MASTER FORMATION AND CONTRIBUTION AGREEMENT

Exhibit 10.1

MASTER FORMATION AND CONTRIBUTION AGREEMENT

between

ARIZONA LAND INCOME CORPORATION

and

POP VENTURE, LLC

Dated as of October 3, 2006

 

Table of Contents

 

 

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THIS MASTER FORMATION AND CONTRIBUTION AGREEMENT is dated as of October 3, 2006 by and between ARIZONA LAND INCOME CORPORATION, an Arizona corporation (together with any successor by merger, “ AZL ”), and POP VENTURE, LLC, a Delaware limited liability company (“ POP ”). All terms not otherwise defined in this Agreement shall have the meanings set forth in Section 2 below.

1. PURPOSE . AZL and POP have entered into this Agreement for the purpose of setting forth the terms of the Transactions pursuant to which the parties shall create an “UPREIT” subsidiary limited partnership of AZL. The UPREIT shall acquire from POP, or the POP Members designated by POP, the Contributed Interests in the POP Affiliates in exchange for Common Units and Preferred Units. AZL and the UPREIT shall thereafter operate under the name “Pacific Office Properties” and through the POP Affiliates, shall directly or indirectly own, in full or in part and in fee simple or leasehold interests, commercial office properties. On the terms and subject to the conditions set forth herein, the parties agree to execute and deliver such additional agreements and undertake such additional actions as further provided herein, including:

 

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Forming a Delaware limited partnership to serve as the UPREIT;

 

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Authorizing a one-for-two reverse stock split of common stock and amendments to the charter of AZL;

 

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Reincorporating AZL in Maryland;

 

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Entering into an agreement with Advisor pursuant to which Advisor shall manage substantially all of the business and operations of the UPREIT and AZL;

 

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Selling substantially all of the assets of AZL and declaring a special dividend of $1.00 per share to the shareholders of AZL;

 

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Selling Common Units of the UPREIT or shares of common stock of AZL to affiliates of POP for $5 million;

 

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Issuing a share of preferred stock of AZL to the Advisor on behalf of holders of Common Units and Preferred Units with voting rights at AZL; and

 

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Obtaining all necessary approvals of the shareholders of AZL at a duly convened special meeting of the shareholders of AZL.

 

2.

DEFINITIONS .

As used in this Agreement, the following terms shown have the meanings set forth in this Section 2.

“ Adjusted Per Share Value ” shall mean the difference of (x) the average closing price per share of AZL Common Stock reported in the consolidated transaction reporting system during the ninety (90) trading days immediately preceding the date of this Agreement (but in no event less than $3.75 nor more than $4.00) minus (y) the amount of the Special Dividend; all subject to adjustment in the event of the Reverse Stock Split or any other change in the capitalization of AZL or the Surviving Corporation.

“ Advisor ” shall mean Pacific Office Management, Inc., a corporation to be incorporated in the State of Delaware.

“ Advisory Agreement ” shall mean all oral and written agreements and other contractual or other similar arrangements between AZL and AZLA or between AZL and AZLB, pursuant to which AZLA or AZLB has provided or may hereafter provide services to AZL prior to the Closing.

“ Affiliate ” shall mean with respect to a specified Person, a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified and shall have such additional meaning as such term has under SEC Rule 12b-2.

“ Agreement ” shall mean this Master Formation and Contribution Agreement.

“ AMEX ” shall mean the American Stock Exchange.

“ AZL Common Stock ” shall mean the Class A common stock, no par value, of AZL, which is listed on the AMEX.

“ AZL Material Adverse Effect ” shall mean an effect that would reasonably be expected to be material and adverse to the financial condition, business, or results of operations of AZL, or to the number of beneficial or record shareholders of AZL Common Stock, or that would materially and adversely affect the ability of AZL, the UPREIT or the Surviving Corporation to consummate the Transactions.

“ AZLA ” shall mean Peacock, Hislop, Staley & Given, Inc., an Arizona corporation.

“ AZLB ” shall mean ALI Advisor, Inc., an Arizona corporation.

“ Closing ” shall mean the closing of the Transactions.

“ Closing Date ” shall mean the date at which all of the Transactions are consummated.

“ Code ” shall mean the Internal Revenue Code of 1986, as amended.

“ Common Units ” shall mean common partnership units of the UPREIT. The Common Units will have a distribution yield equal to the dividend yield of Surviving Corporation Common Stock (anticipated to have the Initial Dividend Yield immediately following Closing) and will be exchangeable into shares of AZL Common Stock initially on a one-for-one basis (subject to adjustment), provided that holders of Common Units issued at the Closing may not exchange their Common Units into shares of AZL Common Stock prior to the second anniversary of the Closing. The Common Units otherwise will have the rights, preferences, terms and conditions set forth in the UPREIT Agreement.

“ Contributed Assets ” shall mean certain tangible and intangible assets, including engineering reports, feasibility studies, contract rights, market studies and other intangibles owned by POP, all of which shall be contributed by POP to the UPREIT at Closing.

“ Contributed Interests ” shall mean the POP Membership Interests to be contributed by POP, or the POP Members designated by POP, to the UPREIT at Closing in exchange for Common Units and Preferred Units.

