Exchange

Agent shall have the right to withdraw such Certificates by written notice

received by the Exchange Agent and thereby revoke such holder's Election as of

the Election Date at any time after the expiration of the period of 60 days

following the Election Date if the Merger shall not have been consummated prior

thereto. Colonial shall obtain from the Exchange Agent an agreement to return

each Form of Election and accompanying Certificates to the holders of

Cornerstone Common Shares submitting the same in the event this Agreement shall

be terminated in accordance with its terms.

 

                                       6

<PAGE>

 

                   (g) Colonial and Cornerstone by mutual agreement shall have

the right to make rules, not inconsistent with the terms of this Agreement,

governing the validity of the Form of Election, the manner and extent to which

Elections are to be taken into account in making the determinations prescribed

by Section 1.10, the issuance and delivery of certificates for Colonial Common

Shares and Colonial Series E Preferred Depositary Shares into which Cornerstone

Common Shares are converted in the Merger and the treatment of Colonial Common

Shares and Cornerstone Common Shares held through brokers or other market

participants (i.e., in street name).

 

            1.10 Proration. The determination of whether Cornerstone Common

Shares shall be converted in the Merger into Colonial Common Shares in

accordance with Section 1.8(a)(ii) or Colonial Series E Preferred Depositary

Shares in accordance with Section 1.8(a)(i), or the right to receive a

combination of Colonial Series E Preferred Depositary Shares and Colonial Common

Shares shall be made as set forth in this Section 1.10.

 

                  (a) Each Cornerstone Common Share for which a Common Election

is received and each Non-Electing Share (as defined herein) shall be converted

into Colonial Common Shares in accordance with Section 1.8(a)(ii). For purposes

of this Section 1.10, outstanding Cornerstone Common Shares as to which an

election is not in effect at the Election Date and shares as to which an

Election has been withdrawn after the 60-day period following the Election Date

and prior to the Effective Time of the Merger shall be called "Non-Electing

Shares." If Colonial and Cornerstone shall determine for any reason that any

Election was not properly made with respect to Cornerstone Common Shares, such

Election shall be deemed ineffective and Cornerstone Common Shares covered by

such Election shall, for purposes hereof, be deemed to be Non-Electing Shares.

 

                  (b) Except as provided in the immediately following sentence,

each Cornerstone Common Share for which a Preferred Election is received shall

be converted into Colonial Series E Preferred Depositary Shares in accordance

with Section 1.8(a)(i). If Preferred Elections are received for a number of

Cornerstone Common Shares which is greater than the Maximum Preferred Depositary

Share Amount (as defined herein), each Cornerstone Common Share for which a

Preferred Election has been received shall be converted in the Merger into the

right to receive (i) a number of Colonial Series E Preferred Depositary Shares

equal to the product of (w) the Preferred Depositary Share Conversion Rate and

(x) a fraction (the "Preferred Fraction") the numerator of which shall be the

Maximum Preferred Depositary Share Amount and the denominator of which shall be

the aggregate number of Cornerstone Common Shares covered by all Preferred

Elections, and (ii) a number of Colonial Common Shares equal to the product of

(y) the Common Share Conversion Rate and (z) a fraction (the "Common Fraction")

equal to one minus the Preferred Fraction and (iii) if (and only if) a Top-Up

Notice shall have been delivered pursuant to Section 7.1(j), additional

consideration in an amount and form equal to the Common Fraction times the

amount of Colonial Common Shares and cash payable with respect to a Cornerstone

Common Share for which a Common Election is received pursuant to clause (B) of

Section 1.8(a)(ii). As used herein, "Maximum Preferred Depositary Share Amount"

shall mean 14,080,954 minus the Maximum Preferred Depositary Share Adjustment

Amount. "Maximum Preferred Depositary Share Adjustment Amount" shall be an

amount

 

                                       7

<PAGE>

 

(rounded to the nearest whole number) equal to the quotient obtained by dividing

(I) the Closing Adjustment Amount by (II) $10.50.

 

            1.11 Partner Approval. Through its approval of the Colonial

Partnership Amendment as general partner of Colonial Partnership, Colonial has

obtained the requisite approval of the partners of Colonial Partnership of the

Colonial Partnership Amendment (the "Colonial Partner Approval").

 

            1.12 Appraisal or Dissenters Rights. The holders of Cornerstone

Common Shares and Colonial Common Shares are not entitled under applicable law

to appraisal, dissenters or similar rights as a result of the Merger.

 

            1.13 Exchange of Certificates; Pre-Closing Dividends; Fractional

Shares.

 

                  (a) Exchange Agent; Depositary. Prior to the Effective Time,

Colonial shall appoint EquiServe Trust Company as the exchange agent, or another

bank or trust company reasonably acceptable to Cornerstone, to act as exchange

agent (the "Exchange Agent") for the exchange of the consideration to be paid in

the Merger pursuant to Section 1.8 and Section 1.10 (the "Merger Consideration")

upon surrender of certificates representing issued and outstanding Cornerstone

Common Shares. In addition, prior to the Effective Time, Colonial shall appoint

Equiserve Trust Company as the depositary for the Colonial Series E Preferred

Depositary Shares, or another bank or trust company reasonably acceptable to

Cornerstone, pursuant to a Depositary Agreement in form and substance reasonably

acceptable to Cornerstone.

 

                  (b) Colonial to Provide Merger Consideration; Cornerstone to

Provide Funds for Final Cornerstone Dividend. Colonial shall provide to the

Exchange Agent at or before the Effective Time of the Merger, for the benefit of

the holders of Cornerstone Common Shares, the Merger Consideration issuable in

exchange for the issued and outstanding Cornerstone Common Shares pursuant to

Section 1.8 and Section 1.10, together with any cash required to make payments

in lieu of any fractional shares pursuant to Section 1.13(g) (the "Exchange

Fund"). The Exchange Agent (or other depository acting for the benefit of the

Exchange Agent) shall invest any cash included in the Exchange Fund as directed

by Colonial, on a daily basis. Any interest or other income resulting from such

investments shall be paid to Colonial. Cornerstone shall provide to the Exchange

Agent not later than three business days prior to the Effective Time of the

Merger, for the benefit of the holders of Cornerstone Common Shares, cash

payable in respect of any dividends required pursuant to Section 1.13(d)(i).

Such cash shall be invested in accordance with written directions delivered by

Cornerstone to the Exchange Agent (or other depository) not later than three

business days prior to the Effective Time of the Merger, with any interest or

other income earned on such investments to be paid to Colonial as the successor

to Cornerstone in the Merger.

 

                  (c) Exchange Procedure. As soon as reasonably practicable

after the Effective Time, Colonial shall use commercially reasonable efforts to

cause the Exchange Agent to mail to each holder of record of a Certificate or

Certificates which immediately prior to the Effective Time represented

outstanding Cornerstone Common Shares (other than to holders of Cornerstone

Common Shares who previously surrendered with their Form of Election their

 

                                       8

<PAGE>

 

Certificates for Cornerstone Common Shares) whose shares were converted into the

right to receive the Merger Consideration pursuant to Section 1.8(a) and Section

1.10, (i) a letter of transmittal (which shall specify that delivery shall be

effected, and risk of loss and title to the Certificates shall pass, only upon

delivery of the Certificates to the Exchange Agent and shall be in a form and

have such other provisions as Colonial may reasonably specify) and (ii)

instructions for use in effecting the surrender of the Certificates in exchange

for the Merger Consideration. To the extent not previously surrendered with a

Form of Election, upon surrender of a Certificate for cancellation to the

Exchange Agent or to such other agent or agents as may be appointed by Colonial,

together with such letter of transmittal, duly executed, and such other

documents as may reasonably be required by the Exchange Agent, the holder of

such Certificate shall be entitled to receive in exchange therefor the Merger

Consideration into which the Cornerstone Common Shares theretofore represented

by such Certificate shall have been converted pursuant to Section 1.8(a) and

Section 1.10, together with cash, if any, payable in lieu of fractional shares

pursuant to Section 1.13(g), to be mailed (or made available for collection by

hand if so elected by the surrendering holder) within five business days of

receipt thereof, and the Certificate so surrendered shall forthwith be canceled.

In the event of a transfer of ownership of Cornerstone Common Shares which is

not registered in the transfer records of Cornerstone, payment may be made to a

Person other than the Person in whose name the Certificate so surrendered is

registered if such Certificate shall be properly endorsed or otherwise be in

proper form for transfer and the Person requesting such payment either shall pay

any transfer or other Taxes required by reason of such payment being made to a

Person other than the registered holder of such Certificate or establish to the

satisfaction of Colonial that such Tax or Taxes have been paid or are not

applicable. Until surrendered as contemplated by this Section 1.13, each

Certificate shall be deemed at any time after the Effective Time to represent

only the right to receive upon such surrender the Merger Consideration, without

interest, into which the Cornerstone Common Shares theretofore represented by

such Certificate shall have been converted pursuant to Section 1.8 and Section

1.10, and any cash payable in lieu of fractional shares pursuant to Section

1.13(g). No interest will be paid or will accrue on the Merger Consideration

upon the surrender of any Certificate or on any cash payable pursuant to Section

1.13(d) or Section 1.13(g). Colonial or the Exchange Agent, as applicable, shall

be entitled, in its sole and absolute discretion, to deduct and withhold from

the cash, Colonial Common Shares or Colonial Series E Preferred Depositary

Shares, or any combination thereof, that otherwise is payable pursuant to this

Agreement to any holder of Cornerstone Common Shares such amounts as Colonial or

the Exchange Agent is required to deduct and withhold with respect to the making

of such payment under the Code or under any provision of federal, state, local

or foreign Tax law. For this purpose, (x) any Colonial Common Shares deducted

and withheld by Colonial shall be valued at the last trading price of the

Colonial Common Shares on the NYSE on the Effective Date of the Merger and (y)

any Colonial Series E Preferred Depositary Shares deducted and withheld by

Colonial shall be valued at $25.00 (i.e., 1/100th of the liquidation preference

of a Colonial Series E Preferred Share). To the extent that amounts are so

withheld by Colonial or the Exchange Agent, such withheld amounts shall be

treated for all purposes of this Agreement as having been paid to the holder of

Cornerstone Common Shares in respect of which such deduction and withholding was

made by Colonial or the Exchange Agent.

 

                                        9

<PAGE>

 

                  (d) Record Dates for Final Dividends; Distributions with

Respect to Unexchanged Shares.

 

                        (i) If and to the extent necessary for Cornerstone to

satisfy the requirements of Section 857(a)(1) of the Code for the taxable year

of Cornerstone ending at the Effective Time of the Merger (and to avoid the

payment of any Tax with respect to undistributed income or gain), Cornerstone

shall declare a dividend (the "Final Cornerstone Dividend") to holders of

Cornerstone Common Shares, the record date for which shall be the close of

business no later than the sixth business day prior to the Effective Time of the

Merger, in an amount equal to the minimum dividend sufficient to permit

Cornerstone to satisfy such requirements. Any dividends payable hereunder to

holders of Cornerstone Common Shares shall be paid on the third business day

immediately preceding the Closing Date. The Final Cornerstone Dividend shall not

include any dividend or distribution in satisfaction of the Dividend Deficiency

Amount (as defined herein). In the event that any prior or contemporaneous

dividends or distributions of Cornerstone are or have been treated as being in

satisfaction of the Dividend Deficiency Amount and Cornerstone would be required

to pay a Final Cornerstone Dividend, then an amount equal to the lesser of such

Final Cornerstone Dividend or the amount of prior or contemporaneous

distributions of Cornerstone that are or have been treated as being in

satisfaction of the Dividend Deficiency Amount shall be treated as a Closing

Deficiency Dividend Amount and not a Final Cornerstone Dividend. In the event

that Cornerstone is required to declare a Final Cornerstone Dividend with

respect to the Cornerstone Common Shares, Cornerstone shall cause Cornerstone NC

Operating Limited Partnership, a Virginia limited partnership ("Cornerstone

Partnership"), to simultaneously declare any related distribution (the "Final

Cornerstone Partnership Distribution") required under the Agreement of Limited

Partnership of Cornerstone Partnership, as amended (the "Cornerstone Partnership

Agreement"), the record date for which shall correspond to the record date for

the Final Cornerstone Dividend. Such distribution shall be payable on the third

business day immediately preceding the Closing Date.

