TABLE OF CONTENTS

ARTICLE I  DEFINED TERMS
ARTICLE II  PARTNERSHIP FORMATION AND IDENTIFICATION
2.01		Formation.
2.02		Name, Office and Registered Agent.
2.03		Partners.
2.04		Term and Dissolution.
2.05		Filing of Certificate and Perfection of Limited Partnership.
2.06		Certificates Describing Partnership Units.
ARTICLE III  BUSINESS OF THE PARTNERSHIP
ARTICLE IV  CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01		Capital Contributions.
4.02		Additional Capital Contributions and Issuances of Additional Partnership Interests.
4.03		Additional Funding.
4.04		Capital Accounts.
4.05		Percentage Interests.
4.06		No Interest on Contributions.
4.07		Return of Capital Contributions.
4.08		No Third-Party Beneficiary.
ARTICLE V  PROFIT AND LOSS; DISTRIBUTIONS
5.01		Allocation of Profit and Loss.
5.02		Distributions of Cash.
5.03		REIT Distribution Requirements.
5.04		No Right to Distributions in Kind.
5.05		Limitations on Return of Capital Contributions.
5.06		Distributions Upon Liquidation.
5.07		Substantial Economic Effect.
5.08		Withholding.
5.09		Tax Consequences to Limited Partners.
ARTICLE VI  RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
6.01		Management of the Partnership.
6.02		Delegation of Authority.
6.03		Indemnification and Exculpation of Indemnitees.
6.04		Liability of the General Partner.
6.05		Reimbursement of or by General Partner.
6.06		Outside Activities.
6.07		Employment or Retention of Affiliates.

 

i

 

 

6.08		Reserved.
6.09		Title to Partnership Assets.
6.10		Miscellaneous.
ARTICLE VII  TRANSFERS OF GENERAL PARTNERSHIP INTERESTS
7.01		Transfers of General Partnership Interests.
7.02		Admission of a Substitute or Additional General Partner.
7.03		Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner.
7.04		Removal of a General Partner.
ARTICLE VIII  RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
8.01		Management of the Partnership.
8.02		Power of Attorney.
8.03		Limitation on Liability of Limited Partners.
8.04		Ownership by Limited Partner of Corporate General Partner or Affiliate.
8.05		Exchange Right.
8.06		Call Right.
8.07		Duties and Conflicts.
ARTICLE IX  TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.01		Purchase for Investment.
9.02		Restrictions on Transfer of Limited Partnership Interests.
9.03		Admission of Substitute Limited Partner.
9.04		Rights of Assignees of Partnership Interests.
9.05		Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner.
9.06		Joint Ownership of Interests.
ARTICLE X  BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01		Books and Records.
10.02		Custody of Partnership Funds; Bank Accounts.
10.03		Fiscal and Taxable Year.
10.04		Annual Tax Information and Report.
10.05		Tax Matters Partner; Tax Elections; Special Basis Adjustments.
10.06		Reports to Limited Partners.
ARTICLE XI  AMENDMENT OF AGREEMENT; MEETINGS
11.01		Amendment.
11.02		Meetings of Partners.
ARTICLE XII  MERGER, EXCHANGE OR CONVERSION
12.01		Merger, Exchange or Conversion of Partnership.
12.02		Approval of Plan of Merger, Exchange or Conversion.
12.03		Rights of Dissenting Limited Partners.
12.04		Roll-Up Transactions.

 

ii

 

 

ARTICLE XIII  GENERAL PROVISIONS
13.01		Notices.
13.02		Survival of Rights.
13.03		Additional Documents.
13.04		Severability.
13.05		Entire Agreement.
13.06		Pronouns and Plurals.
13.07		Headings.
13.08		Counterparts.
13.09		Governing Law.
13.10		Arbitration.
13.11		Vote of Affiliated Limited Partners.
13.12		Acknowledgement as to Exculpation and Indemnification.

 

EXHIBIT A — Limited Partners and Limited Partners’ Capital Contributions and Partnership Units

EXHIBIT B — Notice of Exercise of Exchange Right

EXHIBIT C — Call Notice

 

iii

 

SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

OF

BEHRINGER HARVARD OPERATING PARTNERSHIP I LP

January 1, 2007

This Second Amended and Restated Agreement of Limited Partnership (this “ Agreement ”) is entered into effective as of January 1, 2007 by and among BHR, Inc., a Delaware corporation (the “ General Partner ”), BHR Business Trust, a Maryland business trust (“ BHR Business Trust ”), BHR Partners, LLC, a Delaware limited liability company (“ BHR Partners ” and, collectively with BHR Business Trust, the “ Original Limited Partners ”), Behringer Harvard REIT I, Inc., a Maryland corporation (the “ Company ”), the McCormick Family Trust 1/20/82, a California trust, Gary S. Carr, an individual, and the Limited Partner(s) set forth or which may, in the future, be set forth on Exhibit A hereto, as amended from time to time, with respect to Behringer Harvard Operating Partnership I LP  (the “ Partnership ”), a limited partnership formed under the laws of the State of Texas, pursuant to a Certificate of Limited Partnership filed with the Office of the Secretary of State of the State of Texas effective as of June 27, 2002.

RECITALS

WHEREAS , that certain Agreement of Limited Partnership of the Partnership dated June 27, 2002, as amended by that certain Amended and Restated Agreement of Limited Partnership of the Partnership dated May 11, 2005 (collectively, the “ Original Agreement ”), was entered into by and among the Company as the general partner and BHR Partners as the original limited partner;

WHEREAS , the McCormick Family Trust 1/20/82 and Gary S. Carr were each admitted as an Additional Limited Partner to the Partnership on July 28, 2005;

WHEREAS , the parties hereto desire to amend and restate the Original Agreement in order to set forth (a) the number of issued and outstanding Partnership Units as of the date hereof, (b) the terms and conditions under which the Partnership will be operated and (c) the rights, obligations, and limitations of the parties thereto and any additional Limited Partners with respect to each other and the Partnership as a whole;

WHEREAS , simultaneously with the execution of this Agreement, the Company transferred 100% of its General Partnership Interest to its wholly-owned subsidiary, BHR, Inc.;

WHEREAS , simultaneously with the execution of this Agreement, BHR Partners transferred approximately 88% of its Limited Partnership Interest to BHR Business Trust, a wholly-owned subsidiary of BHR BT, Inc., a Delaware corporation, which is itself a wholly-owned subsidiary of the Company;

 

WHEREAS , BHR, Inc. has executed any and all documents necessary to be admitted as General Partner of the Partnership in substitution of the Company; and

WHEREAS , BHR Business Trust has executed any and all documents necessary to be admitted as a Limited Partner in the Partnership in partial substitution of BHR Partners.