 

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“ Contribution Agreements ” shall mean all of the Contribution Agreements (each in a form reasonably agreed among AZL, POP and the executing POP Members (if different than POP)) executed between AZL and POP, or the POP Members designated by POP, within thirty (30) days after the execution of this Agreement; and each Contribution Agreement shall relate to the particular POP Property that is owned, directly or indirectly, fully or in part and whether in fee simple or through a ground lease, by the POP Affiliate in which such POP Member(s) own membership interests. AZL shall be an intended third party beneficiary to each Contribution Agreement. “ Contribution Agreement ” shall mean any one (1) of the Contribution Agreements.

“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.

“ Exchange Act Filing ” shall mean any report, form, schedule or other documents requested to be filed or filed with the SEC pursuant to the Exchange Act.

“ Gross Asset Value ” shall mean the value of each POP Property set forth in the Contribution Agreement for such POP Property (provided that, in the case of any POP Property for which the Contributed Interests are less than one hundred percent (100%) of the ownership interests in such POP Property, such value shall reflect only the percentage (of the total) economic interests in such POP Property that is owned by one or more POP Affiliates and represented by the Contributed Interests relating to such POP Property). For example, Gross Asset Value would equal $10 million if the POP Property had a value of $100 million and the Contributed Interest of the POP Affiliate was ten percent (10%) of the ownership interests in such POP Property.

“ Independent Director ” shall mean a director of the Surviving Corporation who meets the independence requirements set forth in the rules of AMEX (whether or not he or she meets the requirements of SEC Rule 10A-3).

“ Initial Dividend Yield ” shall mean the annual divided yield set by the Board of Directors of the Surviving Corporation for the first quarterly dividend following Closing and is anticipated by the parties to be an annual amount equal to six percent (6%) of the Adjusted Per Share Value.

“ Knowledge ” shall mean, in the case of AZL, the actual knowledge of any of Thomas R. Hislop, Larry P. Staley or Barry W. Peacock, and, in the case of POP, the actual knowledge of any of Jay H. Shidler, Lawrence J. Taff or James C. Reynolds.

“ Management Advisory Agreement ” shall mean the agreement in the form attached as Exhibit A or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement, to be entered into at Closing among Surviving Corporation, the UPREIT and Advisor, pursuant to which Advisor will provide to and on behalf of Surviving Corporation: (a) entity administration services, (b) asset management services and (c) investment and capital management services.

“ Maryland Subsidiary ” shall mean a corporation to be incorporated in the State of Maryland as a wholly-owned subsidiary of AZL.

“ Members Instrument ” shall mean the instrument required under each Contribution Agreement to be executed by each POP Member(s) at Closing in order to convey his or her Contributed Interests in the applicable POP Affiliate.

 

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“ Mortgage Prepayment ” shall mean the payment in the amount of $1,783,208.79, received by AZL on July 1, 2006 from the maker of the mortgage note receivable held by AZL.

“ Net Asset Value ” shall mean, for each POP Property (or Contributed Interest, in the case of any POP Property for which the Contributed Interests are less than one hundred percent (100%) of the ownership interests in such POP Property), the amount equal to (a) the difference between (i) the Gross Asset Value minus (ii) the amount, including accrued and unpaid interest, of the POP Properties Indebtedness encumbering such POP Property at Closing, as adjusted by (b) the net adjustments for the Closing prorations contemplated by this Agreement and the applicable Contribution Agreement.

“ Permitted Common Dividends ” shall mean regular quarterly dividends declared (whether or not paid) with respect to AZL Common Stock (and expressly excluding the Special Dividend), which regular quarterly dividends shall not exceed $0.10 per share in the aggregate for any calendar quarter beginning with the quarter ended September 30, 2006.

“ Person ” shall mean any individual, trust or entity of any nature.

“ POP Affiliates ” shall mean, collectively, the entities identified on Schedule 2A . “POP Affiliate” shall mean any one (1) of the POP Affiliates.

“ POP Material Adverse Effect ” shall mean an effect that would reasonably be expected to be material and adverse to the financial condition, business, or results of operations of POP, the POP Affiliates and the POP Properties, taken as a whole, or that would materially and adversely affect the ability of POP and the POP Affiliates, taken as a whole, to consummate the Transactions.

“ POP Members ” shall mean the members of the POP Affiliates holding the Contributed Interests prior to Closing, as more particularly identified, with each of their respective POP Membership Interests, on schedules delivered by POP at closing. “POP Member” shall mean any one (1) of the POP Members.

“ POP Membership Interests ” shall mean all of the limited liability company membership interests held by the POP Members in the POP Affiliates.

“ POP Operating Agreements ” shall mean collectively, the limited liability company operating agreements of the POP Affiliates. “POP Operating Agreement” shall mean any one (1) of the POP Operating Agreements.