 

                        (ii) If Cornerstone determines that it is necessary to

declare the Final Cornerstone Dividend, Cornerstone shall notify Colonial at

least 20 days prior to the date for the Cornerstone Shareholders Meeting, and

Colonial shall be entitled to declare a dividend per share payable to holders of

shares of Colonial Common Shares (in which event Colonial shall cause Colonial

Partnership to declare a distribution per unit payable to holders of Colonial OP

Units (as defined herein) if a distribution has been declared on the Colonial

Common Shares), the record dates for which shall correspond to the record date

for the Final Cornerstone Dividend, in an amount per Colonial Common Share (and

Colonial OP Unit) equal to the quotient obtained by dividing (A) the Final

Cornerstone Dividend paid by Cornerstone with respect to each Cornerstone Common

Share by (B) the Common Share Conversion Rate (the "Corresponding Colonial

Dividends and Distributions"). If, and to the extent, the terms of any series of

Colonial Preferred Shares (as defined herein) or Colonial Preferred OP Units (as

defined herein) require the payment of a dividend or distribution by reason of

the payment of the Corresponding Colonial Dividends and Distributions, Colonial

shall (and shall cause Colonial Partnership to) declare and pay any such

required dividends and distributions. Any dividends payable hereunder to holders

of Colonial Common Shares (and Colonial OP Units) shall be paid on the third

business day immediately preceding the Closing Date.

 

                                       10

<PAGE>

 

                  (e) No Further Ownership Rights in Cornerstone Common Shares.

All Merger Consideration paid upon the surrender of Certificates in accordance

with the terms of this Section 1.13 (including any cash paid pursuant to Section

1.13(g)) shall be deemed to have been paid in full satisfaction of all rights

pertaining to the Cornerstone Common Shares theretofore represented by such

Certificates; provided, however, that Cornerstone shall transfer to the Exchange

Agent cash sufficient to pay any dividends or make any other distributions with

a record date prior to the Effective Time which may have been declared or made

by Cornerstone on such Cornerstone Common Shares in accordance with the terms of

this Agreement or prior to the date of this Agreement and which remain unpaid at

the Effective Time and have not been paid prior to such surrender, and there

shall be no further registration of transfers on the stock transfer books of

Cornerstone of the Cornerstone Common Shares which were outstanding immediately

prior to the Effective Time. If, after the Effective Time, Certificates are

presented to Colonial for any reason, they shall be canceled and exchanged as

provided in this Section 1.13.

 

                  (f) No Liability. None of Cornerstone, Colonial, Colonial

Merger Sub or the Exchange Agent shall be liable to any Person in respect of any

Merger Consideration or dividends delivered to a public official pursuant to any

applicable abandoned property, escheat or similar law. Any portion of the

Exchange Fund delivered to the Exchange Agent pursuant to this Agreement that

remains unclaimed for 12 months after the Effective Time shall be redelivered by

the Exchange Agent to Colonial, upon demand, and any holders of Certificates who

have not theretofore complied with Section 1.13(c) shall thereafter look only to

Colonial for delivery of the Merger Consideration, any cash payable in lieu of

fractional shares pursuant to Section 1.13(g) and any unpaid dividends, subject

to applicable escheat and other similar laws.

 

                  (g) No Fractional Shares.

 

                        (i) No certificates, scrip or Depositary Receipts

representing fractional Colonial Common Shares or Colonial Series E Preferred

Depositary Shares shall be issued upon the surrender for exchange of

Certificates, and such fractional share interests will not entitle the owner

thereof to vote, to receive dividends or to any other rights of a shareholder of

Colonial.

 

                        (ii) No fractional Colonial Common Shares or Colonial

Series E Preferred Depositary Shares shall be issued pursuant to this Agreement.

In lieu of the issuance of any fractional Colonial Common Shares pursuant to

this Agreement, each holder of Cornerstone Common Shares shall be paid an amount

in cash (without interest), rounded to the nearest cent (with .5 of a cent

rounded up), determined by multiplying (A) the average closing price of one

Colonial Common Share on the NYSE on the five trading days immediately preceding

the Closing Date by (B) the fraction of a Colonial Common Share which such

holder would otherwise be entitled to receive under this Section 1.13. In lieu

of the issuance of any fractional Colonial Series E Preferred Depositary Shares

pursuant to this Agreement, each holder of Cornerstone Common Shares shall be

paid an amount in cash (without interest), rounded to the nearest cent (with .5

of a cent rounded up), determined by multiplying (A) $25.00 (i.e., 1/100th of

the liquidation preference of a Colonial Series E Preferred Share) by (B) the

fraction of a Colonial Series E Preferred Depositary Share which such holder

would otherwise be entitled to receive under this Section 1.13.

 

                                       11

<PAGE>

 

                  (h) Lost Certificates. If any Certificate shall have been

lost, stolen or destroyed, upon the making of an affidavit of that fact by the

Person claiming such Certificate to be lost, stolen or destroyed and, if

required by Colonial or the Exchange Agent, the posting by such Person of a bond

in such reasonable amount as Colonial or the Exchange Agent may direct (but

consistent with the practices Colonial applies to its own shareholders) as

indemnity against any claim that may be made against them with respect to such

Certificate, the Exchange Agent will issue in exchange for such lost, stolen or

destroyed Certificate the cash, Colonial Common Shares and/or Colonial Series E

Preferred Depositary Shares to which the holders thereof are entitled pursuant

to Section 1.8, any cash payable pursuant to Section 1.13(g) to which the

holders thereof are entitled and any dividends or other distributions to which

the holders thereof are entitled pursuant to Section 1.13(d).

 

            1.14 Post-Merger Reorganization. No later than one day following the

Closing Date, Colonial shall contribute to Colonial Partnership all of the

outstanding Colonial Merger Sub LLC Units in exchange for additional Colonial OP

Units (such transaction, the "Post-Merger Reorganization"). As a result of the

Post-Merger Reorganization, Colonial Merger Sub shall become a wholly owned

subsidiary of Colonial Partnership.

 

            1.15 Cornerstone LP Acquisition Transaction. Notwithstanding

anything to the contrary contained herein (but subject to the last sentence of

this Section 1.15), Colonial shall be permitted to enter into and consummate, or

cause any Colonial Subsidiary (as defined herein) to enter into and consummate,

any transaction or series of related transactions for the purpose of acquiring

the Cornerstone LP OP Units (as defined herein) from the holders thereof (any

such transaction, a "Cornerstone LP Acquisition Transaction"). If a Cornerstone

LP Acquisition Transaction is to be consummated concurrently with or following

the Closing Date, the terms and conditions (including consideration payable and

structure) of such Cornerstone LP Acquisition Transaction shall be determined by

Colonial in its sole discretion. If a Cornerstone LP Acquisition Transaction is

to be consummated prior to the Closing Date, the terms and conditions (including

consideration payable and structure) of any Cornerstone LP Acquisition

Transaction shall be determined by Colonial, subject to the reasonable approval

of Cornerstone. Cornerstone shall (a) use all reasonable efforts to take, or

cause to be taken, all reasonable actions and do, or cause to be done, all

things reasonably necessary to consummate and make effective any Cornerstone LP

Acquisition Transaction and (b) execute such consents, approvals and other

documents and instruments as shall be necessary under the Cornerstone

Partnership Agreement or otherwise to consummate and make effective any

Cornerstone LP Acquisition Transaction. The entering into or consummation of any

Cornerstone LP Acquisition Transaction, or any related action taken by Colonial,

shall not constitute a circumstance, event, occurrence, change or effect that

would constitute a Cornerstone Material Adverse Effect. Colonial shall not, and

shall not permit any Colonial Subsidiary (as defined herein) to, enter into or

consummate any Cornerstone LP Acquisition Transaction that could cause the

Merger not to qualify, for federal income tax purposes, as a reorganization

under Section 368(a)(1)(A) of the Code.

 

                                       12

<PAGE>

 

                                    ARTICLE 2

 

                  REPRESENTATIONS AND WARRANTIES OF CORNERSTONE

 

            Except as specifically set forth in the disclosure letter to this

Agreement delivered to Colonial prior to the execution hereof (the "Cornerstone

Disclosure Letter") (each section of which qualifies the correspondingly

numbered representation and warranty or covenant to the extent specified

therein, provided that any disclosure set forth with respect to any particular

section shall be deemed to be disclosed in reference to all other applicable

sections of this Agreement if the disclosure in respect of the particular

section is sufficient on its face without further inquiry reasonably to inform

the other parties to this Agreement of the information required to be disclosed

in respect of the other sections to avoid a breach under the representation and

warranty or covenant corresponding to such other sections), Cornerstone

represents and warrants to Colonial and Colonial Merger Sub as follows:

 

            2.1 Organization, Standing and Power. Cornerstone is a corporation

duly incorporated, validly existing and in good standing under the laws of

Virginia. Cornerstone has all requisite corporate power and authority to own,

operate, lease and encumber its properties and carry on its business as now

being conducted. The Amended and Restated Articles of Incorporation, as amended

and supplemented, of Cornerstone (the "Cornerstone Articles") are in effect, and

no dissolution, revocation or forfeiture proceedings regarding Cornerstone have

been commenced. Cornerstone is duly qualified or licensed to do business as a

foreign corporation and is in good standing in each jurisdiction in which the

nature of its business or the ownership or leasing of its properties makes such

qualification or licensing necessary, other than in such jurisdictions where the

failure to be so qualified or licensed, individually or in the aggregate, would

not reasonably be expected to have a Cornerstone Material Adverse Effect (as

defined herein). As used in this Agreement, a "Cornerstone Material Adverse

Effect" means any circumstance, event, occurrence, change or effect that is

materially adverse to the business, properties, assets (tangible or intangible),

financial condition or results of operations of Cornerstone, Cornerstone

Partnership and the Cornerstone Subsidiaries (as defined herein), taken as a

whole, other than effects, events or changes arising out of or resulting from

(a) changes in conditions in the United States or global economy or capital or

financial markets generally, including changes in interest or exchange rates,

(b) changes in general legal, regulatory, political, economic or business

conditions or changes in GAAP (as defined herein) that, in each case, generally

affect the real estate industry and that do not affect Cornerstone, Cornerstone

Partnership or the Cornerstone Subsidiaries materially disproportionately

relative to other participants in the real estate industry or (c) the

negotiation, execution, announcement or performance of this Agreement or the

consummation of the transactions contemplated by this Agreement. Cornerstone has

delivered to Colonial complete and correct copies of the Cornerstone Articles

and the Bylaws of Cornerstone (the "Cornerstone Bylaws"), in each case, as

amended or supplemented to the date of this Agreement.