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

AGREEMENT

ARTICLE I

DEFINED TERMS

The following defined terms used in this Agreement shall have the meanings specified below:

“ Act ” means the Texas Revised Uniform Limited Partnership Act, as it may be amended from time to time.

“ Additional Funds ” has the meaning set forth in Section 4.03 hereof.

“ Additional Limited Partner ” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.02 hereof and who is shown as such on the books and records of the Partnership.

“ Additional Securities ” means any additional REIT Shares (other than REIT Shares issued in connection with an exchange pursuant to Section 8.05 hereof) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares, as set forth in Section 4.02(a)(ii).

“ Administrative Expenses ” means (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) those administrative costs and expenses of the General Partner, including any salaries or other payments to directors, officers or employees of the General Partner, any expenses of the Company that are paid or incurred by the Company or any of its Affiliates on behalf of the General Partner and reimbursable by the General Partner, and any accounting and legal expenses of the General Partner, which expenses, the Partners have agreed, are expenses of the Partnership and not the General Partner, and (iii) to the extent not included in clause (ii) above, REIT Expenses; provided, however, that Administrative Expenses shall not include any administrative costs and expenses incurred by the General Partner that are attributable to Properties or partnership interests in a Subsidiary Partnership that are owned by the Company directly.

“ Advisor ” or “ Advisors ” means the Person or Persons, if any, appointed, employed or contracted with by the Company pursuant to its Articles of Incorporation and responsible for

2

 

directing or performing the day-to-day business affairs of the Company, including any Person to whom the Advisor subcontracts all or substantially all of such functions.

“ Affiliate ” or “ Affiliated ” means, with respect to any Person, (i) any Person directly or indirectly owning, controlling or holding, with the power to vote, 10% or more of the outstanding voting securities of such other Person; (ii) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (iv) any executive officer, director, trustee or general partner of such other Person; and (v) any legal entity for which such Person acts as an executive officer, director, trustee or general partner.

“ Agreed Value ” means (i) the fair market value of a Partner’s non-cash Capital Contribution as of the date of contribution as agreed to by such Partner and the General Partner as of the date of contribution as set forth on Exhibit A hereto, as it may be amended from time to time, or (ii) in the case of any contribution or distribution of property other than cash not set forth on Exhibit A , the fair market value of such property as determined by the General Partner at the time such property is contributed or distributed, reduced by liabilities either assumed by the Partnership or Partner upon such contribution or distribution or to which such property is subject when the property is contributed or distributed.

“ Agreement ” means this Second Amended and Restated Agreement of Limited Partnership, as it may be amended or restated from time to time.

“ Articles of Incorporation ” means the Articles of Incorporation of the Company filed with the Maryland State Department of Assessments and Taxation, as amended or restated from time to time.

“ Call Notice ” means a Call Notice, as defined in Section 8.06(a) hereof and substantially in the form of Exhibit C hereto.

“ Call Right ” has the meaning provided in Section 8.06(a) hereof.

“ Capital Account ” has the meaning provided in Section 4.04 hereof.

“ Capital Contribution ” means the total amount of cash, cash equivalents, and the Agreed Value of any Property or other asset contributed or agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of the Agreement.  Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner.

“ Cash Amount ” means an amount of cash equal to the Value of the REIT Shares Amount on the date of receipt by the General Partner of an Exchange Notice.

“ Certificate ” means any instrument or document that is required under the laws of the State of Texas, or any other jurisdiction in which the Partnership conducts business, to be signed

3

 

and sworn to by the Partners of the Partnership (either by themselves or pursuant to the power-of-attorney granted to the General Partner in Section 8.02 hereof) and filed for recording in the appropriate public offices within the State of Texas or such other jurisdiction to perfect or maintain the Partnership as a limited partnership, to effect the admission, withdrawal, or substitution of any Partner from or to the Partnership, or to protect the limited liability of the Limited Partners as limited partners under the laws of the State of Texas or such other jurisdiction.

“ Code ” means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time.  Reference to any particular provision of the Code shall mean that provision in the Code at the date hereof and any successor provision of the Code.

“ Commission ” means the U.S. Securities and Exchange Commission.

“ Company ” means Behringer Harvard REIT I, Inc., a Maryland corporation.

“ Competent Independent Expert ” shall mean a Person with no material current or prior business or personal relationship with the Advisor, the General Partner or the Partnership who is engaged to a substantial extent in the business of rendering opinions regarding the value of the assets of the type held by the Partnership and who is qualified to perform such work.  Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers shall be conclusive evidence of such qualification.

“ Conversion Factor ” means 1.0, provided, that in the event that the Company (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on such date, and provided further, that in the event that an entity other than an Affiliate of the Company shall become General Partner pursuant to any merger, consolidation or combination of the Company with or into another entity (the “ Successor Entity ”), the Conversion Factor shall be adjusted by multiplying the Conversion Factor by the number of shares of the Successor Entity into which one REIT Share is converted pursuant to such merger, consolidation or combination, determined as of the date of such merger, consolidation or combination.  Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event; provided, however, that if the General Partner receives an Exchange Notice after the record date, but prior to the effective date of such dividend, distribution, subdivision or combination, the Conversion Factor shall be determined as if the General Partner had received the Exchange Notice immediately prior to the record date for such dividend, distribution, subdivision or combination; and provided further, however, that if the General Partner, in its sole

4

 

and absolute discretion, causes the Partnership to make a distribution of Partnership Units or to subdivide or combine the outstanding Partnership Units in order to give equivalent effect to a dividend or distribution of REIT Shares or a subdivision or combination or REIT Shares, then the Conversion Factor shall remain the factor which it was immediately prior to such dividend or distribution of REIT Shares or subdivision or combination of REIT Shares.

“ Dissenting Limited Partner ” has the meaning provided in Section 12.03(a) hereof.