“ POP Properties ” shall mean, collectively, the properties identified on Schedule 2B . “POP Property” shall mean any one (1) of the POP Properties. As will be addressed in more detail in the relevant Contribution Agreement: (a) certain POP Affiliates directly or indirectly own certain of the POP Properties in fee simple; (b) certain POP Affiliates directly or indirectly own leasehold interests in certain of the POP Properties; (c) certain POP Affiliates directly or indirectly own less than one hundred percent (100%) of certain POP Properties, in a tenancy-in-common with an unrelated third party; (d) certain POP Affiliates directly or indirectly own less than one hundred percent (100%) of certain POP Properties in a joint venture relationship with an unrelated third party; and (e) certain POP Affiliates directly or indirectly own a POP Property through a condominium. In the case of all of (c), (d) and (e), however, the POP Affiliates directly or indirectly hold day-to-day operational control over the relevant POP Properties.

 

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“ POP Properties Indebtedness ” shall mean, for any POP Property, the unpaid mortgage debt secured by such POP Property (it being understood, however, that the collateral for such indebtedness may, depending on the POP Property in question, be a lien encumbering fee simple title, a leasehold estate or an ownership interest in a condominium); provided that, in the case of any POP Property for which the Contributed Interests are less than one hundred percent (100%) of the ownership interests in such POP Property, such amount shall reflect only that percentage of the indebtedness equal to the percentage ownership represented by such Contributed Interests relating to such POP Property. By way of example, the POP Properties Indebtedness would equal $10 million if the POP Property was encumbered with $100 million of indebtedness and the interest of the POP Affiliate was ten percent (10%) of the ownership interests in such POP Property. The POP Properties Indebtedness is expected to aggregate approximately $403,000,000 at Closing.

“ Preferred Units ” shall mean convertible preferred partnership units of the UPREIT, each with terms and conditions of the Preferred Units described on Schedule 2C .

“ Pursuit Costs ” are all out-of-pocket professional and other costs and expenses incurred in connection with all document preparation, negotiation, due diligence, regulatory approval and other actions or undertakings, incident to, in preparation for or in anticipation of this Agreement, the consummation of the Transactions, whether with respect to the POP Properties, the UPREIT, the Maryland Subsidiary or otherwise, up to a maximum amount of Five Hundred Thousand Dollars ($500,000).

“ Registration Rights Agreement ” shall mean the Master Registration Rights Agreement in the form attached as Exhibit B or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement, to be entered into at Closing among AZL and the POP Members, pursuant to which AZL shall give the POP Members certain registration rights (commonly known as “demand” and “piggyback” registration rights) with respect to AZL Common Stock.

“SEC ” shall mean the U.S. Securities and Exchange Commission.

“ Securities Act ” shall mean the Securities Act of 1933, as amended.

“ Shareholder Approval ” shall mean the approval and adoption by the shareholders of AZL of this Agreement and the Transactions, all in satisfaction of the requirements of the Arizona Business Corporation Act, the Articles of Incorporation and By-laws of AZL, SEC Rule 14a-4(a)(3) and applicable AMEX rules.

“ Special Dividend ” shall mean a dividend with respect to AZL Common Stock in the amount of $1.00 per share, which shall, to the extent possible, constitute a “capital gain dividend” within the meaning of Section 857(b)(3)(C) of the Code.

“ Superior Proposal ” shall mean any bona fide, written and unsolicited acquisition proposal made by a Person that is not an Affiliate of AZL, AZLA or AZLB for a transaction which would result in (a) the shareholders of AZL immediately preceding the consummation of such transaction ceasing to hold at least a majority of the voting equity securities in the surviving or resulting Person of such transaction or (b) AZL ceasing to hold all or substantially all of AZL’s assets, taken as a whole, in either case in exchange for consideration consisting solely of cash or securities traded on a registered national securities exchange or a combination thereof and not subject to a financing contingency and otherwise on terms that the Board of Directors of AZL determines, in its good faith judgment (and taking into account all of the terms and conditions of such acquisition proposal, including any break-up

 

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fees, expense reimbursement provisions, conditions to consummation, the ability of the Person making the acquisition proposal to finance the transaction, timing of the closing thereof, as well as any revisions to the terms of the Transactions or this Agreement proposed by POP after being notified pursuant to Section 14.7) and after consultation with Bryan Cave LLP, are more favorable to AZL’s shareholders from a financial point of view than the Transactions (after taking into account any revised terms thereof) and is reasonably likely to be completed without undue delay.

“ Surviving Corporation ” shall mean the corporation surviving the merger of AZL with and into the Maryland Subsidiary.

“ Surviving Corporation Articles ” shall mean the Articles of Incorporation in the form attached hereto as Exhibit C or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement, of the Surviving Corporation.

“ Surviving Corporation By-laws ” shall mean the By-laws in the form attached hereto as Exhibit D or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement, of the Surviving Corporation.

“ Surviving Corporation Class B Common Stock ” shall mean the Class B common stock of the Surviving Corporation, which shall not be listed on the AMEX.

“ Surviving Corporation Common Stock ” shall mean the common stock of the Surviving Corporation, which shall be listed on the AMEX.

“ Title Insurance Company ” shall mean First American Title Insurance Company.

“ Transactions ” shall mean collectively all of the transactions and corporate actions contemplated by this Agreement, including the Exhibits hereto.