 

            2.2 Cornerstone Subsidiaries.

 

                  (a) Schedule 2.2(a) to the Cornerstone Disclosure Letter sets

forth (i) each Subsidiary (as defined herein) of Cornerstone (the "Cornerstone

Subsidiaries") and each

 

                                       13

<PAGE>

  other Person in which Cornerstone owns, directly or indirectly through a

Cornerstone Subsidiary, 10% or more of the capital stock, voting securities or

other equity interests, (ii) the ownership interest therein of Cornerstone,

(iii) if not directly or indirectly wholly owned by Cornerstone, the identity

and ownership interest of each of the other owners of each Cornerstone

Subsidiary, (iv) each property owned by such Cornerstone Subsidiary and such

other Person and each other asset material to such Cornerstone Subsidiary or

such other Person, and (v) if not wholly owned by such Cornerstone Subsidiary or

such other Person, the identity and ownership interest of each of the other

owners of such property. As used in this Agreement, "Subsidiary" of any Person

(as defined herein) means any corporation, partnership, limited liability

company, joint venture, trust or other legal entity of which such Person owns

(either directly or through or together with another Subsidiary of such Person)

either (i) a general partner, managing member or other similar interest, or (ii)

50% (or in the case of Section 2.14(b) and Section 3.12(b), 10%) or more of the

capital stock or other equity interests of such corporation, partnership,

limited liability company, joint venture or other legal entity. As used herein,

"Person" means an individual, corporation, partnership, limited liability

company, joint venture, association, trust, unincorporated organization or other

entity. Schedule 2.2(a) of the Cornerstone Disclosure Letter sets forth a true

and complete list of the equity securities owned by Cornerstone or any

Cornerstone Subsidiary, in any corporation, partnership, limited liability

company, joint venture, trust or other legal entity that is not a Cornerstone

Subsidiary.

 

                  (b) Except as set forth in Schedule 2.2(b) to the Cornerstone

Disclosure Letter, (i) all of the outstanding shares of capital stock of each

Cornerstone Subsidiary that is a corporation have been duly authorized, validly

issued and are (A) fully paid and nonassessable and not subject to preemptive or

similar rights, and (B) in the case of capital stock owned by Cornerstone or a

Cornerstone Subsidiary, owned free and clear of all pledges, claims, liens,

charges, encumbrances and security interests of any kind or nature whatsoever

(collectively, "Liens") and (ii) all equity interests in each Cornerstone

Subsidiary that is a partnership, joint venture, limited liability company or

trust which are owned by Cornerstone or a Cornerstone Subsidiary are owned free

and clear of all Liens other than pledges, if any, contained in organizational

documents of such Cornerstone Subsidiary and given to secure performance

thereunder. Each Cornerstone Subsidiary that is a corporation is duly

incorporated, validly existing and in good standing under the laws of its

jurisdiction of incorporation and has the requisite corporate power and

authority to own, operate, lease and encumber its properties and carry on its

business as now being conducted, and each Cornerstone Subsidiary that is a

partnership, limited liability company or trust is duly organized, validly

existing and in good standing under the laws of its jurisdiction of organization

and has the requisite power and authority to own, operate, lease and encumber

its properties and carry on its business as now being conducted. Each

Cornerstone Subsidiary is duly qualified or licensed to do business and is in

good standing in each jurisdiction in which the nature of its business or the

ownership or leasing of its properties makes such qualification or licensing

necessary, other than in such jurisdictions where the failure to be so qualified

or licensed, individually or in the aggregate, would not reasonably be expected

to have a Cornerstone Material Adverse Effect. Complete and correct copies of

the articles of incorporation, bylaws, organization documents and partnership,

joint venture and operating agreements of each Cornerstone Subsidiary, as

amended to the date

 

                                       14

<PAGE>

 

of this Agreement, have been previously delivered or made available to Colonial.

No amendment has been made to the Cornerstone Partnership Agreement since March

11, 2004.

 

            2.3 Capital Structure.

 

                  (a) The authorized shares of capital stock of Cornerstone on

the date hereof consist of 125,000,000 shares of capital stock, of which

100,000,000 are classified as Common Shares (previously defined herein as

"Cornerstone Common Shares"), and 25,000,000 are classified as preferred shares,

without par value (the "Cornerstone Preferred Shares"). 12,700,000 of the

Cornerstone Preferred Shares have been designated as Series A Convertible

Preferred Shares ("Cornerstone Series A Preferred Shares") and 607,000 of the

Cornerstone Preferred Shares have been designated as Series B Convertible

Preferred Shares ("Cornerstone Series B Preferred Shares"). 56,323,817.1326

Cornerstone Common Shares are issued and outstanding on the date of this

Agreement. 127,380 Cornerstone Series A Preferred Shares are issued and

outstanding on the date of this Agreement. No Cornerstone Series B Preferred

Shares or other Cornerstone Preferred Shares are issued and outstanding on the

date of this Agreement.

 

                  (b) Set forth in Schedule 2.3(b) to the Cornerstone Disclosure

Letter is a true and complete list of the following: (i) each qualified or

nonqualified option to purchase Cornerstone Common Shares or Cornerstone OP

Units granted under either Cornerstone's 1992 Non-Employee Directors Stock

Option Plan, as amended, Cornerstone's 1992 Incentive Plan, as amended, or any

other formal or informal arrangement (collectively, the "Cornerstone Stock

Options"); and (ii) except for the Cornerstone Series A Preferred Shares and the

Cornerstone Preferred Units, all other warrants or other rights to acquire

Cornerstone's shares of capital stock, all stock appreciation rights, restricted

stock, dividend equivalents, deferred compensation accounts, performance awards,

restricted stock unit awards and other awards which are outstanding on the date

of this Agreement ("Cornerstone Share Rights"). Schedule 2.3(b) to the

Cornerstone Disclosure Letter sets forth for each Cornerstone Stock Option and

Cornerstone Share Right (other than Cornerstone Preferred Units and Cornerstone

Series A Preferred Shares) the name of the grantee, the date of the grant, the

type of grant, the status of the option grants as qualified or nonqualified

under Section 422 of the Code, the number of Cornerstone Common Shares or other

shares subject to each option or other award, the number and type of shares

subject to options or awards that are currently exercisable, the exercise price

per share, and the number and type of such shares subject to stock appreciation

rights. On the date of this Agreement, except as set forth in this Section 2.3

or as set forth in Schedule 2.3(b) to the Cornerstone Disclosure Letter, no

shares of Cornerstone were outstanding or reserved for issuance (except for the

Cornerstone Common Shares reserved for issuance upon redemption of Cornerstone

Preferred Units or conversion of Cornerstone Series A Preferred Shares).

 

                  (c) All outstanding Cornerstone Common Shares are duly

authorized, validly issued, fully paid and nonassessable and not subject to

preemptive or similar rights under applicable law or the Cornerstone Articles or

Cornerstone Bylaws, or any contract or instrument to which Cornerstone is a

party or by which it is bound. There are no bonds, debentures, notes or other

indebtedness of Cornerstone having the right to vote (or convertible into, or

exchangeable or exercisable for, securities having the right to vote) on any

matters on which shareholders of Cornerstone may vote.

 

                                       15

<PAGE>

 

                  (d) Except (i) as set forth in this Section 2.3 or in Schedule

2.3(b) to the Cornerstone Disclosure Letter, (ii) Cornerstone Preferred Units,

which may be converted into Cornerstone Common Shares at a rate of one

Cornerstone Common Share for each Cornerstone Preferred Unit or, under the

circumstances described in the Cornerstone Partnership Agreement, into cash or a

combination of cash and Cornerstone Common Shares, (iii) Cornerstone

Non-Preferred Units, which may be exchanged for Cornerstone Preferred Units at a

rate of one Cornerstone Preferred Unit for each Cornerstone Non-Preferred Unit

under the circumstances described in the Cornerstone Partnership Agreement, and

(iv) Cornerstone Common Shares issuable, and reserved for issuance, upon the

conversion of the Cornerstone Series A Preferred Shares, there are no

outstanding securities, options, warrants, calls, rights, commitments,

agreements, arrangements or undertakings of any kind to which Cornerstone or any

Cornerstone Subsidiary is a party or by which such entity is bound, obligating

Cornerstone or any Cornerstone Subsidiary to issue, deliver or sell, or cause to

be issued, delivered or sold, additional shares of capital stock, voting

securities or other ownership interests of Cornerstone or any Cornerstone

Subsidiary or obligating Cornerstone or any Cornerstone Subsidiary to issue,

grant, extend or enter into any such security, option, warrant, call, right,

commitment, agreement, arrangement or undertaking (other than to Cornerstone or

a Cornerstone Subsidiary).

 

                  (e) As of the date of this Agreement, 11,189,492 Partnership

Units (as defined in the Cornerstone Partnership Agreement) ("Cornerstone OP

Units"), consisting of 9,362,347 Cornerstone OP Units constituting General

Partner Interests (as defined in the Cornerstone Partnership Agreement)

("Cornerstone GP OP Units"), 1,807,145 Preferred Partnership Units (as defined

in the Cornerstone Partnership Agreement) (the "Cornerstone Preferred Units"),

and 20,000 Non-Preferred Partnership Units (as defined in the Cornerstone

Partnership Agreement) (the "Cornerstone Non-Preferred Units" and, together with

the Cornerstone Preferred Units, the "Cornerstone LP OP Units"), are validly

issued and outstanding, fully paid and nonassessable and not subject to

preemptive or similar rights under law or the Cornerstone Partnership Agreement,

or any contract or instrument to which Cornerstone or Cornerstone Partnership is

a party or by which either is bound. Schedule 2.3(e) to the Cornerstone

Disclosure Letter sets forth the name of each holder of Cornerstone OP Units and

the number and classification of Cornerstone OP Units owned by each such holder

as of the date of this Agreement. Except as provided in the Cornerstone

Partnership Agreement, the Cornerstone OP Units are not subject to any

restrictions. Except as set forth in Schedule 2.3(e) to the Cornerstone

Disclosure Letter, Cornerstone Partnership has not issued or granted and is not

a party to any outstanding commitments of any kind relating to, or any

agreements or understandings with respect to, the issuance or sale of interests

in Cornerstone Partnership, whether issued or unissued, or securities

convertible into or exchangeable or exercisable for interests in Cornerstone

Partnership.

 

                  (f) All dividends on Cornerstone Common Shares and Cornerstone

Preferred Shares and all distributions on Cornerstone OP Units, which have been

declared prior to the date of this Agreement, have been paid in full.

 

                  (g) Set forth on Schedule 2.3(g) to the Cornerstone Disclosure

Letter is a list of each registration rights agreement or other agreement

between Cornerstone and/or Cornerstone Partnership, on the one hand, and one or

more other parties, on the other hand,

 

                                       16

<PAGE>

 

which sets forth the rights of any such other party or parties to cause the

registration of any securities of Cornerstone and/or Cornerstone Partnership

pursuant to the Securities Act of 1933, as amended (the "Securities Act").