“ Event of Bankruptcy ” as to any Person means (i) the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has been dismissed within 90 days); (ii) the insolvency or bankruptcy of such Person as finally determined by a court proceeding; (iii) the filing by such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial part of his assets; and (iv) the commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another, provided, that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days.

“ Exchange Amount ” means either the Cash Amount or the REIT Shares Amount, as selected by the Company in its sole and absolute discretion pursuant to Section 8.05(b) hereof.

“ Exchange Notice ” means a Notice of Exercise of Exchange Right, as defined in Section 8.05(a) hereof and substantially in the form of Exhibit B hereto.

“ Exchange Right ” has the meaning provided in Section 8.05(a) hereof.

“ Exchanging Partner ” has the meaning provided in Section 8.05(a) hereof.

“ General Partner ” means BHR, Inc., a Delaware corporation, and any Person who becomes a substitute or additional General Partner as provided herein, and any successors thereto.

“ General Partnership Interest ” means a Partnership Interest held by the General Partner that is a general partnership interest.

“ GP Capital ” means the aggregate of Capital Contributions of cash made by the General Partner in accordance with Sections 4.01 and 4.02 hereof.

“ GP Minimum Return ” means such amount as may be necessary or required to allow the Company to meet its distribution requirement for qualification as a REIT as set forth in Section 857 of the Code and to avoid any federal income or excise tax liability imposed by the Code.

5

 

“ Holding Period ” means, with respect to Partnership Units acquired by Additional Limited Partners hereunder, the period commencing on the date of issuance of such Units through and including the fourth anniversary of such date of acquisition.

“ Indemnitee ” means (i) any Person made a party to a proceeding by reason of its status as the General Partner, as the sole owner of all of the voting securities of the General Partner, or a director, officer or employee of the General Partner or the Partnership, and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time, in its sole and absolute discretion.

“ Independent Director ” means a member of the board of directors of the Company who is not on the date of determination, and within the last two (2) years from the date of determination has not been, directly or indirectly associated with the Company, the Sponsor or the Advisor or any of their respective Affiliates by virtue of (i) ownership of an interest in the Sponsor or the Advisor or any of their respective Affiliates, other than the Company, (ii) employment by the Company, the Sponsor or the Advisor or any of their respective Affiliates, (iii) service as an officer or director of the Sponsor or the Advisor or their respective Affiliates, other than as a director of the Company, (iv) performance of services, other than as a director of the Company, (v) service as a director or trustee of more than three (3) real estate investment trusts organized by the Sponsor or advised by the Advisor, or (vi) maintenance of a material business or professional relationship with the Company, the Sponsor or the Advisor or any of their respective Affiliates.  A business or professional relationship is considered “material” if the gross revenue derived by the director from the Sponsor and the Advisor and their Affiliates exceeds five percent (5%) of either the director’s annual gross income during either of the last two (2) years or the director’s net worth on a fair market value basis.  An indirect relationship with the Sponsor or the Advisor shall include circumstances in which a director’s spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law or brother- or sister-in-law is or has been associated with the Sponsor or the Advisor, any of their respective Affiliates or the Company.

“ Joint Venture ” means any joint venture or partnership arrangement in which the Partnership is a co-venturer or general partner established to acquire or hold Properties, Mortgages or other investments of the Company.

“ Limited Partner ” means the Original Limited Partners, any Person named as a Limited Partner on Exhibit A attached hereto, and any Person who becomes a Substitute or Additional Limited Partner in such person’s capacity as a Limited Partner in the Partnership.

“ Limited Partnership Interest ” means the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of such Act.

“ Liquidating Event ” has the meaning set forth in Section 2.04 hereof.

6

 

“ Loss ” has the meaning provided in Section 5.01(f) hereof.

“ LP Capital ” means the aggregate of Capital Contributions in cash or cash equivalents and the Agreed Value of any non-cash contributions to the Partnership made by a Limited Partner in accordance with Sections 4.01 and 4.02 hereof.

“ LP Return ” means, with regard to any Limited Partner, an amount equal to the aggregate cash dividends that would have been payable to such Limited Partner with respect to the applicable fiscal period if such Limited Partner had owned REIT Shares equal in number to the number of Partnership Units owned by such Limited Partner during such fiscal period.

“ Mortgage ” means, in connection with mortgage financing provided, invested in or purchased by the Partnership, any note, deed of trust, security interest or other evidence of indebtedness or obligations, which is secured or collateralized by real property owned by the borrower under such note, deed of trust, security interest or other evidence of indebtedness or obligations.

“ Net Capital Proceeds ” means the net cash proceeds received by the Partnership in connection with (i) any Sale, (ii) any borrowing or refinancing of borrowing(s) by the Partnership, (iii) any condemnation or deeding in lieu of condemnation of all or a portion of any Property, (iv) any collection in respect of property, hazard, or casualty insurance (but not business interruption insurance) or any damage award; or (v) any other transaction the proceeds of which, in accordance with generally accepted accounting principles, are considered to be capital in nature, in each case, after deduction of (a) all costs and expenses incurred by the Partnership with regard to such transactions (including, without limitation, any repayment of any indebtedness required to be repaid as a result of such transaction or which the General Partner elects to pay out of the proceeds of such transaction, together with accrued interest and premium, if any, thereon and any sales commissions or other costs or expenses due and payable to any Person in connection therewith, including to a Partner or its Affiliates), and (b) all amounts expended by the Partnership for the acquisition of additional Properties, Mortgages or other investments or for capital repairs or improvements to any Property with such cash proceeds.

“ Offer ” has the meaning set forth in Section 7.01(c)(ii) hereof.

“ Offering ” means the offer and sale of REIT Shares to the public by the Company.

“ Original Limited Partners ” means the Limited Partners designated as such on Exhibit A hereto.

“ Partner ” means any General Partner or Limited Partner.

“ Partner Nonrecourse Debt Minimum Gain ” has the meaning set forth in Regulations Section 1.704-2(i).  A Partner’s share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5).

7

 

“ Partnership ” means Behringer Harvard Operating Partnership I LP, a Texas limited partnership.

“ Partnership Interest ” means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement.

“ Partnership Minimum Gain ” has the meaning set forth in Regulations Section 1.704-2(b)(2).  In accordance with Regulations Section 1.704-2(d), the amount of Partnership Minimum Gain is determined by first computing, for each Partnership nonrecourse liability, any gain the Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and then aggregating the separately computed gains.  A Partner’s share of Partnership Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(g)(1).