“ UPREIT ” shall mean Pacific Office Properties L.P., a Delaware limited partnership to be formed, and whose sole general partner shall be AZL and which will be the operating partnership or “umbrella partnership” in AZL’s umbrella partnership real estate investment trust structure. “UPREIT” shall also include (a) any entity or entities controlled by the UPREIT or AZL and designated by the UPREIT to acquire any of the Contributed Interests, and (b) any directly or indirectly wholly owned subsidiary entities of Pacific Office Properties, L.P. designated by Pacific Office Properties, L.P., to enter into agreements relating to real estate or to own real estate for and on behalf of Pacific Office Properties, L.P. excluding all Taxable REIT Subsidiaries (as defined in Section 856(l) of the Code).

“ UPREIT Agreement ” shall mean the limited partnership agreement of the UPREIT in the form attached hereto as Exhibit E or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement.

“ UPREIT Certificate ” shall mean the certificate of formation of the UPREIT in the form attached hereto as Exhibit F or, if such form is not so attached, as agreed by the parties within thirty (30) days following the date of this Agreement.

 

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3.

SHAREHOLDER APPROVAL .

3.1 Shareholders Meeting . AZL, acting through its Board of Directors, shall, subject to, and in accordance with, applicable law, (i) promptly and duly call, give notice of, convene and hold as soon as practicable, a meeting of the holders of AZL Common Stock and Class B Common Stock (the “ Shareholders Meeting ”) for the purpose of voting to approve and adopt this Agreement and the Transactions, all in satisfaction of the requirements of SEC Rule 14a-4(a)(3); (ii) recommend approval and adoption of this Agreement and the Transactions by the shareholders of AZL and include in the proxy statement such recommendation and (iii) take all reasonable action to solicit and obtain such approval.

3.2 Filing of Proxy Statement . As promptly as practicable following the date of this Agreement, AZL shall file a preliminary proxy statement for the Shareholders Meeting, which proxy statement shall satisfy the requirements of Section 3.1 of this Agreement and of SEC Schedule 14A. AZL shall use its commercially reasonable efforts to ensure that such proxy statement is finalized such that a definitive proxy statement can be filed no later than thirty (30) days after the filing of the preliminary proxy statement. In advance of filing the preliminary proxy statement, AZL shall provide POP with a copy of the preliminary proxy statement and provide an opportunity to comment thereon, and thereafter shall promptly advise POP of any material communication received by AZL or its advisors from the SEC with respect to the preliminary proxy statement. The description of POP, POP Affiliates, POP Members and POP Properties and of the terms and conditions of this Agreement contained in the preliminary proxy statement shall be provided by POP. Each of AZL and POP shall cooperate and shall instruct their respective agents, attorneys and accountants to cooperate in the preparation and filing of the preliminary and final proxy statements. Each of POP and AZL agrees, as to itself and its Affiliates, that none of the information supplied or to be supplied by it for inclusion or incorporation by reference in the proxy statement and any supplement thereto will, at the date of mailing to AZL’s shareholders and at the time of the Shareholders Meeting, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which such statement is made, not misleading. Each of POP and AZL further agrees that if it shall become aware, prior to the Shareholders Meeting, of any information that would cause any of the statements in the proxy statement to be false or misleading with respect to any material fact, or to omit to state any material fact necessary to make the statements therein not false or misleading, to promptly inform the other party thereof.

3.3 Mailing of Proxy Statement . AZL, as promptly as practicable following the satisfaction of the requirements of Section 3.2, shall cause the definitive proxy statement relating to the Shareholders Meeting mailed to its shareholders in satisfaction of the requirements of the Exchange Act, AMEX and Arizona Business Corporation Act.

 

4.

CONTRIBUTION .

4.1 Formation . AZL shall form the UPREIT immediately prior to Closing by filing the UPREIT Certificate with the Delaware Secretary of State and adopting the UPREIT Agreement. AZL shall be the sole general partner of the UPREIT.

4.2 POP Members Contribution . Pursuant to the terms of this Agreement and pursuant to the Contribution Agreements, the UPREIT will acquire the Contributed Interests and Contributed Assets subject to and in accordance with the terms of the Contribution Agreements. As a result, the UPREIT will acquire (fully or in part) direct or indirect ownership of the POP Properties, as more specifically described in the respective Contribution Agreement for each POP Property.

 

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4.3 Agreed Value . AZL and POP have agreed that the aggregate Gross Asset Values, including the value attributable to the Contributed Assets, is $568,000,000 (prior to deducting the aggregate amount of the POP Properties Indebtedness), subject to the prorations and adjustments provided in the applicable Contribution Agreement, or as otherwise provided herein.

4.4 Aggregate Unit Issuance . As consideration for the contribution of the Contributed Interests and the Contributed Assets to the UPREIT, POP and the POP Members shall receive, or direct the issuance, in the aggregate, of Common Units having a value equal to twenty five percent (25%), and Preferred Units equal to seventy-five percent (75%), of an amount equal to the aggregate Net Asset Values (which would be approximately $165,000,000 on the date hereof). For the purposes of this Section, Common Units shall have a per unit value equal to the Adjusted Per Share Value. For the purposes of this Section, Preferred Units shall have a per unit value of $25.00.