 

            2.4 Other Interests. Except for interests in the Cornerstone

Subsidiaries and the other entities as set forth in Schedule 2.2(a) or Schedule

2.4 to the Cornerstone Disclosure Letter (the "Cornerstone Other Interests"),

neither Cornerstone nor any Cornerstone Subsidiary owns directly or indirectly

any interest or investment (whether equity or debt) in any corporation,

partnership, joint venture, business, trust, limited liability company or other

entity (other than investments in short-term investment securities). With

respect to the Cornerstone Other Interests, Cornerstone or the applicable

Cornerstone Subsidiary is a partner, member or shareholder in good standing, and

owns such interests free and clear of all Liens. Neither Cornerstone nor any

Cornerstone Subsidiary is in material breach of any agreement, document or

contract which is of a material nature governing its rights in or to the

Cornerstone Other Interests, all of which agreements, documents and contracts

are (a) listed in Schedule 2.4 to the Cornerstone Disclosure Letter, (b)

unmodified except as described therein and (c) in full force and effect. To the

Knowledge of Cornerstone (as defined herein), the other parties to any such

agreement, document or contract which is of a material nature are not in

material breach of any of their respective obligations under such agreements,

documents or contracts.

 

            2.5 Authority; Noncontravention; Consents.

 

                  (a) Cornerstone has the requisite corporate power and

authority to enter into this Agreement and, subject to the requisite Cornerstone

shareholder approval of this Agreement and the Merger (the "Cornerstone

Shareholder Approval"), to consummate the transactions contemplated by this

Agreement to which Cornerstone is a party. The execution and delivery of this

Agreement by Cornerstone and the consummation by Cornerstone of the transactions

contemplated by this Agreement to which Cornerstone is a party have been duly

authorized by all necessary action on the part of Cornerstone, except for and

subject to the Cornerstone Shareholder Approval. This Agreement has been duly

executed and delivered by Cornerstone and constitutes a valid and binding

obligation of Cornerstone, enforceable against Cornerstone in accordance with

and subject to its terms, subject to applicable bankruptcy, insolvency,

moratorium or other similar laws relating to creditors' rights and general

principles of equity.

 

                  (b) Except as set forth in Schedule 2.5(b)(1) to the

Cornerstone Disclosure Letter, the execution and delivery of this Agreement by

Cornerstone do not, and, subject to receipt of the Cornerstone Shareholder

Approval, the consummation of the transactions contemplated by this Agreement to

which Cornerstone is a party and compliance by Cornerstone with the provisions

of this Agreement will not, conflict with, or result in any violation of, or

default (with or without notice or lapse of time, or both) under, or give rise

to a right of termination, cancellation or acceleration of any material

obligation or to loss of a material benefit under, or result in the creation of

any Lien upon any of the properties or assets of Cornerstone or any Cornerstone

Subsidiary under, (i) the Cornerstone Articles or Cornerstone Bylaws or the

comparable charter or organizational documents or partnership, operating, or

similar agreement (as the case may be) of any Cornerstone Subsidiary, each as

amended or

 

                                       17

<PAGE>

 

supplemented to the date of this Agreement, (ii) any loan or credit agreement,

note, bond, mortgage, indenture, merger or other acquisition agreement,

shareholder rights plan, reciprocal easement agreement, lease or other

agreement, instrument, permit, concession, franchise or license applicable to

Cornerstone or any Cornerstone Subsidiary or their respective properties or

assets or (iii) subject to the governmental filings and other matters referred

to in the following sentence, any judgment, order, decree, statute, law,

ordinance, rule or regulation (collectively, "Laws") applicable to Cornerstone

or any Cornerstone Subsidiary, or their respective properties or assets, other

than, in the case of clause (ii) or (iii), any such conflicts, violations,

defaults, rights, loss or Liens that individually or in the aggregate would not

reasonably be expected to (x) have a Cornerstone Material Adverse Effect or (y)

prevent or materially impair the ability of Cornerstone or Cornerstone

Partnership to perform any of its obligations hereunder or prevent or materially

threaten or impede the consummation of the transactions contemplated by this

Agreement. No consent, approval, order or authorization of, or registration,

declaration or filing with, any federal, state or local government or any court,

administrative or regulatory agency or commission or other governmental

authority or agency, domestic or foreign (a "Governmental Entity"), is required

by or with respect to Cornerstone or any Cornerstone Subsidiary in connection

with the execution and delivery of this Agreement by Cornerstone and Cornerstone

Partnership or the consummation by Cornerstone or any Cornerstone Subsidiary of

the transactions contemplated by this Agreement, except for (i) the filing with

the Securities and Exchange Commission (the "SEC") of (x) the Joint Proxy

Statement, and (y) such reports and filings under the Securities Act and the

Exchange Act (as defined herein) as may be required in connection with this

Agreement and the transactions contemplated by this Agreement, (ii) the filing

of the Delaware Certificate of Merger with the Delaware Secretary, (iii) the

filing of the Virginia Articles of Merger with the Virginia Commission and (iv)

such other consents, approvals, orders, authorizations, registrations,

declarations and filings (A) as are set forth in Schedule 2.5(b)(2) to the

Cornerstone Disclosure Letter, (B) as may be required under (w) the

Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR

Act"), (x) laws requiring transfer, recordation or gains tax filings, (y)

federal, state or local environmental laws or (z) the "blue sky" laws of various

states, to the extent applicable, or (C) which, if not obtained or made, would

not prevent or delay in any material respect the consummation of any of the

transactions contemplated by this Agreement or otherwise prevent Cornerstone

from performing its obligations under this Agreement in any material respect or

reasonably be expected to have, individually or in the aggregate, a Cornerstone

Material Adverse Effect.

 

            2.6 SEC Documents; Financial Statements; Undisclosed Liabilities.

Cornerstone has furnished or filed all reports, schedules, forms, statements and

other documents required to be furnished or filed with the SEC since December

31, 1997 through the date of this Agreement (the "Cornerstone SEC Documents").

All of the Cornerstone SEC Documents (other than preliminary material), as of

their respective filing dates, complied in all material respects with all

applicable requirements of the Securities Act and the Securities Exchange Act of

1934, as amended (the "Exchange Act"), and, in each case, the rules and

regulations promulgated thereunder applicable to such Cornerstone SEC Documents.

None of the Cornerstone SEC Documents at the time of filing contained, nor will

any report, schedule, form, statement or other document filed by Cornerstone

after the date hereof and prior to the Effective Time contain, any untrue

statement of a material fact or omitted to state any material fact required to

be stated

 

                                       18

<PAGE>

 

therein or necessary in order to make the statements therein, in light of the

circumstances under which they were made, not misleading. The consolidated

financial statements of Cornerstone included in the Cornerstone SEC Documents

complied, as to form in all material respects with applicable accounting

requirements and the published rules and regulations of the SEC with respect

thereto, have been prepared in accordance with generally accepted accounting

principles ("GAAP") (except, in the case of unaudited statements, as permitted

by the applicable rules and regulations of the SEC) applied on a consistent

basis during the periods involved (except as may be indicated in the notes

thereto) and fairly presented, in all material respects in accordance with the

applicable requirements of GAAP and the applicable rules and regulations of the

SEC, the consolidated financial position of Cornerstone and its Subsidiaries, as

the case may be, in each case, taken as a whole, as of the dates thereof and the

consolidated results of operations and cash flows for the periods then ended

(except, in the case of unaudited statements, as permitted by Form 10-Q under

the Exchange Act). Except as set forth in Schedule 2.6 to the Cornerstone

Disclosure Letter, Cornerstone has no Subsidiaries which are not consolidated

for accounting purposes. Except for liabilities and obligations set forth in the

Cornerstone SEC Documents or in Schedule 2.6 to the Cornerstone Disclosure

Letter, neither Cornerstone nor any Cornerstone Subsidiary has any liabilities

or obligations of any nature (whether accrued, absolute, contingent or

otherwise) required by GAAP to be set forth on a consolidated balance sheet of

Cornerstone or in the notes thereto and which, individually or in the aggregate,

would reasonably be expected to have a Cornerstone Material Adverse Effect.

 

            2.7 Absence of Certain Changes or Events. Except as disclosed in the

Cornerstone SEC Documents or in Schedule 2.7 to the Cornerstone Disclosure

Letter, since December 31, 2003 (the "Cornerstone Financial Statement Date"),

Cornerstone and its Subsidiaries have conducted their business only in the

ordinary course (taking into account prior practices, including the acquisition

and disposition of properties and issuance of securities) and there has not been

(a) any circumstance, event, occurrence, change or effect that has had a

Cornerstone Material Adverse Effect, nor has there been any circumstance, event,

occurrence, change or effect that with the passage of time would reasonably be

expected to result in a Cornerstone Material Adverse Effect, (b) except for

regular quarterly distributions not in excess of $0.20 per Cornerstone Common

Share or Cornerstone OP Unit (subject to changes pursuant to Section 5.10 and to

any Final Cornerstone Dividend payable pursuant to Section 1.13(d)(i)) and

$0.5938 per Cornerstone Series A Preferred Share (or, in each case, with respect

to the period commencing on the date hereof and ending on the Closing Date,

distributions as necessary to maintain REIT (as defined herein) status), in each

case with customary record and payment dates, any authorization, declaration,

setting aside or payment of any dividend or other distribution (whether in cash,

stock or property) with respect to the Cornerstone Common Shares, the

Cornerstone OP Units or the Cornerstone Series A Preferred Shares, (c) any

split, combination or reclassification of, or any issuance or the authorization

of, or any issuance of any other securities in respect of, in lieu of or in

substitution for, or giving the right to acquire by exchange or exercise, shares

of stock of Cornerstone or partnership interests in Cornerstone Partnership or

any issuance of an ownership interest in, any Cornerstone Subsidiary, (d) any

damage, destruction or loss, whether or not covered by insurance, that has had

or would reasonably be expected to have a Cornerstone Material Adverse Effect,

(e) any change made prior to the date of this Agreement in accounting methods,

principles or practices by Cornerstone or any of its

 

                                        19

<PAGE>

 

Subsidiaries or Cornerstone Partnership or any of its Subsidiaries materially

affecting its assets, liabilities or business, except insofar as may have been

disclosed in Cornerstone SEC Documents or required by a change in GAAP, or (f)

any amendment of any employment, consulting, severance, retention or any other

agreement between Cornerstone or any Cornerstone Subsidiary and any officer or

director of Cornerstone or any Cornerstone Subsidiary.

 

            2.8 Litigation. Except as disclosed in Schedule 2.8 to the

Cornerstone Disclosure Letter, and other than personal injury and other routine

tort litigation arising from the ordinary course of operations of Cornerstone

and the Cornerstone Subsidiaries (a) which are covered by adequate insurance or

(b) for which all material costs and liabilities arising therefrom are

reimbursable pursuant to common area maintenance or similar agreements, there is

no suit, action or proceeding pending (in which service of process has been

received by an employee of Cornerstone or a Cornerstone Subsidiary) or, to the

Knowledge of Cornerstone (as defined herein), threatened in writing against or

affecting Cornerstone or any Cornerstone Subsidiary that, individually or in the

aggregate, would reasonably be expected to (i) have a Cornerstone Material

Adverse Effect or (ii) prevent or materially impair the ability of Cornerstone

to perform any of its obligations hereunder or prevent or materially threaten or

impair the consummation of any of the transactions contemplated by this

Agreement, nor is there any judgment, decree, injunction, rule or order of any

court or Governmental Entity or arbitrator outstanding against Cornerstone or

any Cornerstone Subsidiary having, or which, insofar as reasonably can be

foreseen, in the future would have, any such effect. Notwithstanding the

foregoing, (y) Schedule 2.8 to the Cornerstone Disclosure Letter sets forth each

and every material uninsured claim, equal employment opportunity claim and claim

relating to sexual harassment and/or discrimination pending or, to the Knowledge

of Cornerstone, threatened as of the date hereof, in each case with a brief

summary of such claim or threatened claim, and (z) no claim has been made under

any directors' and officers' liability insurance policy maintained at any time

by Cornerstone or any of the Cornerstone Subsidiaries.