“ Partnership Record Date ” means the record date established by the General Partner for the distribution of cash pursuant to Section 5.02 hereof, which record date shall be the same as the record date established by the General Partner for a distribution to its stockholders.

“ Partnership Unit ” means a fractional, undivided share of the Partnership Interests of all Partners issued hereunder.  The number of Partnership Units held by the Original Limited Partners will, as of any relevant date, equal the difference between (a) the product of the number of shares of the Company issued since the formation of the Company through such relevant date (adjusted to reflect any subdivisions or combinations of shares of the Company through such relevant date), multiplied by the inverse of the Conversion Factor as of such relevant date (i.e., one (1) divided by the Conversion Factor as of such relevant date), and (b) the sum of (i) the number of Partnership Units of the Original Limited Partners deemed purchased or redeemed pursuant to Section 6.10 since the inception of the Partnership through such relevant date and (ii) all Partnership Units held by the General Partner.  It is acknowledged that the Original Limited Partners will contribute the proceeds from the sale of shares in the Company to the Partnership and the Partnership Units resulting from the contribution of such proceeds by the Original Limited Partners to the Partnership will be issued by the Partnership to the Original Limited Partners.  Furthermore, it is acknowledged that if the Partnership makes a distribution of Partnership Units or subdivides or combines the outstanding Partnership Units in order to give equivalent effect to a dividend or distribution of the Company’s shares or a subdivision or combination of the Company’s shares, then the Partnership Units held by the Original Limited Partners will not be entitled to any such distribution of Partnership Units or affected by any such subdivision or combination of Partnership Units because the number of the Original Limited Partners’ Partnership Units will have already been adjusted by virtue of the dividend or distribution of the Company’s shares or the subdivision or combination of the Company’s shares.

“ Percentage Interest ” means the percentage ownership interest in the Partnership of each Partner, as determined by dividing the number of Partnership Units owned by a Partner by the aggregate number of Partnership Units owned by all Partners.

8

 

“ Person ” means any individual, partnership, corporation, joint venture, limited liability company, trust or other entity.

“ Profit ” has the meaning provided in Section 5.01(f) hereof.

“ Property ” means any office, industrial or other commercial real property in which the Partnership holds an ownership interest, either directly or pursuant to the Partnership’s ownership of an interest in a subsidiary which owns an interest in any such office, industrial or other commercial real property.

“ Prospectus ” means the final prospectus, as amended or supplemented, that is delivered to purchasers of REIT Shares in the Offering.

“ Regulations ” means the Federal Income Tax Regulations, including temporary or proposed regulations, issued under the Code, as amended and as hereafter amended from time to time.  Reference to any particular provision of the Regulations shall mean that provision of the Regulations on the date hereof and any successor provision of the Regulations.

“ REIT ” means a real estate investment trust under Sections 856 through 860 of the Code.

“ REIT Expenses ” means (i) costs and expenses relating to the formation and continuity of existence and operation of the Company and any Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included within the definition of “Company”), including taxes, fees and assessments associated therewith, any and all costs, expenses or fees payable to any director, officer, or employee of the Company, (ii) costs and expenses relating to (A) any registration and public offering of securities by the Company, the net proceeds of which were used to make a contribution to the Partnership, and (B) all statements and reports incidental thereto, including, without limitation, underwriting discounts and selling commissions applicable to any such offering of securities, and any costs and expenses associated with any claims made by any holders of such securities or any underwriters or placement agents thereof, (iii) costs and expenses associated with any repurchase of any securities by the Company, (iv) costs and expenses associated with the preparation and filing, of any periodic or other reports and communications by the Company under federal, state or local laws or regulations, including filings with the Commission, (v) costs and expenses associated with compliance by the Company with laws, rules and regulations promulgated by any regulatory body, including the Commission and any securities exchange, (vi) costs and expenses associated with any section 401(k) plan, incentive plan, bonus plan or other plan providing for compensation for the employees of the Company, (vii) costs and expenses incurred by the Company relating to any issuance or redemption of Partnership Interests or REIT Shares, and (viii) all other operating or administrative costs of the Company incurred in the ordinary course of its business on behalf of or in connection with the Partnership.

“ REIT Share ” means a share of common stock in the Company (or Successor Entity, as the case may be).

9

 

“ REIT Shares Amount ” means a number of REIT Shares equal to the product of the number of Partnership Units offered for exchange by an Exchanging Partner, multiplied by the Conversion Factor as adjusted to and including the Specified Exchange Date; provided that in the event the Company issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the stockholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the “ Rights ”), and the rights have not expired at the Specified Exchange Date, then the REIT Shares Amount shall also include the rights issuable to a holder of the REIT Shares on the record date fixed for purposes of determining the holders of REIT Shares entitled to Rights.

“ Sale ” means any transaction or series of transactions whereby (i) the Partnership directly or indirectly (except as described in other subsections of this definitions) sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including the lease of any Property consisting of a building only, and including any event with respect to any Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (ii) the Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys or relinquishes its ownership of all or substantially all the interest of the Partnership in any Joint Venture in which it is a co-venturer or partner; (iii) any Joint Venture directly or indirectly (except as described in other subsections of this definition) in which the Partnership as a co-venturer or partner sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including any event with respect to any Property which gives rise to insurance claims or condemnation awards; (iv) the Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, conveys or relinquishes its interest in any Mortgage or portion thereof (including with respect to any Mortgage, all payments thereunder or in satisfaction thereof other than regularly scheduled interest payments) of amounts owed pursuant to such Mortgage and any event with respect to a Mortgage which gives rise to a significant amount of insurance proceeds or similar awards, or (v) the Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys or relinquishes its ownership of any other asset (other than investments in bank accounts, money market funds or other current assets) not previously described in this definition or any portion thereof.

“ Securities Act ” means the Securities Act of 1933, as amended.

“ Service ” means the Internal Revenue Service.

“ Specified Exchange Date ” means the first business day of the month first occurring after the expiration of 60 business days from the date of receipt by the General Partner of the Exchange Notice.