4.5 Allocation Among POP Members . The Common Units and Preferred Units issuable at Closing shall be allocated as designated by POP based upon a schedule prepared by POP and delivered at Closing.

4.6 General Partner’s Contribution . Pursuant to the terms of this Agreement, at Closing, AZL shall contribute to the UPREIT all of its assets as of the Closing Date (including any AZL Assets that have not been sold prior to the Closing Date) except for any cash reserved for the payment of the Special Dividend, any Permitted Common Dividends or any accrued liabilities of AZL. In consideration for such contribution, AZL shall acquire a general partner interest in the UPREIT and become the sole general partner of the UPREIT and shall be deemed to have made a contribution to the UPREIT in an amount equal to the book value of the assets so contributed. Thereafter, AZL shall have the rights, duties, privileges and obligations as the holder of the general partner interest and as the general partner of the UPREIT and be subject to the terms and conditions of the UPREIT Certificate and the UPREIT Agreement. AZL’s general partner interest at any particular time shall be equal to the quotient obtained by dividing (i) the total number of shares of Surviving Corporation Common Stock and Surviving Corporation Class B Common Stock outstanding as of such time, by (ii) the sum of (A) the total number of shares of Surviving Corporation Common Stock and Surviving Corporation Class B Common Stock outstanding as of such time, plus (B) the total number of shares of Surviving Corporation Common Stock into which Common Units outstanding as of such time are exchangeable.

4.7 Intended Tax Treatment . The parties acknowledge that, except to the extent that any or all of POP and the POP Members receive any cash in consideration for the Contributed Interests or the Contributed Assets, the parties intend for the transfer of the Contributed Interests and the Contributed Assets in exchange for Common Units and Preferred Units to result in no current recognition (i.e., a deferral) of gain or loss for federal income tax purposes pursuant to Section 721 of the Code (such treatment, the “ Intended Tax Treatment ”). The parties shall cooperate in all reasonable respects with POP and the POP Members to facilitate such treatment. Without limiting the generality of the foregoing sentence, the UPREIT and AZL shall be responsible for costs associated with any Internal Revenue Service audit made directly of either or both of the UPREIT and AZL relating to their respective operations.

4.8 Termination for Tax Purposes . Because the contribution of the Contributed Interests may cause certain POP Affiliates to terminate for federal income tax purposes under Section 708(b) of the Code, the parties to this Agreement agree that the Contribution Agreements with respect to POP Membership Interests in such POP Affiliates shall provide that the POP Members shall have the right and obligation to file any final tax returns for such POP Affiliates. The parties intend that the foregoing contribution section shall not terminate or liquidate the POP Affiliates under the laws

 

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of their jurisdiction of formation for any other purpose and that each POP Affiliate shall continue to exist after Closing, with each POP Affiliate continuing to own its interest in the POP Property owned by such POP Affiliate prior to Closing but with the UPREIT as the sole member of each POP Affiliate as of the Closing Date.

 

5.

REVERSE STOCK SPLIT AND CHARTER AMENDMENTS .

AZL shall obtain authority at the Shareholders Meeting to effectuate an up to one-for-two reverse stock split of the AZL Common Stock (the “ Reverse Stock Split ”) in the discretion of AZL, and to amend the Articles of Incorporation and By-laws of AZL (the “ Interim Charter Amendments ”) to have provisions consistent with the provisions of the Surviving Corporation Articles and the Surviving Corporation By-laws (provided that the name of AZL shall not be changed). If so requested by POP, AZL shall consummate the Reverse Stock Split and effectuate any Interim Charter Amendments prior to the Reincorporation Effective Time. If so requested by POP, AZL shall consummate the Reverse Stock Split following the Reincorporation Effective Time.

 

6.

SALE OF ASSETS AND DIVIDENDS .

6.1 Sale of Assets . AZL shall use its commercially reasonable efforts (including, in its discretion, by engaging AZLA to act on its behalf) to sell on or after (and not before) the later of (x) January 15, 2007 and (y) the Closing Date, for cash, all of its assets (other than cash and cash equivalents) ( “AZL Assets” ) in arms’-length transactions (provided that transactions with Affiliates of AZL or AZLA shall not be prohibited provided that they are on terms at least as favorable to AZL as those that could be obtained in an arms’-length transaction, but at no less than the greater of ninety-five percent (95%) of (a) the balance sheet carrying value of the asset or (b) the par value of the note receivable, as such terms are specifically and individually approved by the Board of Directors of AZL). In the event that AZL engages AZLA to act on its behalf in order to sell the AZL Assets, AZL may pay a fee to AZLA in consideration of its services provided that (a) such fee may only be paid upon the consummation of a sale of AZL Assets to an unrelated third party; and (b) the aggregate amount of such fee shall not exceed a sum equal to one percent (1.0%) of the price at which the AZL Assets are sold to a third party.

6.2 Discharge of Accrued Brokerage Commission . AZL shall, prior to the Closing Date, pay and discharge in full all unpaid commissions owed (whether or not then due) by AZL to one or more brokers or other intermediaries in connection with its sale of assets prior to the Closing (including any sales of assets prior to the date of this Agreement). In consideration for such payments, AZL shall receive from each broker or other intermediary an instrument evidencing the full release and discharge of such obligations.