 

            2.9 Properties.

 

                  (a) Except as provided in Schedule 2.2 or Schedule 2.9(a) to

the Cornerstone Disclosure Letter, Cornerstone or the Cornerstone Subsidiary set

forth on Schedule 2.2 to the Cornerstone Disclosure Letter owns fee simple title

to each of the real properties identified in Schedule 2.2 to the Cornerstone

Disclosure Letter (the "Cornerstone Properties"), which are all of the real

estate properties owned or leased by them, in each case (except for the

Permitted Title Exceptions (as defined herein)) free and clear of liens,

mortgages or deeds of trust, claims against title, charges which are liens,

security interests or other encumbrances on title ("Encumbrances"). Except as

set forth in Schedule 2.2 to the Cornerstone Disclosure Letter, no other Person

has any ownership interest in any of the Cornerstone Properties and any such

ownership interest so scheduled does not materially detract from the value of

Cornerstone's or the Cornerstone Subsidiary's (as the case may be) interest in,

or materially interfere with the present use of, any of the Cornerstone

Properties subject thereto or affected thereby. Except as set forth in Schedule

2.9(a) to the Cornerstone Disclosure Letter, no Cornerstone Property is subject

to any restriction on the sale or other disposition thereof or on the financing

or release of financing thereon. No Cornerstone Property is subject to any

rights of way, agreements, laws, ordinances and regulations affecting building

use or occupancy, or

 

                                       20

<PAGE>

 

reservations of an interest in title (collectively, "Property Restrictions") or

Encumbrances, except for the following (collectively, the "Permitted Title

Exceptions") (i) Property Restrictions and Encumbrances set forth in Schedule

2.9(a) of the Cornerstone Disclosure Letter, (ii) Property Restrictions imposed

or promulgated by law or any governmental body or authority with respect to real

property, including zoning regulations, which do not materially adversely affect

the current use of such Cornerstone Property, (iii) Property Restrictions and

Encumbrances disclosed on existing title reports or policies or existing

surveys, in each case as previously made available to Colonial, or subsequently

granted by Cornerstone or the applicable Cornerstone Subsidiary (which

subsequently granted Property Restrictions and Encumbrances, in any event, do

not materially detract from the value of, or materially interfere with the

present use of, such Cornerstone Property) and (iv) liens for real estate taxes

not yet due and payable, mechanics', carriers', workmen's, repairmen's liens and

other Encumbrances and Property Restrictions, if any, which, individually or in

the aggregate, do not materially detract from the value of or materially

interfere with the present use of such Cornerstone Property. With respect to the

existing title reports or policies or existing surveys previously provided to

Colonial, there has been no material change with respect to any Cornerstone

Property that would affect title or survey matters from the date of the

information provided to the date hereof. Schedule 2.9(a) to the Cornerstone

Disclosure Letter lists each of the Cornerstone Properties which are under

development as of the date of this Agreement and describes the status of such

development as of the date hereof.

 

                  (b) Except as provided in Schedule 2.2 or Schedule 2.9(b) to

the Cornerstone Disclosure Letter, valid policies of title insurance have been

issued insuring Cornerstone's or the applicable Cornerstone Subsidiary's fee

simple title or leasehold estate, as the case may be, to the Cornerstone

Properties owned by it in amounts which are at least equal to the purchase price

therefor paid by Cornerstone or such Cornerstone Subsidiary, subject only to the

Permitted Title Exceptions. Such policies are, at the date hereof, in full force

and effect and no material claim has been made against any such policy.

 

                   (c) Except as provided in Schedule 2.9(c) to the Cornerstone

Disclosure Letter, Cornerstone has no Knowledge (i) that, any certificate,

permit or license from any governmental authority having jurisdiction over any

of the Cornerstone Properties or any agreement, easement or other right which is

necessary to permit the lawful use and operation of the buildings and

improvements on any of the Cornerstone Properties or which is necessary to

permit the lawful use and operation of all driveways, roads and other means of

egress and ingress to and from any of the Cornerstone Properties has not been

obtained and is not in full force and effect, or of any pending threat of

modification or cancellation of any of the same, which would have a material

adverse effect on such Cornerstone Property, (ii) of any written notice of any

violation of any federal, state or municipal law, ordinance, order, regulation

or requirement affecting any of the Cornerstone Properties issued by any

governmental authority which would have a material adverse effect on such

Cornerstone Property, (iii) of any existing structural defects relating to any

Cornerstone Property which would have a material adverse effect on such

Cornerstone Property, (iv) of any Cornerstone Property whose building systems

are not in working order so as to have a material adverse effect on such

Cornerstone Property, or (v) of any physical damage to any Cornerstone Property

which would have a material adverse effect on

 

                                        21

<PAGE>

 

such Cornerstone Property for which there is not insurance in effect covering

the cost of the restoration and the loss of rent.

 

                  (d) To the Knowledge of Cornerstone, there is no (and neither

Cornerstone nor any of the Cornerstone Subsidiaries has received any written or

published notice of) (i) any condemnation or rezoning proceedings pending or

threatened with respect to any of the Cornerstone Properties or (ii) any zoning,

building or similar law, code, ordinance, order or regulation that is or will be

violated by the continued maintenance, operation or use of any buildings or

other improvements on any of the Cornerstone Properties or by the continued

maintenance, operation or use of the parking areas which would have a material

adverse effect on such Cornerstone Property. Except as set forth in Schedule

2.9(d) to the Cornerstone Disclosure Letter, (i) to the Knowledge of

Cornerstone, all work required to be performed, payments required to be made and

actions required to be taken prior to the date hereof pursuant to any agreement

entered into with a governmental body or authority in connection with a site

approval, zoning reclassification or other similar action relating to any

Cornerstone Properties (e.g., Local Improvement District, Road Improvement

District, Environmental Mitigation (as defined herein)) has been performed, paid

or taken, as the case may be, and (ii) Cornerstone has no Knowledge of any

planned or proposed work, payments or actions that may be required after the

date hereof pursuant to such agreements, in each case except as set forth in

development or operating budgets for such Cornerstone Properties delivered to

Colonial and Colonial Partnership prior to the date hereof and other than any

work, payments or actions which would not reasonably be expected to have a

Cornerstone Material Adverse Effect. As used in this Agreement, "Environmental

Mitigation" means investigation, clean-up, removal action, remedial action,

restoration, repair, response action, corrective action, monitoring, sampling

and analysis, installation, reclamation, closure or post-closure in response to

any Release or actual or suspected environmental condition or Hazardous

Materials.

 

                  (e) The rent rolls previously provided by Cornerstone to

Colonial (the "Cornerstone Rent Roll") set forth a list of each Cornerstone

Space Lease (as defined herein) in effect as of the dates set forth therein. All

information set forth in the Cornerstone Rent Roll is true, correct and complete

with respect to each Cornerstone Property in all material respects as of the

date thereof. "Cornerstone Space Lease" means each lease or other right of

occupancy affecting or relating to a property in which Cornerstone or any

Cornerstone Subsidiary is the landlord, either pursuant to the terms of the

lease agreement or as successor to any prior landlord, but excluding any ground

lease. Except as set forth in a delinquency report made available to Colonial,

neither Cornerstone nor any Cornerstone Subsidiary, on the one hand, nor, to the

knowledge of Cornerstone or Cornerstone Partnership, any other party, on the

other hand, is in monetary default under any Cornerstone Space Lease as of the

date of delinquency report, except for such defaults that would not reasonably

be expected to materially adversely affect the applicable Cornerstone Property.

 

                  (f) Schedule 2.9(f) contains a true and complete list, by type

of insurance, carrier, coverages (including limits) and term, of all material

policies of casualty, liability and other types of insurance (except title

insurance) carried by Cornerstone or any Cornerstone Subsidiary. All such

policies are in full force and effect and neither Cornerstone nor any

Cornerstone Subsidiary has received from any insurance company notice of any

material

 

                                       22

<PAGE>

 

defects or deficiencies affecting the insurability of Cornerstone or any

Cornerstone Subsidiary or any of their respective assets thereunder.

 

            2.10 Environmental Matters.

 

            (a) "Environmental Law" shall mean all applicable Laws relating to

the environment, and including, without limitation, Laws relating to the use,

manufacturing, production, generation, installation, recycling, reuse, sale,

storage, handling, transport, treatment, release, threatened release or disposal

of any Hazardous Materials (including the Comprehensive Environmental Response,

Compensation, and Liability Act, as amended, 42 U.S.C. Sections 9601 et seq.

("CERCLA")). "Hazardous Materials" shall mean substances, wastes, radiation or

materials (whether solids, liquids or gases) (i) which are hazardous, toxic,

infectious, explosive, radioactive, carcinogenic, or mutagenic, (ii) which are

listed, regulated or defined under any Environmental Law, and shall include

"hazardous wastes," "hazardous substances," "hazardous materials," "pollutants,"

"contaminants," "chemical substances," "radioactive materials" or "solid

wastes," (iii) the presence of which on the property cause or threaten to cause

a nuisance pursuant to applicable statutory or common law upon the property or

to adjacent properties, (iv) which contain without limitation polychlorinated

biphenyls (PCBs), toxic mold, asbestos or asbestos-containing materials,

lead-based paints, urea-formaldehyde foam insulation, or petroleum or petroleum

products (including, without limitation, crude oil or any fraction thereof) or

(v) which pose a hazard to human health, safety, natural resources, industrial

hygiene, or the environment, or an impediment to working conditions. "Release"

shall mean any emission, spill, seepage, leak, escape, leaching, discharge,

injection, pumping, pouring, emptying, dumping, disposal, migration, or release

of Hazardous Materials into or upon the environment, including the air, soil,

improvements, surface water, groundwater, the sewer, septic system, storm drain,

publicly owned treatment works, or waste treatment, storage, or disposal

systems.

 

                  (b)    (i) Except as set forth on Schedule 2.10(b) to the

Cornerstone Disclosure Letter, there have been no Releases of Hazardous

Materials (and, to the Knowledge of Cornerstone, there has been no presence of

Hazardous Materials) at, on, under or from (A) any real property owned, operated

or leased by Cornerstone or any Cornerstone Subsidiary or (B) any real property

formerly owned, operated or leased by Cornerstone or any Cornerstone Subsidiary

(the "Former Cornerstone Properties") during the period of such ownership,

operation or tenancy which would, individually or in the aggregate, reasonably

be expected to have a Cornerstone Material Adverse Effect.

 

                        (ii) Cornerstone and the Cornerstone Subsidiaries have

not failed to comply with any Environmental Law, and neither Cornerstone nor any

of the Cornerstone Subsidiaries has any liability under the Environmental Laws,

except to the extent that any such failure to comply or any such liability,

individually or in the aggregate, would not reasonably be expected to have a

Cornerstone Material Adverse Effect.

 

                        (iii) Cornerstone and the Cornerstone Subsidiaries have

been duly issued and maintain all permits, licenses, certificates and approvals

required under any Environmental Law (collectively, the "Environmental Permits")

necessary to operate their businesses as currently operated except where the

failure to obtain and maintain such

 

                                       23

<PAGE>

 

Environmental Permits would not, individually or in the aggregate, reasonably be

expected to have a Cornerstone Material Adverse Effect. Cornerstone and the

Cornerstone Subsidiaries have timely filed applications for all Environmental

Permits except where the failure to so timely file such applications would not,

individually or in the aggregate, reasonably be expected to have a Cornerstone

Material Adverse Effect. All of the Environmental Permits maintained by

Cornerstone and the Cornerstone Subsidiaries are listed on Schedule 2.10.