“ Sponsor ” means any Person which (i) is directly or indirectly instrumental in organizing, wholly or in part, the Company, (ii) will manage or participate in the management of the Company, and any Affiliate of any such Person, other than a Person whose only relationship with the Company is that of an independent property manager and whose only compensation is as such, (iii) takes the initiative, directly or indirectly, in founding or organizing the Company, either alone or in conjunction with one or more other Persons, (iv) receives a material

10

 

participation in the Company in connection with the founding or organizing of the business of the Company, in consideration of services or property, or both services and property, (v) has a substantial number of relationships and contacts with the Company, (vi) possesses significant rights to control Properties, (vii) receives fees for providing services to the Company which are paid on a basis that is not customary in the industry, or (viii) provides goods or services to the Company on a basis which was not negotiated at arm’s-length with the Company.

“ Subsidiary ” means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person.

“ Subsidiary Partnership ” means any partnership, limited liability company or other entity taxed as a partnership for federal income tax purposes in which interests are owned by the Company or by a wholly-owned Subsidiary or Subsidiaries of the Company.

“ Substitute Limited Partner ” means any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.03 hereof.

“ Successor Entity ” has the meaning provided in the definition of “Conversion Factor” contained herein.

“ Survivor ” has the meaning set forth in Section 7.01(d) hereof.

“ Transaction ” has the meaning set forth in Section 7.01(c) hereof.

“ Transfer ” has the meaning set forth in Section 9.02(a) hereof.

“ Transfer Restriction Date ” means the effective date upon which Behringer Advisors LP, a Texas limited partnership, shall cease acting as the advisor to the Company under the terms of an advisory agreement entered into between Behringer Advisors LP and the Company.

“ Unaffiliated Percentage Interest ” means a Percentage Interest held by a Limited Partner that is not an Affiliate of the Company.

“ Unpaid Return ” means any accrued but unpaid LP Return or GP Minimum Return less all amounts distributed by the Partnership to a Limited Partner or the General Partner in reduction thereof.

“ Value ” means, with respect to any security, the average of the daily market price of such security for the ten consecutive trading days immediately preceding the date as of which such Value is to be determined.  The market price for each such trading day shall be: (i) if the security is listed or admitted to trading on any securities exchange, the sale price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices, regular way, on such day; (ii) if the security is not listed or admitted to trading on any securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable

11

 

quotation source designated by the Company; or (iii) if the security is not listed or admitted to trading on any securities exchange and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Company, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the ten days prior to the date in question, the value of the security shall be determined by the Company acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.  In the event the security includes any additional rights, then the value of such rights shall be determined by the Company acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.

ARTICLE II

PARTNERSHIP FORMATION AND IDENTIFICATION

2.01        Formation.   The Partnership is a limited partnership formed pursuant to the Act and upon the terms and conditions set forth in the Original Agreement.  The Partnership shall continue upon the execution of this Agreement.

2.02        Name, Office and Registered Agent.   The name of the Partnership is “ Behringer Harvard Operating Partnership I LP ”  The registered office and principal place of business of the Partnership shall be 15601 Dallas Pkwy., Suite 600, Addison, Texas 75001.  The General Partner may at any time change the location of such office, provided the General Partner gives notice to the Partners of any such change.  The name and address of the Partnership’s registered agent is CT Corporation System, 350 North St. Paul, Dallas, Texas 75201.  The sole duty of the registered agent as such is to forward to the Partnership any notice that is served on it as registered agent.

2.03        Partners.

(a)           The General Partner of the Partnership is BHR, Inc., a Delaware corporation.  Its principal place of business is the same as that of the Partnership.

(b)           The Limited Partners are those Persons identified as Limited Partners (including the Original Limited Partners) on Exhibit A hereto, as it may be amended from time to time.

2.04        Term and Dissolution.

(a)           The term of the Partnership shall continue in full force and effect until December 31, 2054, except that the Partnership shall be dissolved earlier upon the first to occur of any of the following events (“ Liquidating Events ”):

(i)            the occurrence of an Event of Bankruptcy as to a General Partner or the dissolution, death, removal or withdrawal of a General Partner unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof, provided, that if a General

12

 

Partner is on the date of such occurrence a partnership, the dissolution of such General Partner as a result of the dissolution, death, withdrawal, removal or Event of Bankruptcy of a partner in such partnership shall not be an event of dissolution of the Partnership if the business of such General Partner is continued by the remaining partner or partners thereof, either alone or with additional partners, and such General Partner and such partners comply with any other applicable requirements of this Agreement;

(ii)           the passage of 90 days after the sale or other disposition of all or substantially all of the assets of the Partnership (provided, that if the Partnership receives an installment obligation as consideration for such sale or other disposition, the Partnership shall continue, unless sooner dissolved under the provisions of this Agreement, until such time as such obligation is paid in full);

(iii)          the exchange of all Limited Partnership Interests (other than any of such interests held by the General Partner or Affiliates of the General Partner); or

(iv)          the election by the General Partner that the Partnership should be dissolved.

(b)           Upon dissolution of the Partnership (unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof), the General Partner (or its trustee, receiver, successor or legal representative) shall amend or cancel the Certificate and liquidate the Partnership’s assets and apply and distribute the proceeds thereof in accordance with Section 5.06 hereof.  Notwithstanding the foregoing, the liquidating General Partner may either (i) defer liquidation of, or withhold from distribution for a reasonable time, any assets of the Partnership (including those necessary to satisfy the Partnership’s debts and obligations), or (ii) distribute the assets to the Partners in kind.

2.05        Filing of Certificate and Perfection of Limited Partnership.   The General Partner shall execute, acknowledge, record and file, at the expense of the Partnership, the Certificate and any and all amendments thereto and all requisite fictitious name statements and notices in such places and jurisdictions as may be necessary to cause the Partnership to be treated as a limited partnership under, and otherwise to comply with, the laws of each state or other jurisdiction in which the Partnership conducts business.