6.3 Declaration of Special Dividend . AZL, acting through its Board of Directors, shall, prior to December 31, 2006, declare the Special Dividend to its shareholders of record prior to the Closing, which Special Dividend shall, to the extent possible, constitute a “capital gain dividend” within the meaning of Section 857(b)(3)(C) of the Code and shall be used to entirely offset AZL’s net capital gain and other taxable income (if any), arising from the Mortgage Prepayment.

6.4 Restrictions on Dividends . From and after the date hereof through the Closing Date, other than the Special Dividend and any Permitted Common Dividends, AZL shall not make, declare, pay or set aside for payment any dividend payable in cash, stock or property on or in respect of, or declare or make any distribution on, any shares of its capital stock, or directly or indirectly adjust, split, combine, reclassify, redeem, purchase or otherwise acquire any shares of its capital stock.

 

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7.

REINCORPORATION .

7.1 Incorporation and Merger . AZL shall cause the Maryland Subsidiary to be incorporated in the State of Maryland prior to the Shareholders Meeting. Promptly following the Shareholders Meeting, if Shareholder Approval is obtained, AZL shall file or cause to be filed an agreement and plan of merger (or articles of merger if permitted in such jurisdiction) to be filed with the Secretary of State of the State of Arizona and the Department of Assessments and Taxation of the State of Maryland. Pursuant to such agreement and plan of merger:

 

(a)

AZL shall be merged (the “ Reincorporation ”) with and into the Maryland Subsidiary and the separate corporate existence of AZL shall thereupon cease, and the Maryland Subsidiary shall be the Surviving Corporation;

 

(b)

the name of the Surviving Corporation shall be “Pacific Office Properties Trust, Inc.;”

 

(c)

the Articles of Incorporation of the Surviving Corporation shall be the Surviving Corporation Articles; and

 

(d)

the By-Laws of the Surviving Corporation shall be the Surviving Corporation By-laws.

7.2 Consequence of Merger . At and after the effectiveness of the Reincorporation (the “ Reincorporation Effective Time ”), the Surviving Corporation shall be governed by the laws of the State of Maryland. The assets of AZL and the Maryland Subsidiary shall transfer to, vest in, and devolve on the Surviving Corporation without further act or deed. Furthermore the Surviving Corporation shall be liable for all the debts and obligations of AZL and the Maryland Subsidiary. At and after the Reincorporation Effective Time, the Reincorporation shall have the further effects as set forth in Section 10-1107 of the Arizona Business Corporation Act and Section 3-114 of the Maryland General Corporation Law.

7.3 Board of Directors . Under the Surviving Corporation Articles, the size of the Board of Directors of the Surviving Corporation shall be five (5) to seven (7) members. Effective as of the Closing Date, three (3) of the Directors will be Jay H. Shidler, Thomas R. Hislop and Robert Denton; two (2) to four (4) of the Directors shall be nominated by POP and shall be Independent Directors. From and after the Closing Date, Jay H. Shidler shall be the Chairman of the Board of Directors of AZL.

7.4 Executive Officers . Effective as of the Closing Date, the officers of the Surviving Corporation shall include Jay H. Shidler as Chief Executive Officer and President, Lawrence J. Taff as Chief Financial Officer and Assistant Secretary and Kimberly F. Aquino as Secretary. At Closing, AZL will enter into a Non-Competition Agreement with Messrs. Shidler and Taff, in the form set forth as Exhibit G . The powers, duties and responsibilities of the officers of the Surviving Corporation shall be as set forth in the Surviving Corporation By-laws or as established by the Board of Directors of Surviving Corporation.

 

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7.5 Effect on Capital Stock . Subject to the provisions of this Agreement, on the Closing Date, automatically by virtue of the Reincorporation and without any action on the part of any Person:

 

(a)

AZL Common Stock . Each share of AZL Common Stock issued and outstanding immediately prior to the Reincorporation shall be converted into one (1) share of the Surviving Corporation Common Stock. Shareholders of AZL shall not be required to exchange certificates evidencing AZL Common Stock for certificates evidencing Surviving Corporation Common Stock upon consummation of the Reincorporation.

 

(b)

AZL Class B Common Stock . Each share of AZL Class B Common Stock issued and outstanding immediately prior to the Reincorporation shall be converted into one (1) share of the Surviving Corporation Class B Common Stock. Shareholders of AZL shall not be required to exchange certificates evidencing AZL Class B Common Stock for certificates evidencing Surviving Corporation Class B Common Stock upon consummation of the Reincorporation.

 

(c)

Maryland Subsidiary Common Stock . Each share of common stock of the Maryland Subsidiary issued and outstanding immediately prior to the Closing Date shall be extinguished and have no further force or effect.

7.6 Intended Tax Treatment . The parties intend that the Reincorporation shall qualify as “reorganization” under Section 368(a) of the Code.

 

8.

ARRANGEMENTS WITH ADVISOR.

8.1 Termination of AZLA Engagement . At Closing, AZL shall pay to AZLA all accrued and unpaid fees and out of pocket costs due under any applicable Advisory Agreement through Closing (including any entered into pursuant to Section 6.1), in the amount not to exceed $250,000. In consideration for such payment, AZLA shall terminate, relinquish and release all claims against AZL and all rights (if any) for present and future payments including, compensation and reimbursement under, any applicable Advisory Agreement, including any other compensation in connection with the Transactions.