 

                        (iv) Cornerstone and the Cornerstone Subsidiaries have

not arranged, by contract, agreement, or otherwise, for the transportation,

disposal or treatment of Hazardous Materials at any location such that they are

or could be liable for Environmental Mitigation of such location pursuant to

Environmental Laws, except as would not, individually or in the aggregate,

reasonably be expected to have a Cornerstone Material Adverse Effect.

 

                        (v) There are no facts, circumstances or conditions

existing, initiated or occurring prior to the Effective Time, which will result

in liability under Environmental Laws to Cornerstone or the Cornerstone

Subsidiaries, except as would not, individually or in the aggregate, reasonably

be expected to have a Cornerstone Material Adverse Effect.

 

                        (vi) Except as set forth on Schedule 2.10 to the

Cornerstone Disclosure Letter, neither Cornerstone, nor any Cornerstone

Subsidiary has installed any underground storage tanks or associated piping used

currently or in the past for the management of Hazardous Materials on any real

property owned, operated or leased by Cornerstone or any Cornerstone

Subsidiaries, and to the Knowledge of Cornerstone, no such underground storage

tanks are located on any real property owned, operated or leased by Cornerstone

or any Cornerstone Subsidiary. Except as set forth on Schedule 2.10 to the

Cornerstone Disclosure Letter, to the Knowledge of Cornerstone, neither

Cornerstone, nor any Cornerstone Subsidiary is using or has used any real

property owned, operated or leased by Cornerstone or any Cornerstone Subsidiary

as a dump or landfill nor does any real property owned, operated or leased by

Cornerstone or any Cornerstone Subsidiary consist of or contain filled in land,

wetlands, asbestos-containing materials, PCBs or toxic mold.

 

                  (c) Cornerstone has previously delivered or made available to

Colonial complete copies of all material information, documents and reports,

including, without limitation, environmental investigations and testing or

analysis, which relate to compliance with Environmental Laws by Cornerstone and

the Cornerstone Subsidiaries or to the past or current environmental condition

of any of the real property owned, operated or leased by Cornerstone or any

Cornerstone Subsidiary or Former Cornerstone Properties that are in the

possession or control of any of Cornerstone and the Cornerstone Subsidiaries.

 

            2.11 Related Party Transactions. Set forth in Schedule 2.11 to the

Cornerstone Disclosure Letter or in the Cornerstone SEC Documents is a list of

all arrangements, agreements and contracts entered into by Cornerstone or any

Cornerstone Subsidiary which are in effect and which are with (a) any investment

banker or financial advisor or (b) any Person who is an officer, director or

Affiliate (as defined herein) of Cornerstone or any Cornerstone Subsidiary, any

relative of any of the foregoing or any entity of which any of the foregoing is

an Affiliate and, in

 

                                       24

<PAGE>

 

the case of arrangements, agreement and contracts referred to in this clause

(b), are required to be described in Item 404 of Regulation S-K under the

Securities Act. Such documents, copies of all of which have previously been

delivered or made available to Colonial, are listed in Schedule 2.11 to the

Cornerstone Disclosure Letter. As used in this Agreement, the term "Affiliate"

shall have the same meaning as such term is defined in Rule 405 promulgated

under the Securities Act.

 

            2.12 Employee Benefits. As used herein, the term "Employee Plan"

includes any pension, retirement, savings, disability, medical, dental, health,

fringe benefit, life, death benefit, group insurance, profit sharing, deferred

compensation, stock option, bonus, incentive, vacation pay, tuition

reimbursement, severance pay, or other employee benefit plan, trust, agreement,

contract, agreement, policy or commitment (including, without limitation, any

pension plan, as defined in Section 3(2) of the Employee Retirement Income

Security Act of 1974, as amended, and the rules and regulations promulgated

thereunder ("ERISA") ("Pension Plan"), and any welfare plan as defined in

Section 3(1) of ERISA ("Welfare Plan")), whether any of the foregoing is funded,

insured or self-funded, written or oral, (i) sponsored or maintained by

Cornerstone or any entity that, together with Cornerstone, is required to be

treated as a single employer under Section 414(b), (c), (m) or (o) of the Code

(each, a "Controlled Group Member") and covering any Controlled Group Member's

active or former employees (or their beneficiaries), (ii) to which any

Controlled Group Member is a party or by which any Controlled Group Member (or

any of the rights, properties or assets thereof) is bound or (iii) with respect

to which any current Controlled Group Member may otherwise have any material

liability (whether or not such Controlled Group Member still maintains such

Employee Plan). Each Employee Plan is listed on Schedule 2.12 to the Cornerstone

Disclosure Letter. Except as disclosed in Schedule 2.12 to the Cornerstone

Disclosure Letter, with respect to the Employee Plans:

 

                  (a) No Controlled Group Member has any continuing liability

under any Welfare Plan which provides for continuing benefits or coverage for

any participant or any beneficiary of a participant after such participant's

termination of employment, except as may be required by Section 4980B of the

Code or Section 601 (et seq.) of ERISA, or under any applicable state law, and

at the expense of the participant or the beneficiary of the participant.

 

                  (b) Each Employee Plan complies in all material respects with

the applicable requirements of ERISA, the Code and any other applicable law

governing such Employee Plan, and, to the Knowledge of Cornerstone, each

Employee Plan has at all times been properly administered in all material

respects in accordance with all such requirements of law, and in accordance with

its terms and the terms of any applicable collective bargaining agreement to the

extent consistent with all such requirements of law. Each Pension Plan which is

intended to be qualified is qualified under Section 401(a) of the Code, has

received a favorable determination letter from the IRS stating that such plan

meets the requirements of Section 401(a) of the Code and, to the Knowledge of

Cornerstone, no event has occurred which would jeopardize the qualified status

of any such plan or the tax exempt status of any such trust under Section 401(a)

and Section 501(a) of the Code, respectively. No lawsuits, claims (other than

routine claims for benefits) or complaints to, or by, any Person or Governmental

Entity have been filed, are pending or, to the Knowledge of Cornerstone,

threatened with respect to any Employee Plan and, to the Knowledge of

Cornerstone, there is no fact or contemplated event which would

 

                                       25

<PAGE>

 

be expected to give rise to any such lawsuit, claim (other than routine claims

for benefits) or complaint with respect to any Employee Plan. Without limiting

the foregoing, the following are true with respect to each Employee Plan:

 

                        (i) all Controlled Group Members have complied in all

            material respects with the applicable reporting and disclosure

            requirements of ERISA, the Code, or both, with respect to each

            Employee Plan and no Controlled Group Member has incurred any

            material liability in connection with such reporting or disclosure;

 

                        (ii) all contributions and payments with respect to

            Employee Plans that are required to be made by a Controlled Group

            Member with respect to periods ending on or before the Closing Date

            (including periods from the first day of the current plan or policy

            year to the Closing Date) have been, or will be, made or accrued

            before the Closing Date in accordance with the appropriate plan

            document, actuarial report, collective bargaining agreements or

            insurance contracts or arrangements or as otherwise required by

            ERISA or the Code; and

 

                        (iii) with respect to each such Employee Plan, to the

            extent applicable, Cornerstone has delivered to or has made

            available to Colonial true and complete copies of (A) current plan

            documents and any amendments thereto, or any and all other documents

            that establish the existence of the plan, trust, arrangement,

             contract, policy or commitment and all amendments thereto, (B) the

            most recent summary plan description and the subsequent summaries of

            material modifications, (C) all rulings, opinions or advice issued

            by the U.S. Department of Labor, the IRS or the Pension Benefit

            Guaranty Corporation, (D) the most recent determination letter, if

            any, received from the IRS, (E) the three most recent Form 5500

            Annual Reports (and all schedules and reports relating thereto) and

            actuarial reports and (F) all related trust agreements, insurance

            contracts or other funding agreements that implement each such

            Employee Plan.

 

                  (c) With respect to each Employee Plan, to the Knowledge of

Cornerstone, there has not occurred, and no Person is contractually bound to

enter into, (i) any "prohibited transaction" within the meaning of Section

4975(c) of the Code or Section 406 of ERISA, which transaction is not exempt

under Section 4975(d) of the Code or Section 408 of ERISA or (ii) any breach of

responsibilities or obligations imposed upon fiduciaries under Title I of ERISA

and which in the case of either (i) or (ii) could subject Cornerstone or any

Controlled Group Member to material liability.

 

                  (d) No Controlled Group Member has ever maintained or

participated in been otherwise obligated to contribute to (i) any Employee Plan

subject to Code Section 412 or Title IV of ERISA or (ii) any "multiemployer

plan", as such term is defined in ERISA Section 3(37). No Employee Plan subject

to Code Section 412 or Title IV of ERISA has been terminated.

 

                                       26

<PAGE>

 

                  (e) With respect to each Pension Plan maintained by any

Controlled Group Member, such plan provides the plan sponsor the authority to

amend or terminate the Plan at any time, subject to applicable requirements of

ERISA and the Code.

 

                  (f) No Employee Plan is (i) an "employee stock ownership

plan", as defined by Code Section 4975(e)(7), or otherwise invests in employer

securities, as defined by Code Section 409(l) or (ii) a "voluntary employees'

beneficiary association", as defined by Code Section 501(c)(9).

 

                  (g) Except as set forth on Schedule 2.12(g) to the Cornerstone

Disclosure Letter, the consummation of the transaction contemplated by this

Agreement will not (i) result in any material payment becoming due pursuant to

an Employee Plan to any current or former employee or other service provider of

any Controlled Group Member or (ii) accelerate the vesting or timing of the

payment of material benefits or compensation payable pursuant to any Employee

Plan to any current or former employee or other service provider of any

Controlled Group Member.

 

                  (h) Except as set forth on Schedule 2.12(h) to the Cornerstone

Disclosure Letter, no amount required to be paid or payable to or with respect

to any employee or other service provider of any Controlled Group Member in

connection with the transaction contemplated by this Agreement will be an

"excess parachute payment" as defined by Code Section 280G.

 

            2.13 Employee Policies. The employee handbooks of Cornerstone and

the Cornerstone Subsidiaries currently in effect have been delivered to Colonial

and fairly and accurately summarize in all material respects the employee

policies, vacation policies and payroll policies.