2.06        Certificates Describing Partnership Units.   At the request of a Limited Partner, the General Partner may, at its option and in its discretion, issue a certificate summarizing the terms of such Limited Partner’s interest in the Partnership, including the number of Partnership Units owned as of the date of such certificate.  If issued, any such certificates (a) shall be in form and substance as approved by the General Partner, (b) shall not be negotiable, and (c) shall bear a legend substantially similar to the following:

“ This certificate is not negotiable.  The Partnership Units represented by this certificate are governed by and transferable only in accordance with the provisions of the Agreement of Limited Partnership of Behringer Harvard Operating Partnership I LP, as amended from time to time. ”

13

 

ARTICLE III

BUSINESS OF THE PARTNERSHIP

The purpose and nature of the business to be conducted by the Partnership is (a) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act, provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to qualify as a REIT, unless the General Partner otherwise ceases to qualify as a REIT, (b) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing, and (c) to do anything necessary or incidental to the foregoing.  In connection with the foregoing, and without limiting the Company’s right in its sole and absolute discretion to cease qualifying as a REIT, the Partners acknowledge that the Company’s current status as a REIT and the avoidance of income and excise taxes on the Company inures to the benefit of all the Partners and not solely to the Company and the General Partner.  Notwithstanding the foregoing, the Limited Partners agree that the Company may terminate its status as a REIT under the Code at any time to the full extent permitted under its Articles of Incorporation.  The General Partner shall be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Code.

ARTICLE IV

CAPITAL CONTRIBUTIONS AND ACCOUNTS

4.01        Capital Contributions.   As of January 1, 2007, the parties hereto, or their respective predecessors in interest as the case may be, have made Capital Contributions to the Partnership, as applicable, in exchange for the number of Partnership Units (estimated as of January 1, 2007 with respect to the Original Limited Partners only) set forth opposite their names on Exhibit A .  After the Company has filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, the General Partner shall, without the approval of any other Partner, attach an amended Exhibit A to this Agreement to reflect the actual number of Partnership Units held by the Original Limited Partners as of January 1, 2007.  At such time as Additional Limited Partners are admitted to the Partnership, each shall make Capital Contributions as set forth opposite their names on Exhibit A , as it may be amended from time to time.  Exhibit A shall be deemed amended upon, and the General Partner may, without the approval of any other Partner, attach an amended Exhibit A to this Agreement to reflect: (a) the issuance of Partnership Units issued to Additional Limited Partners or to any existing Limited Partner pursuant to Section 4.02 (including the Original Limited Partners), (b) any Partnership Units purchased or redeemed pursuant to Section 6.10, (c) any redemption or purchase of Partnership Units by the Partnership or the Company by reason of the exercise by a Limited Partner of the Exchange Right, (d) any purchase by the Company (or any of its Affiliates) of Partnership Units pursuant to the Call Right and (e) any changes required pursuant to the second sentence of this Section 4.01.

4.02        Additional Capital Contributions and Issuances of Additional Partnership Interests.

Except as provided in this Section 4.02 or in Section 4.03, the Partners shall have no right

14

 

or obligation to make any additional Capital Contributions or loans to the Partnership.  The General Partner may contribute additional capital to the Partnership, from time to time, and receive additional Partnership Units in respect thereof in the manner contemplated by this Section 4.02.

(a)           Issuances of Additional Partnership Interests.

(i)            General .  The General Partner is hereby authorized to cause the Partnership to issue additional Partnership Interests in the form of Partnership Units for any Partnership purpose, at any time or from time to time, to the Partners (including the General Partner) or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners.  Any additional Partnership Interests issued thereby may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion and without the approval of any Limited Partner, subject to Texas law, including, without limitation, (A) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (B) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (C) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; provided, however, that no additional Partnership Interests shall be issued to the General Partner or the Original Limited Partners unless:

(1)           the additional Partnership Interests are issued in connection with an issuance of REIT Shares or other interests in, the Company, which shares or interests have designations, preferences and other rights such that the economic interests are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner or the Original Limited Partners by the Partnership in accordance with this Section 4.02, and the General Partner, on its own or with the Original Limited Partners, shall make a Capital Contribution to the Partnership in an amount equal to the aggregate proceeds raised in connection with the issuance of such shares of stock of or other interests in the Company;

(2)           the additional Partnership Interests are issued in exchange for property or other assets owned by the General Partner or Original Limited Partners with a fair market value, as determined by the General Partner, in good faith, equal to the value of the Partnership Interests; or

(3)           the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests.

Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units for less than fair market value, so long as the General

15

 

Partner concludes in good faith that such issuance is in the best interests of the Company and the Partnership.

(ii)           Issuance of Additional Securities .  The Company shall not issue any additional REIT Shares (other than REIT Shares issued in connection with an exchange made pursuant to Section 8.05 hereof) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares (collectively, “Additional Securities”), other than to all holders of REIT Shares or pursuant to an Offering, unless (A) the General Partner shall cause the Partnership to issue to the General Partner (or to the General Partner and/or the Original Limited Partners), as the General Partner may designate, Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights such that the economic interests are substantially similar to those of the Additional Securities, and (B) the Company through the General Partner (or the General Partner and/or the Original Limited Partners) contributes the proceeds from the issuance of such Additional Securities and from any exercise of rights contained in such Additional Securities to the Partnership; provided, however, that the Company is allowed to issue Additional Securities in connection with an acquisition of a Property or other asset to be held directly by the General Partner, but if and only if, such direct acquisition and issuance of Additional Securities have been approved and determined to be in the best interests of the Company and the Partnership by a majority of the Independent Directors and Limited Partners holding more than 50% of the Unaffiliated Percentage Interests, if any.  Without limiting the foregoing, the General Partner is expressly authorized to issue Additional Securities for less than fair market value, and to cause the Partnership to issue to the General Partner (or to the General Partner and/or the Original Limited Partners) corresponding Partnership Interests, so long as (1) the Company concludes in good faith that such issuance is in the best interests of the Company and the Partnership, including without limitation, the issuance of REIT Shares and corresponding Partnership Units pursuant to an employee share purchase plan providing for employee purchases of REIT Shares at a discount from fair market value or employee stock options that have an exercise price that is less than the fair market value of the REIT Shares, either at the time of issuance or at the time of exercise, and (2) the Company through the General Partner (or the General Partner and/or the Original Limited Partners) contributes all proceeds from such issuance to the Partnership.