8.2 Termination of AZLB Engagement . At Closing, AZL shall pay to AZLB all accrued and unpaid fees and out of pocket costs due under any applicable Advisory Agreement through Closing, in the amount not to exceed $20,000. In consideration for such payment, AZLB shall terminate, relinquish and release all claims against AZL and all rights (if any) for present and future payments including, compensation and reimbursement under, any applicable Advisory Agreement, including any other compensation in connection with the Transactions.

8.3 Engagement of Advisor . At Closing, AZL shall execute and deliver the Management Advisory Agreement, and POP shall cause said agreement to be executed and delivered by Advisor. The UPREIT and AZL shall engage Advisor to manage substantially all of their business and operations. The Management Advisory Agreement shall have a term of ten (10) years, subject to early termination upon the payment of a termination fee in the amount of $1,000,000, plus accrued and unreimbursed expenses, and subject to the other terms and conditions set forth in such agreement. Pursuant to the Management Advisory Agreement, Advisor shall provide the following services to AZL and the UPREIT:

 

(a)

Corporate Management : Advisor will administer and operate the Surviving Corporation as a publicly traded real estate investment trust, inclusive of all tax

 

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and public company compliance activities, for a predetermined “Base Fee” of $1,500,000 per annum, plus reimbursement of certain third party costs and expenses incurred on behalf of the Surviving Corporation by Advisor as to which the Surviving Corporation is the primary obligor. This fee shall be subject to upward adjustment, based on the growth in size and scope of the Surviving Corporation and the resulting increases in responsibilities incurred by the Advisor, on the basis of a “Supplemental Fee” over and above the Base Fee, equal to the product of (x) 0.1% times (y) the aggregate value of the consolidated gross asset value of the Surviving Corporation in excess of $1.5 billion.

 

(b)

Investment Management . Advisor will manage the origination, underwriting, acquisition, capitalization and disposition functions for the Surviving Corporation in consideration for specific investment management fees.

 

(c)

Property Management . Advisor will provide all property management and leasing functions for all properties held and operated by the UPREIT in consideration for property-specific property management fees.

Advisor shall have the right, on behalf of the UPREIT, to engage third party brokers, contractors, leasing agents and others to assist it in performing the above services, and shall additionally have the right to utilize the staff, facilities and resources of various Affiliates of POP.

8.4 Proportionate Voting Preferred Stock . At Closing, AZL shall authorize, issue, sell and convey to Advisor in consideration for $2,000 paid in cash, one (1) share of Voting Preferred Stock, no par value per share, in the Surviving Corporation which will be authorized in Articles Supplementary to the Surviving Corporation Articles (the “ Proportionate Voting Preferred Stock ”). The Proportionate Voting Preferred Stock shall have voting rights, voting together as a single class with Surviving Corporation Common Stock, equal to the total number of shares of Surviving Corporation Common Stock issuable upon exchange of the Common Units and Preferred Units issued to the POP Members pursuant to the Transactions. As Common Units and Preferred Units are exchanged by the Surviving Corporation at the option of a POP Member for Surviving Corporation Common Stock, the number of votes attaching to the Proportionate Voting Preferred Stock will decrease by a proportionate amount. The Management Advisory Agreement shall provide that on all matters, the Advisor shall cast votes in respect to the Proportionate Voting Common Stock as, and in amounts, directed by the POP Members and their permitted transferees. The Proportionate Voting Preferred Stock shall have no dividend rights and de minimis rights to distributions upon liquidation and shall be redeemable at the election of the Surviving Corporation at such time as the Management Advisory Agreement is terminated and the Surviving Corporation becomes self-advised.

 

9.

SUBSCRIPTION AND REGISTRATION RIGHTS .

9.1 Subscription . At the Closing, AZL shall sell to POP, POP Affiliates, POP Members or other affiliates of POP Common Units and Surviving Corporation Common Stock, as elected by POP, for an aggregate purchase price of $5,000,000 and a price per Common Unit or share of Surviving Corporation Common Stock equal to the Adjusted Per Share Value. The purchase price shall be payable in immediately available funds at Closing.

9.2 Registration Rights . AZL shall enter into the Registration Rights Agreement at Closing with recipients of Common Units and Preferred Units. Under the Registration Rights

 

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Agreement, AZL shall grant the recipients of Common Units and Preferred Units demand and piggyback registration rights with respect to Surviving Corporation Common Stock, which rights shall not require the Surviving Corporation to cause to be effective under the Securities Act a registration statement prior to the second anniversary of the Closing Date.

 

10.

CLOSING .

Closing shall take place on the Closing Date, commencing at 10:00 a.m. Central Time at the offices of Barack Ferrazzano Kirschbaum Perlman & Nagelberg LLP, 333 West Wacker Drive, Chicago, Illinois 60606, or at such other place as AZL and POP shall agree, but shall be deemed effective as of 12:01 a.m. Eastern Time on the Closing Date.

 

11.