 

            2.14 Taxes.

 

                  (a) Each of Cornerstone and the Cornerstone Subsidiaries (i)

has filed all Tax returns and reports required to be filed by it (after giving

effect to any filing extension properly granted by a Governmental Entity having

authority to do so) and all such returns and reports are accurate and complete

in all material respects, (ii) has paid (or Cornerstone has paid on its behalf)

all Taxes (as defined herein) shown on such returns and reports as required to

be paid by it, and (iii) has complied in all material respects with all

applicable laws, rules and regulations relating to the payment and withholding

of Taxes (including, without limitation, withholding of Taxes pursuant to

Sections 1441, 1442, 1445, 1446, 3121, 3402 and 3406 of the Code) and has,

within the time period prescribed by law, withheld and paid over to the proper

governmental entities all amounts required to be so withheld and paid over under

applicable laws and regulations, except, with respect to all of the foregoing,

where the failure to file such tax returns and reports or failure to pay such

Taxes or failure to comply with such withholding requirements would not

reasonably be expected to have a Cornerstone Material Adverse Effect. The most

recent audited financial statements contained in the Cornerstone SEC Documents

reflect an adequate reserve for all material Taxes payable by Cornerstone and

the Cornerstone Subsidiaries for all taxable periods and portions thereof

through the date of such financial

 

                                       27

<PAGE>

 

statements. Since the Cornerstone Financial Statement Date, Cornerstone has

incurred no liability for Taxes under Sections 857(b), 860(c) or 4981 of the

Code, including without limitation any Tax arising from a prohibited transaction

described in Section 857(b)(6) of the Code, and neither Cornerstone nor any

Cornerstone Subsidiary has incurred any material liability for Taxes other than

in the ordinary course of business. No event has occurred, and no condition or

circumstance exists, which presents a material risk that any material Tax

described in the preceding sentences will be imposed upon Cornerstone or any

Cornerstone Subsidiary. Neither Cornerstone nor any Cornerstone Subsidiary is

the subject of any audit, examination, or other proceeding in respect of federal

income Taxes, and to Cornerstone's Knowledge, no audit, examination or other

proceeding in respect of federal income Taxes involving Cornerstone or any

Cornerstone Subsidiary is being considered by any Tax authority. To the

Knowledge of Cornerstone, no deficiencies for any Taxes have been proposed,

asserted or assessed against Cornerstone or any Cornerstone Subsidiary, and no

requests for waivers of the time to assess any such Taxes are pending. As used

in this Agreement, "Taxes" shall include all taxes, charges, fees, levies and

other assessments, including, without limitation, income, gross receipts,

excise, property, sales, withholding (including, without limitation, dividend

withholding and withholding required pursuant to Sections 1445 and 1446 of the

Code), social security, occupation, use, service, license, payroll, franchise,

transfer and recording taxes, fees and charges, including estimated taxes,

imposed by the United States or any taxing authority (domestic or foreign),

whether computed on a separate, consolidated, unitary, combined or any other

basis, and any interest, fines, penalties or additional amounts attributable to,

or imposed upon, or with respect to any such taxes, charges, fees, levies or

other assessments.

 

                  (b) Cornerstone (i) for all taxable years for which the

Internal Revenue Service could assert a tax liability, has been subject to

taxation as a real estate investment trust (a "REIT") within the meaning of

Section 856 of the Code and has satisfied all requirements to qualify as a REIT

for all such years, (ii) has operated since December 31, 2003 to the date of

this representation, and intends to continue to operate, in such a manner as to

qualify as a REIT for the taxable year ending on the earlier of December 31,

2004 or the Closing Date and, if later, for the taxable year of Cornerstone

ending on the Closing Date, and (iii) has not taken or omitted to take any

action which would reasonably be expected to result in a challenge to its status

as a REIT and, to Cornerstone's Knowledge, no such challenge is pending or

threatened. Except as set forth on Schedule 2.14(b), each Cornerstone Subsidiary

which is a partnership, joint venture or limited liability company has been

since the later of its formation or the acquisition by Cornerstone of a direct

or indirect interest therein, and continues to be treated for federal income tax

purposes as a partnership or as an entity that is disregarded for federal income

tax purposes and not as a corporation or an association taxable as a

corporation. In addition, each Cornerstone Subsidiary which is a partnership,

joint venture or limited liability company has not since the later of its

formation or the acquisition by Cornerstone of a direct or indirect interest

therein, owned any assets (including, without limitation, securities) that would

cause Cornerstone to violate Section 856(c)(4) of the Code. Cornerstone

Partnership is not a publicly traded partnership within the meaning of Section

7704(b) of the Code that is taxable as a corporation pursuant to Section 7704(a)

of the Code. For all taxable years for which the Internal Revenue Service either

could assert a Tax liability or could assert that Cornerstone failed to qualify

as a REIT, each Cornerstone Subsidiary which is a corporation (for federal

income tax purposes) has

 

                                       28

<PAGE>

 

been either, at all times during which Cornerstone has owned an interest in such

corporation representing more than 10% of the value of the outstanding

securities of such corporation or more than 10% of the outstanding voting

securities of such corporation, a qualified REIT subsidiary under Section 856(i)

of the Code, a taxable REIT subsidiary of Cornerstone under Section 856(l) of

the Code, or a corporation which qualifies under the transitional rules set

forth in Section 546(b) of the Tax Relief Extension Act of 1999. Each

Cornerstone Subsidiary that is a "qualified REIT subsidiary" under Section

856(i) of the Code is set forth on Schedule 5.13 to the Cornerstone Disclosure

Letter. Neither Cornerstone nor any Cornerstone Subsidiary holds any asset the

disposition of which would be subject to rules similar to Section 1374 of the

Code as a result of an election under IRS Notice 88-19, Temporary Treas. Reg.

Section 1.337(d)-5T, Treas. Reg. Section 1.337(d)-5, Treas. Reg. Section

1.337(d)-6 or the application of Treas. Reg. Section 1.337(d)-7 except as set

forth on Schedule 2.14(b).

 

                  (c) To Cornerstone's knowledge, as of the date hereof,

Cornerstone is a "domestically-controlled REIT" within the meaning of Section

897(h)(4)(B) of the Code.

 

            2.15 No Payments to Employees, Officers or Directors. Schedule 2.15

to the Cornerstone Disclosure Letter contains a true and complete list of all

arrangements, agreements or plans pursuant to which cash and non-cash payments

which will become payable (and the maximum aggregate amount which may be payable

thereunder) to each employee, officer or director of Cornerstone or any

Cornerstone Subsidiary as a result of the Merger or a termination of service

subsequent to the consummation of the Merger. Except as described in Schedule

2.15 to the Cornerstone Disclosure Letter, or as otherwise provided for in this

Agreement, there is no employment or severance contract, or other agreement

requiring payments, cancellation of indebtedness or other obligations or lapse

of vesting requirements or other restrictions to be made on a change of control

or otherwise as a result of the consummation of any of the transactions

contemplated by this Agreement or as a result of a termination of service

subsequent to the consummation of any of the transactions contemplated by this

Agreement, with respect to any employee, officer or director of Cornerstone or

any Cornerstone Subsidiary. Except as set forth on Schedule 2.15 to the

Cornerstone Disclosure Letter, there is no agreement or arrangement with any

employee, officer or other service provider under which Cornerstone or any

Cornerstone Subsidiary has agreed to pay any tax that might be owed under

Section 4999 of the Code with respect to payments to such individuals.

 

            2.16 Broker; Schedule of Fees and Expenses. No broker, investment

banker, financial advisor or other Person, other than Wachovia Securities, the

fees and expenses of which are described in the engagement letter dated June 16,

2004, between Wachovia Securities and Cornerstone, a true, correct and complete

copy of which has previously been given to Colonial, is entitled to any

broker's, finder's, financial advisor's or other similar fee or commission in

connection with the transactions contemplated hereby based upon arrangements

made by or on behalf of Cornerstone or any Cornerstone Subsidiary.

 

            2.17 Compliance with Laws. Neither Cornerstone nor any Cornerstone

Subsidiary has violated or failed to comply with any statute, law, ordinance,

regulation, rule, judgment, decree or order of any Governmental Entity

applicable to its business, properties or

 

                                       29

<PAGE>

 

operations, except to the extent that such violation or failure would not

reasonably be expected to have a Cornerstone Material Adverse Effect.

 

            2.18 Contracts; Debt Instruments.

 

                  (a) Neither Cornerstone nor any Cornerstone Subsidiary has

received a written notice that it is in violation of or in default under (nor to

the Knowledge of Cornerstone does there exist any condition which upon the

passage of time or the giving of notice or both would cause such a violation of

or default under) any material loan or credit agreement, note, bond, mortgage,

indenture, lease, permit, concession, franchise, license or any other material

contract, agreement, arrangement or understanding, to which it is a party or by

which it or any of its properties or assets is bound, nor to the Knowledge of

Cornerstone does such a violation or default exist, except to the extent that

such violation or default, individually or in the aggregate, would not

reasonably be expected to have a Cornerstone Material Adverse Effect.

 

                  (b) Schedule 2.18(b) to the Cornerstone Disclosure Letter sets

forth a list of each material loan or credit agreement, note, bond, mortgage,

indenture and any other agreement or instrument pursuant to which any

Indebtedness (as defined herein) in excess of $1,000,000 of Cornerstone or any

Cornerstone Subsidiary, other than Indebtedness payable to Cornerstone or a

Cornerstone Subsidiary, is outstanding or may be incurred. For purposes of this

Section 2.18, "Indebtedness" shall mean (i) indebtedness for borrowed money,

whether secured or unsecured, (ii) obligations under conditional sale or other

title retention agreements relating to property purchased by such Person, (iii)

capitalized lease obligations, (iv) obligations under interest rate cap, swap,

collar or similar transaction or currency hedging transactions (valued at the

termination value thereof) and (v) guarantees of any such indebtedness of any

other Person.

 

                  (c) To the extent not set forth in response to the

requirements of Section 2.18(b), Schedule 2.18(c) to the Cornerstone Disclosure

Letter sets forth each interest rate cap, interest rate collar, interest rate

swap, currency hedging transaction, and any other agreement relating to a

similar transaction to which Cornerstone or any Cornerstone Subsidiary is a

party or an obligor with respect thereto and which has a notional amount in

excess of $1,000,000.

 

                  (d) [Intentionally omitted.]

 

                  (e) Except as set forth on Schedule 2.18(e) of the Cornerstone

Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary is a party

to any agreement relating to the management of any Cornerstone Property by any

Person other than Cornerstone or a Cornerstone Subsidiary.

 

                   (f) Except as set forth on Schedule 2.18(f) to the Cornerstone

Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary is a party

to any agreement pursuant to which Cornerstone or any Cornerstone Subsidiary

manages or provides services with respect to any real properties other than

Cornerstone Properties.

 

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                  (g) Cornerstone has delivered to Colonial prior to the date of

this Agreement a true and complete capital budget for the year 2004 relating to

budgeted capital improvements and development. Schedule 2.18(g) to the

Cornerstone Disclosure Letter lists all material agreements entered into by

Cornerstone or any of the Cornerstone Subsidiaries relating to the development

or construction of, or additions or expansions to, any Cornerstone Properties

(or any properties with respect to which Cornerstone or any Cornerstone

Subsidiary has executed as of the date of this Agreement a purchase agreement or

other similar agreement) which are currently in effect and under which

Cornerstone or any of the Cornerstone Subsidiaries currently has, or expects to

incur, an obligation in excess of $250,000 per agreement. True, correct and

complete copies of such agreements have previously been delivered or made

available to Colonial.

 

                  (h) Schedule 2.18(h) to the Cornerstone Disclosure Letter

lists all agreements entered into by Cornerstone or any Cornerstone Subsidiary

providing for the sale of, or option to sell, any Cornerstone Properties or the

purchase of, or option to purchase, by Cornerstone or any Cornerstone

Subsidiary, on the one hand, or the other party thereto, on the other hand, any

real estate not yet consummated as of the date hereof.

 

                  (i) Except as set forth in Schedule 2.18(i) to the Cornerstone

Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary has any

material continuing contractual liability (A) for indemnification or otherwise

under any agreement relating to the sale of real estate previously owned,

whether directly or indirectly by Cornerstone, or any Cornerstone Subsidiary or

(B) to pay any additional purchase price for any of the Cornerstone Properties.

