REAL ESTATE FUND FORMATION
AGREEMENT
This Real Estate Fund Formation
Agreement (this “ Agreement ”), dated
as of October 15, 2009, is entered into by and between Yucaipa
American Alliance Fund II, LLC, a Delaware limited liability
company (“ Yucaipa ”), and Morgans Hotel Group
Co., a Delaware corporation (“ MHG ”). In
consideration of the promises and representations, warranties,
covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
1. The Fund . Yucaipa and MHG shall
use good faith efforts to endeavor to raise a private investment
fund (the “ Fund ”) in accordance with
subparagraphs (a) through (g) of this Section 1
:
(a) The purpose of the Fund will be to,
subject to reasonable exceptions to be mutually agreed by Yucaipa
and MHG, invest in ( i ) hotel real estate projects located
in North America (including, without limitation, ( x ) the
acquisition, development or redevelopment of hotel real estate
projects and ( y ) investments in, or acquisitions,
development or redevelopment of, condominiums, bars, restaurants,
retail establishments, entertainment venues and other business
ventures located within or reasonably related to any hotel real
estate project described in the foregoing clause (y) )
directly or indirectly undertaken by MHG or any of its subsidiaries
where there is the opportunity to own at least a 20% equity
interest in such project and to make an equity investment of at
least $10,000,000 (each such project, a “ Qualified
Morgans Project ”) (each underlying hotel of a Qualified
Morgans Project in which the Fund invests, a “ Fund
Morgans Hotel ”) and ( ii ) such other hotel real
estate projects that are related to first class full-service hotels
as determined by the General Partner; provided that no hotel
real estate project located in North America that had been
undertaken by a person without the participation of MHG or any of
its subsidiaries shall be deemed to be a Qualified Morgans Project
if ( A ) such project is subsequently acquired by MHG or any
of its subsidiaries in connection with the acquisition by MHG or
such subsidiary of such project together with ( I ) assets
other than hotel real estate projects or ( II ) hotel real
estate projects that are located outside of North America and (
B ) a majority of the value of the assets being acquired in
such acquisition (as measured based on allocable purchase price at
the time of such acquisition) arises from the portion of such
assets that are either ( I ) assets other than hotel real
estate projects or ( II ) hotel real estate projects that
are located outside of North America.
(b) The Fund will have the first right to
fund up to the entire equity investment (but excluding any portion
reserved for co-investment by MHG pursuant to the last sentence of
this Section 1(b) ) in ( i ) each Qualified
Morgans Project and ( ii ) other hotel real estate projects
to be mutually agreed by Yucaipa and MHG (such right, the “
Investment Rights ”). MHG will not, and will cause its
subsidiaries and the Non-Yucaipa Key Professionals (as defined
below) to not, invest in, or cause to be offered to any person, the
opportunity to invest or otherwise participate in any project
(including, without limitation, any Qualified Morgans Project) that
is subject to the Investment
Rights, in each
case, except to the extent the Fund has been offered in accordance
with this Agreement, and the Fund has declined, such opportunity.
The Fund will be deemed to have declined an opportunity if the Fund
does not accept such opportunity within 30 calendar days after
being offered such opportunity in accordance with this Agreement.
The General Partner shall use its reasonable best efforts to
complete, and MHG shall use its reasonable best efforts to provide
promptly to the General Partner such information as the General
Partner may reasonably request in order to facilitate the
completion of, the General Partner’s due diligence review of
such opportunity within such 30-calendar-day period. If the Fund
has been offered such opportunity in accordance with this
Agreement, and the Fund has declined any portion of such
opportunity, then MHG, its affiliates and the Non-Yucaipa Key
Professionals may invest or otherwise participate in such portion
on its own or with one or more third parties; provided that
such investment or participation must be on terms and conditions no
more favorable, taken as a whole, to any such participating party
in any material respect than the terms and conditions that were
offered to, and declined by, the Fund, unless ( x ) such
more favorable terms and conditions are offered to the Fund in
accordance with this Agreement and ( y ) the Fund does not
elect, within seven calendar days after such offer, to invest in
such opportunity upon such more favorable terms and conditions. If
the Fund invests in any Qualified Morgans Project, MHG may, in
MHG’s sole discretion, elect to co-invest with the Fund, on a
pari passu basis with the Fund and upon terms and conditions no
more favorable to MHG than the terms and conditions applicable to
the Fund’s investment in such Qualified Morgans Project, in
such amount as MHG shall determine up to 20% of the aggregate
equity investment of the Fund and MHG in such Qualified Morgans
Project.