(b)           Certain Deemed Contributions of Proceeds of Issuance of REIT Shares .  In connection with any and all issuances of REIT Shares, the Company through the General Partner (or the General Partner and/or the Original Limited Partners) shall make Capital Contributions to the Partnership of the proceeds therefrom, provided, that if the proceeds actually received and contributed by the Company are less than the gross proceeds of such issuance as a result of any underwriter’s discount or other fees or expenses paid or incurred in connection with such issuance, then the General Partner (or the General Partner together with the Original Limited Partners, as applicable) shall be deemed to have made Capital Contributions to the Partnership in the aggregate amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid such offering expenses in accordance with Section 6.05 hereof and in connection with the required issuance of additional Partnership Units for such Capital Contributions pursuant to Section 4.02(a) hereof.

 

16

 

(c)           Original Limited Partner Deemed Contributions .  In the event that any Original Limited Partner elects to defer any distribution of cash hereunder to be made to it pursuant to Section 5.02(a) hereof, then such amount shall be deemed to be an additional contribution of capital to the Partnership by the Original Limited Partner, which shall be added to the Original Limited Partner’s Capital Contribution to the Partnership and the Original Limited Partner’s Capital Account as established and maintained under Section 4.04 hereof.

4.03        Additional Funding.   If the General Partner determines that it is in the best interests of the Partnership to provide for additional Partnership funds (“ Additional Funds ”) for any Partnership purpose, the General Partner may (a) cause the Partnership to obtain such funds from outside borrowings, or (b) elect to have the General Partner or any of its Affiliates provide such Additional Funds to the Partnership through loans or otherwise.

4.04        Capital Accounts.   A separate capital account (a “ Capital Account ”) shall be established and maintained for each Partner in accordance with Regulations Section 1.704-1(b)(2)(iv).  If (a) a new or existing Partner acquires an additional Partnership Interest in exchange for more than a de minimis Capital Contribution, (b) the Partnership distributes to a Partner more than a de minimis amount of Partnership property as consideration for the redemption of a Partnership Interest, or (c) the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the property of the Partnership to its fair market value (as determined by the General Partner, in its sole and absolute discretion, and taking into account Section 7701(g) of the Code) in accordance with Regulations Section 1.704-l(b)(2)(iv)(f).  When the Partnership’s property is revalued by the General Partner, the Capital Accounts of the Partners shall be adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which generally require such Capital Accounts to be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the Capital Accounts previously) would be allocated among the Partners pursuant to Section 5.01 hereof if there were a taxable disposition of such property for its fair market value (as determined by the General Partner, in its sole and absolute discretion, and taking into account Section 7701(g) of the Code) on the date of the revaluation.

4.05        Percentage Interests.   If the number of outstanding Partnership Units increases or decreases during a taxable year, each Partner’s Percentage Interest shall be adjusted by the General Partner effective as of the date of each such increase or decrease to a percentage equal to the number of Partnership Units held by such Partner divided by the aggregate number of Partnership Units outstanding after giving effect to such increase or decrease.  In such event, the General Partner shall revalue the property of the Partnership and the Capital Account for each Partner shall be adjusted as set forth in Section 4.04 hereof.  If the Partners’ Percentage Interests are adjusted pursuant to this Section 4.05, the Profit and Loss for the taxable year in which the adjustment occurs shall be prorated between the part of the year ending on the day when the Partnership’s property is revalued by the General Partner and the part of the year beginning on the following day and, as so divided, shall be allocated to the Partners based on their Percentage Interests before adjustment, and their adjusted Percentage Interests, respectively, either (a) as if the taxable year had ended on the date of the adjustment or (b) based on the number of days in each part.  The General Partner, in its sole and absolute discretion, shall determine which method

17

 

shall be used to allocate Profit and Loss for the taxable year in which an adjustment occurs, as may be required or permitted under Section 706 of the Code.

4.06        No Interest on Contributions.   No Partner shall be entitled to interest on its Capital Contribution, except as specifically provided in this Agreement.

4.07        Return of Capital Contributions.   No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership, except as specifically provided in this Agreement.  Except as otherwise provided herein, there shall be no obligation to return to any Partner or withdrawn Partner any part of such Partner’s Capital Contribution for so long as the Partnership continues in existence.

4.08        No Third-Party Beneficiary.   No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns.  None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners.  In addition, it is the intent of the parties hereto that no distribution to any Limited Partner shall be deemed a return of money or other property in violation of the Act.  However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to return such money or property, such obligation shall be the obligation of such Limited Partner and not of the General Partner.  Without limiting the generality of the foregoing, a deficit Capital Account of a Partner shall not be deemed to be a liability of such Partner nor an asset or property of the Partnership.

ARTICLE V

PROFIT AND LOSS; DISTRIBUTIONS

5.01        Allocation of Profit and Loss.

(a)           After giving effect to the special allocations set forth in Sections 5.01(b), (c) and (d), Profit for each fiscal year of the Partnership shall be allocated as follows: (i) first to the Partners, pro rata, in accordance with and in proportion to their respective Partnership Interests, in amounts equal to the amount of cash distributed to the Partners pursuant to Section 5.02(a) hereof with respect to such fiscal year; (ii) second, to the extent the amount of Profit for such fiscal year exceeds the amount of cash distributed to the Partners pursuant to Section 5.02(a) hereof, such excess shall be allocated to the General Partner and the Limited Partners in amounts and in proportion to the cumulative Loss allocated to the General Partner pursuant to clause (y) of this Section 5.01(a) and the cumulative Loss allocated to the Limited Partners pursuant to clause (x) of this Section 5.01(a), respectively; and (iii) finally, the balance, if any, of Profit shall be allocated to the Partners in accordance with and in proportion to their respective Percentage

18

 

Interests.  Notwithstanding the foregoing, however, it is the intent of the Partners that allocations of Profit to the Limited Partners be such that the amount of Profit allocated to each Limited Partner be equal to the amount of income that would have been allocated to such Limited Partner with respect to the applicable fiscal period if such Limited Partner had owned REIT Shares equal in number to the number of Partnership Units owned by such Limited Partner during such fiscal period, and if, for any reason, the foregoing allocations of Profit result in any material variation from this concept, Profit shall be allocated to each Limited Partner in an amount equal to the aggregate amount of income that would have been allocated to such Limited Partner with respect to the applicable fiscal period if such Limited Partner had owned REIT Shares equal in number to the number of Partnership Units owned by such Limited Partner during such fiscal period.  After giving effect to the special allocations set forth in Sections 5.01(b), (c) and (d), Loss for a fiscal year of the Partnership shall be allocated as follows: (w) first, to the Partners, pro rata, in accordance with and in proportion to their respective Partnership Interests, until the cumulative Loss allocated to each Partner under this clause (w) equals the cumulative Profit allocated to each Partner under clause (ii) of this Section 5.01(a); (x) second, to the Limited Partners in an amount equal to each such Limited Partner’s Capital Account balance prior to the allocation made under this clause (x); (y) third, to the General Partner in an amount equal to the General Partner’s Capital Account balance prior to the allocation made under this clause (y); and (z) fourth, to the General Partner to the extent that any further allocation of Loss to Limited Partners would result in any such Limited Partners having a deficit balance in their Capital Accounts.