 

                  (j) Except as set forth in Schedule 2.18(j) to the Cornerstone

Disclosure Letter, neither Cornerstone nor any Cornerstone Subsidiary has

entered into or is subject, directly or indirectly, to any Tax Protection

Agreements. As used herein, a "Tax Protection Agreement" is an agreement, oral

or written, entered into between (x) either Cornerstone or a Cornerstone

Subsidiary and (y) a Person other than Cornerstone or a Cornerstone Subsidiary

and (A) that has as one of its purposes to permit a Person to take the position

that such Person could defer federal taxable income that otherwise might have

been recognized upon a transfer of property to the Cornerstone Partnership or

any other Cornerstone Subsidiary that is treated as a partnership for federal

income tax purposes, and that (i) prohibits or restricts in any manner the

disposition of any assets of Cornerstone or any Cornerstone Subsidiary, (ii)

requires that Cornerstone or any Cornerstone Subsidiary maintain, put in place,

or replace, indebtedness, whether or not secured by one or more of the

Cornerstone Properties, or (iii) requires that Cornerstone or any Cornerstone

Subsidiary offer to any Person at any time the opportunity to guarantee or

otherwise assume, directly or indirectly (including, without limitation, through

a "deficit restoration obligation," guarantee (including, without limitation, a

"bottom" guarantee), indemnification agreement or other similar arrangement),

the risk of loss for federal income tax purposes for indebtedness or other

liabilities of Cornerstone or any Cornerstone Subsidiary, (B) that specifies or

relates to a method of taking into account book-tax disparities under Section

704(c) of the Code with respect to one or more assets of Cornerstone or a

Cornerstone Subsidiary, or (C) that requires a particular method for allocating

one or more liabilities of Cornerstone or any Cornerstone Subsidiary under

Section 752 of the Code. Neither

 

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Cornerstone nor any Cornerstone Subsidiary is in violation of or in default

under any Tax Protection Agreement (or similar agreement concerning action that

would affect the tax liability of any person) that it is or has been a party to,

and neither Cornerstone nor any Cornerstone Subsidiary has any outstanding tax

liability to any person under any such agreement.

 

                  (k) Except as set forth in Schedule 2.18(k) to the Cornerstone

Disclosure Letter and for the Confidentiality Agreement, dated July 15, 2004

between Cornerstone and Colonial (the "Confidentiality Agreement"), neither

Cornerstone nor any Cornerstone Subsidiary is a party to any (A) standstill,

lock-up, financial advisory or voting agreement or (B) confidentiality agreement

related to any of the types of transactions described in clauses (A), (B) or (C)

of Section 4.3(a)(i) (but substituting 50% for each instance where 10% appears).

 

                  (l) Cornerstone does not have any shareholder rights plan or

similar arrangement in effect.

 

            2.19 Opinion of Financial Advisor. Cornerstone has received the

opinion of Wachovia Securities, Cornerstone's financial advisor, to the effect

that, as of the date thereof, the aggregate Merger Consideration to be received

by the holders of Cornerstone Common Shares pursuant to the Merger is fair to

such holders from a financial point of view. Within 15 days after the date

hereof, Cornerstone will have received the written opinion of Wachovia

Securities to such effect.

 

            2.20 State Takeover Statutes. Cornerstone has taken all action

necessary to exempt the transactions contemplated by this Agreement between

Colonial and Cornerstone and its Affiliates from the operation of any "fair

price," "moratorium," "control share acquisition" or any other anti-takeover

statute or similar statute enacted under the laws of the state or federal laws

of the United States or similar statute or regulation (a "Takeover Statute").

 

            2.21 Investment Company Act of 1940. Neither Cornerstone nor any

Cornerstone Subsidiary is required to be registered under the Investment Company

Act of 1940, as amended (the "1940 Act").

 

            2.22 Definition of "Knowledge of Cornerstone". As used in this

Agreement, the phrase "Knowledge of Cornerstone" (or words of similar import)

means the actual knowledge of those individuals identified in Schedule 2.22 to

the Cornerstone Disclosure Letter.

 

            2.23 Required Shareholder Approval. Assuming the redemption of the

Cornerstone Series A Preferred Shares as provided for in Section 5.15, the

affirmative vote of the holders of at least two-thirds of the outstanding

Cornerstone Common Shares is the only vote or approval of the holders of any

class or series of Cornerstone capital shares necessary or required under

applicable law to approve the Merger and this Agreement.

 

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                                    ARTICLE 3

 

                   REPRESENTATIONS AND WARRANTIES OF COLONIAL

                             AND COLONIAL MERGER SUB

 

            Except as specifically set forth in the disclosure letter to this

Agreement delivered to Cornerstone prior to the execution hereof (the "Colonial

Disclosure Letter") (each section of which qualifies the correspondingly

numbered representation and warranty or covenant to the extent specified

therein, provided that any disclosure set forth with respect to any particular

section shall be deemed to be disclosed in reference to all other applicable

sections of this Agreement if the disclosure in respect of the particular

section is sufficient on its face without further inquiry reasonably to inform

the other parties to this Agreement of the information required to be disclosed

in respect of the other sections to avoid a breach under the representation and

warranty or covenant corresponding to such other sections), Colonial and

Colonial Merger Sub represent and warrant to Cornerstone as follows:

 

            3.1 Organization, Standing and Power of Colonial. Colonial is a real

estate investment trust duly organized, validly existing and in good standing

under the laws of Alabama. Colonial has all requisite power and authority to

own, operate, lease and encumber its properties and carry on its business as now

being conducted. The Colonial Declaration of Trust is in effect, and no

dissolution, revocation or forfeiture proceedings regarding Colonial have been

commenced. Colonial is duly qualified or licensed to do business as a foreign

trust and is in good standing in each jurisdiction in which the nature of its

business or the ownership or leasing of its properties makes such qualification

or licensing necessary, other than in such jurisdictions where the failure to be

so qualified or licensed, individually or in the aggregate, would not reasonably

be expected to have a Colonial Material Adverse Effect (as defined herein). As

used in this Agreement, a "Colonial Material Adverse Effect" means any

circumstance, event, occurrence, change or effect that is materially adverse to

the business, properties, assets (tangible or intangible), financial condition

or results of operations of Colonial, Colonial Partnership and the Subsidiaries

of Colonial (collectively, "Colonial Subsidiaries"), taken as a whole, other

than effects, events or changes arising out of or resulting from (a) changes in

conditions in the United States or global economy or capital or financial

markets generally, including changes in interest or exchange rates, (b) changes

in general legal, regulatory, political, economic or business conditions or

changes in GAAP (as defined herein) that, in each case, generally affect the

real estate industry and that do not affect Colonial, Colonial Partnership or

the Colonial Subsidiaries materially disproportionately relative to other

participants in the real estate industry or (c) the negotiation, execution,

announcement or performance of this Agreement or the consummation of the

transactions contemplated by this Agreement. Colonial has delivered to

Cornerstone complete and correct copies of the Colonial Declaration of Trust and

the Bylaws of Colonial (the "Colonial Bylaws"), as amended or supplemented to

the date of this Agreement.

 

            3.2 Colonial Subsidiaries.

 

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                  (a) Schedule 3.2(a) to the Colonial Disclosure Letter sets

forth (i) each Colonial Subsidiary and each other Person in which Colonial owns,

directly or indirectly through a Colonial Subsidiary, 10% or more of the capital

stock, voting securities or other equity interests, (ii) the ownership interest

therein of Colonial, (iii) if not directly or indirectly wholly owned by

Colonial, the identity and ownership interest of each of the other owners of

each Colonial Subsidiary, (iv) each property owned by such Colonial Subsidiary

or such other Person and each other asset material to such Colonial Subsidiary

or such other Person, and (v) if not wholly owned by such Colonial Subsidiary or

such other Person, the identity and ownership interest of each of the other

owners of such property.

 

                  (b) Except as set forth in Schedule 3.2(b) to the Colonial

Disclosure Letter, (i) all the outstanding shares of capital stock of each

Colonial Subsidiary that is a corporation have been duly authorized, validly

issued and are (A) fully paid and nonassessable and not subject to preemptive or

similar rights and (B) in the case of capital stock owned by Colonial or a

Colonial Subsidiary, owned free and clear of all Liens and (ii) all equity

interests in each Colonial Subsidiary that is a partnership, joint venture,

limited liability company or trust which are owned by Colonial or a Colonial

Subsidiary are owned free and clear of all Liens. Each Colonial Subsidiary that

is a corporation is duly incorporated, validly existing and in good standing

under the laws of its jurisdiction of incorporation and has the requisite

corporate power and authority to own, operate, lease and encumber its properties

and carry on its business as now being conducted, and each Colonial Subsidiary

that is a partnership, limited liability company or trust is duly organized,

validly existing and in good standing under the laws of its jurisdiction of

organization and has the requisite power and authority to own, operate, lease

and encumber its properties and carry on its business as now being conducted.

Each Colonial Subsidiary is duly qualified or licensed to do business and is in

good standing in each jurisdiction in which the nature of its business or the

ownership or leasing of its properties makes such qualification or licensing

necessary, other than in such jurisdictions where the failure to be so qualified

or licensed, individually or in the aggregate, would not reasonably be expected

to have a Colonial Material Adverse Effect. Complete and correct copies of the

Articles of Incorporation, Bylaws, organization documents and partnership, joint

venture and operating agreements of each Colonial Subsidiary, as amended to the

date of this Agreement, have been previously delivered or made available to

Cornerstone. No effective amendment has been made to the Colonial Partnership

Agreement since February 18, 2004 (except to provide for redemptions of Colonial

OP Units in the ordinary course of business).

 

            3.3 Capital Structure.

 

                  (a) The authorized shares of beneficial interest of Colonial

on the date hereof consist of 75,000,000 shares of beneficial interest, of which

65,000,000 are classified as common shares of beneficial interest, par value

$0.01 per share (previously defined herein as "Colonial Common Shares"), and

10,000,000 are classified as preferred shares of beneficial interest, par value

$0.01 per share (the "Colonial Preferred Shares"). 2,000,000 of the Colonial

Preferred Shares have been designated as 7.25% Series B Cumulative Redeemable

Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share

("Colonial Series B Preferred Shares"), 2,000,000 of the Colonial Preferred

Shares have been designated as 9.25% Series C Cumulative Redeemable Preferred

Shares of Beneficial Interest, par value $0.01 per share

 

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("Colonial Series C Preferred Shares"), 500,000 of the Colonial Preferred Shares

have been designated as 8 1/8% Series D Cumulative Redeemable Preferred Shares

of Beneficial Interest, par value $0.01 per share ("Colonial Series D Preferred

Shares"), 70,000 of the Colonial Preferred Shares have been designated as 7.62%

Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par

value $0.01 per share (previously defined herein as "Colonial Series E Preferred

Shares") and 6,500 of the Colonial Preferred Shares have been designated as

Series 1998 Junior Participating Preferred Shares of Beneficial Interest (the

"Colonial Series 1998 Preferred Shares"). 27,388,192 Colonial Common Shares are

issued and outstanding on the date of this Agreement (such amount does not

include 5,623,150 Colonial Common Shares held as treasury shares). No Colonial

Series B Preferred Shares are issued and outstanding on the date of this

Agreement. 2,000,000 Colonial Series C Preferred Shares and 500,000 Colonial

Series D Preferred Shares are issued and outstanding on the date of this

Agreement. No Colonial Series E Preferred Shares are issued and outstanding on

the date of this Agreement. No Colonial Series 1998 Preferred Shares are issued

and outstanding on the date of this Agreement. No other Colonial Preferred

Shares are issued and outstanding on the date of this Agreemen