REPRESENTATIONS AND WARRANTIES OF POP .

POP hereby represents and warrants to AZL, which representations and warranties shall be true and correct on the date hereof and at Closing.

11.1 Authority . POP is a limited liability company duly organized and in good standing under the laws of its jurisdiction of organization. POP has all necessary power and authority to execute, deliver and perform this Agreement and consummate all of the Transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement and the Transactions have been approved and duly authorized by all necessary action of POP. This Agreement is the valid and binding obligation of POP, enforceable against POP in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles and doctrines of general application.

11.2 Authority of POP Affiliates . Each POP Affiliate is a limited liability company duly organized and in good standing under the laws of its jurisdiction of organization, and is authorized to do business in the state in which the POP Property directly or indirectly owned (whether fully or in part) by such POP Affiliate is located, except to the extent such failure to qualify would not have a POP Material Adverse Effect. The copy of the POP Operating Agreement of each POP Affiliate delivered, or to be delivered, to AZL is true, correct and complete in all material respects as of the date delivered. Each POP Affiliate has all necessary power and authority to perform the Transactions contemplated by this Agreement. Except for the Members Instruments, the execution, delivery and performance of this Agreement and the Transactions have been approved and duly authorized by all necessary action of each POP Affiliate, except as set forth in any Contribution Agreement.

11.3 Title and Physical Condition . One or more POP Affiliates (on a direct or an indirect basis) holds (fully or in part) fee simple or leasehold title to each POP Property, as described in further detail in the Contribution Agreements. To the Knowledge of POP, and except as otherwise provided in the Contribution Agreements, there is no existing patent or latent structural or other physical defect or deficiency in the condition of any POP Property, or any component or portion thereof, that would have a POP Material Adverse Effect.

11.4 Compliance with Existing Laws . To POP’s Knowledge (i) no POP Property is in violation of any material building, zoning, environmental or other ordinances, statutes or regulations of any governmental agency, in respect to the ownership, use, maintenance, condition and operation of the POP Property or any part thereof, and (ii) the fee simple owner or ground lessee of each POP Property possesses all material licenses, certificates, permits and authorizations necessary for the use and operation of the POP Property owned or ground leased, as the case may be, by it in the

 

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manner in which it is currently being operated, except, in each case where such violation or failure would not have a POP Material Adverse Effect.

11.5 Litigation . No litigation is pending or, to POP’s Knowledge, threatened, including administrative actions or orders relating to governmental regulations, against the fee simple owner or ground lessee of any POP Property or affecting the use, operation or ownership of any POP Property or any part thereof as contemplated herein, except, in any case, such as would not have a POP Material Adverse Effect.

11.6 No Defaults . To the Knowledge of POP, neither the execution of this Agreement nor the consummation of the Transactions will: (i) subject to any approval that may be required under any or all of the POP Properties Indebtedness, the POP Operating Agreements, and any tenancy-in-common or joint venture agreement to which a POP Property may be subject, conflict with, or result in a breach of, the terms, conditions or provisions of, or constitute a default under, any agreement or instrument to which any POP Affiliate is a party or by which any POP Affiliate or any POP Property is bound, (ii) subject to any approval required under any or all of the POP Properties Indebtedness, the POP Operating Agreement, and any tenancy-in-common or joint venture agreement to which a POP Property may be subject, violate any restriction, requirement, covenant or condition to which any POP Affiliate is subject or by which any POP Affiliate or any POP Property is bound, (iii) constitute a violation of any applicable code, resolution, law, statute, regulation, ordinance, rule, judgment, decree or order applicable to any POP Affiliate, or (iv) result in the cancellation of any contract or lease pertaining to any POP Property; except in any instance in any of (i) – (iv) such as would not have a POP Material Adverse Effect.

11.7 Environmental Matters . POP has no Knowledge of any release, discharge, spillage, uncontrolled loss, seepage or filtration of oil, petroleum or chemical liquids or solids, liquid or gaseous products or any hazardous waste or hazardous substance (as those terms are used in the Comprehensive Environmental Response, Compensation and Liability Act of 1986, as amended, the Resource Conservation and Recovery Act of 1976, as amended, or in any other applicable federal, state or local laws, ordinances, rules or regulations relating to protection of public health, safety or the environment, as such laws may be amended from time to time) at, upon, under or within any POP Property that would have a POP Material Adverse Effect. To POP’s Knowledge, there is no proceeding or action pending or threatened by any person or governmental agency regarding the environmental condition of any POP Property that would have a POP Material Adverse Effect.

11.8 POP Affiliate Liabilities . Except for (i) the POP Property Indebtedness, (ii) any tenancy-in-common or joint venture agreement to which a POP Property may be subject, and (iii) any accrued liabilities and obligations of the POP Affiliate which are subject to Closing prorations pursuant to this Agreement, to the Knowledge of POP, no POP Affiliate shall have any material liabilities or obligations, either accrued, absolute or contingent or otherwise, which will not be paid or discharged on or before the Closing Date. In addition, except for the claims and liabilities described in the preceding sentence or otherwise described or disclosed in this Agreement (including the Schedules and Exhibits hereto), no POP Affiliate has, to the Knowledge of POP, received not