(c) The Investment Rights will commence as
of the closing of the Fund at which aggregate capital commitments
to the Fund equal or exceed $100,000,000 and will terminate upon
the earliest to occur of ( i ) the expiration of the
Fund’s commitment period, ( ii ) the date on which the
Fund has invested or committed to invest at least 85% of the
aggregate capital commitments to the Fund, and ( iii ) the
fifth anniversary of the date hereof.
(d) The aggregate capital commitments of
the General Partner (as defined below) and its affiliates to the
Fund (the “ GP Commitment ”) will be equal to 5%
of the aggregate capital commitments to the Fund; provided
that in no event will the GP Commitment be required to exceed
$25,000,000.
(e) The targeted size of the Fund will be
between $250,000,000 and $500,000,000 in aggregate capital
commitments to the Fund.
(f) The Fund will be subject to governance
and investor rights satisfactory to Yucaipa and MHG. The Fund will
be entitled to consent rights over certain actions of MHG with
respect to Fund Morgans Hotels and each other Fund hotel owned by
the Fund that is managed by MHG or a subsidiary of MHG. The
material terms and conditions of each Fund Morgans Hotel and each
other Fund hotel owned by the Fund that is managed by MHG or a
subsidiary of MHG, including, without limitation, the acquisition
and the corresponding renovation/development scope and budget, will
be mutually decided by the Fund and MHG. Furthermore, if MHG or any
of its subsidiaries
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co-invests in a
Qualified Morgans Project, major decisions of the applicable joint
venture established with respect to the underlying Fund Morgans
Hotel will be mutually decided upon by the Fund and MHG. Such major
decisions will include, without limitation, capital expenditures in
excess of applicable reserves or budgets, financings, dispositions
and approvals of operating and capital budgets.
(g) Except as contemplated by this
Agreement (including, without limitation, subparagraphs (a)
through (g) of this Section 1 ) or otherwise
mutually agreed by Yucaipa and MHG, the terms and conditions of the
Fund, and the rights and obligations of investors in the Fund, will
be commercially reasonable, as determined by reference to
prevailing investor expectations, industry standards and market
practices for private investment funds with similar investment
objectives as the Fund.
2. The General Partner . The Fund,
if successfully organized, shall be controlled by a general partner
(or other equivalent control entity in the case the Fund is not
organized as a limited partnership) (the “ General
Partner ”), which shall be organized as a joint venture
between Yucaipa, its affiliates and its related persons, on the one
hand, and MHG, its subsidiaries and its related persons, on the
other hand, in accordance with subparagraphs (a) through
(d) of this Section 2 :
(a) 50% of the equity interests in the
General Partner will be allocated to Yucaipa, its affiliates and
its investment professionals in such proportions as Yucaipa may
determine. The remaining 50% of the equity interests in the General
Partner will be allocated to key non-Yucaipa professionals who are
( i ) employed by, or serve as directors to, MHG, (
ii ) actively involved with the Fund, and ( iii )
reasonably satisfactory to Yucaipa (such non-Yucaipa professionals,
the “ Non-Yucaipa Key Professionals
”).
(b) In the event the General Partner issues
equity interests to persons other than Yucaipa, MHG, Non-Yucaipa
Key Professionals or their respective subsidiaries, affiliates and
related persons, including, without limitation, in connection with
the raising of additional capital or as allocations to other
management and professionals, the equityholders of the General
Partner will be subject to pro rata dilution of their equity
interests in the General Partner.
(c) Yucaipa will assist the Non-Yucaipa Key
Professionals in funding their pro rata share of the GP Commitment
by making to them, or causing one of Yucaipa’s affiliates to
make to them, an interest-bearing loan on mutually agreeable terms
and conditions to be determined by Yucaipa and such Non-Yucaipa Key
Professionals and secured only by a first priority lien in favor of
Yucaipa or such affiliate, as applicable, on such Non-Yucaipa Key
Professionals’ interests in the General Partner and the Fund.
Such loans will be structured such that Yucaipa or such affiliate,
as applicable, will be repaid in full (including, without
limitation, all outstanding principal, accrued and unpaid interest
and other amounts owing under such loans) on a first priority basis
before any distributions are made with respect to the General
Partner or the Fund to the Non-Yucaipa Key Professionals. Such
loans shall be made in compliance with the Sarbanes-Oxley
Act.
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(d) Except as contemplated by this
Agreement (including, without limitation, subparagraphs (a)
through (d) of this Section 2) , the terms and
conditions of the General Partner, and the respect
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