(b)           Notwithstanding any provision to the contrary herein, (i) any expense of the Partnership that is a “nonrecourse deduction” within the meaning of Regulations Section 1.704-2(b)(1) shall be allocated in accordance with the Partners’ respective Percentage Interests, (ii) any expense of the Partnership that is a “partner nonrecourse deduction” within the meaning of Regulations Section 1.704-2(i)(2) shall be allocated to the Partner that bears the “economic risk of loss” of such deduction in accordance with Regulations Section 1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum Gain within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership taxable year, then, subject to the exceptions set forth in Regulations Section 1.704-2(f)(2), (3), (4) and (5), items of gain and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j), and (iv) if there is a net decrease in Partner nonrecourse debt minimum gain within the meaning of Regulations Section 1.704-2(i)(4) for any Partnership taxable year, then, subject to the exceptions set forth in Regulations Section 1.704-2(g), items of gain and income shall be allocated among the Partners, in accordance with Regulations Section 1.704-2(i)(4) and the ordering rules contained in Regulations Section 1.704-2(j).  A Partner’s “interest in partnership profits” for purposes of determining its share of the nonrecourse liabilities of the Partnership within the meaning of Regulations Section 1.752-3(a)(3) shall be such Partner’s Percentage Interest.

(c)           If a Partner receives in any taxable year an adjustment, allocation, or distribution described in subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases a deficit balance in such Partner’s Capital Account that exceeds the sum of such Partner’s shares of Partnership Minimum Gain and Partner nonrecourse debt minimum gain, as determined in accordance with Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially for such taxable year (and, if necessary, later taxable years) items of income and gain in an amount and manner sufficient to eliminate such deficit Capital Account

19

 

balance as quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d).  After the occurrence of an allocation of income or gain to a Partner in accordance with this Section 5.01(c), to the extent permitted by Regulations Section 1.704-1(b), items of expense or loss shall be allocated to such Partner in an amount necessary to offset the income or gain previously allocated to such Partner under this Section 5.01(c).

(d)           Loss shall not be allocated to a Limited Partner to the extent that such allocation would cause a deficit in such Partner’s Capital Account (after reduction to reflect the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of such Partner’s shares of Partnership Minimum Gain and Partner nonrecourse debt minimum gain.  Any Loss in excess of that limitation shall be allocated to the General Partner.  After the occurrence of an allocation of Loss to the General Partner in accordance with this Section 5.01(d), to the extent permitted by Regulations Section 1.704-1(b), Profit shall be allocated to the General Partner in an amount necessary to offset the Loss previously allocated to the General Partner under this Section 5.01(d).

(e)           If a Partner transfers any part or all of its Partnership Interest, the distributive shares of the various items of Profit and Loss allocable among the Partners during such fiscal year of the Partnership shall be allocated between the transferor and the transferee Partner either (i) as if the Partnership’s fiscal year had ended on the date of the transfer, or (ii) based on the number of days of such fiscal year that each was a Partner without regard to the results of Partnership activities in the respective portions of such fiscal year in which the transferor and the transferee were Partners.  The General Partner, in its sole and absolute discretion, shall determine which method shall be used to allocate the distributive shares of the various items of Profit and Loss between the transferor and the transferee Partner.

(f)            “ Profit ” and “ Loss ” and any items of income, gain, expense, or loss referred to in this Agreement shall be determined in accordance with federal income tax accounting principles, as modified by Regulations Section 1.704-(b)(2)(iv), except that Profit and Loss shall not include items of income, gain and expense that are specially allocated pursuant to Sections 5.01(b), 5.01(c), or 5.01(d).  All allocations of income, Profit, gain, Loss, and expense (and all items contained therein) for federal income tax purposes shall be identical to all allocations of such items set forth in this Section 5.01, except as otherwise required by Section 704(c) of the Code and Regulations Section 1.704-1(b)(4).  Any deductions, income, gain or loss (“ Tax Items ”) with respect to Partnership property that is contributed to the Partnership by a Partner shall be shared among the Partners for income tax purposes pursuant to Regulations promulgated under Section 704(c) of the Code, so as to take into account the variation, if any, between the basis of the property to the Partnership and its initial Agreed Value.  With respect to any property that is contributed to the Partnership by Ryanco Partners Ltd. No. X, a California limited partnership, such variation between basis and initial Agreed Value shall be taken into account under the “traditional method” with curative allocations on sale as described in Regulations Section 1.704-3.  With respect to any other non-cash properties subsequently contributed to the Partnership, the Partnership shall account for such variation under any method approved under Section 704(c) of the Code and the applicable regulations as chosen by the General Partner.  In the event Agreed Value of any Partnership asset is adjusted, subsequent allocations of Tax Items with respect to such asset shall take account of the variation, if any, between the adjusted basis of such asset and its Agreed Value in the same manner as under Section 704(c) of the Code and the applicable

20

 

regulations consistent with the requirements of Regulations Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the Code and the applicable regulations as chosen by the General Partner.

(g)           If the General Partner determines that is advantageous to the business of the Partnership to amend the allocation provisions of this Agreement so as to permit the Partnership to avoid the characterization of Partnership income allocable to various qualified plans, IRAs and other entities which are exempt from federal income taxation (“ Tax Exempt Partners ”) as constituting Unrelated Business Taxable Income (“ UBTI ”) within the meaning of the Code, specifically including, but not limited to, amendments to satisfy the so-called “fractions rule” contained in Code Section 514(c)(9), the General Partner is authorized, in its discretion, to amend this Agreement so as to allocate income, gain, loss, deduction or credit (or items thereof) arising in any year differently than as provided for in this Section if, and to the extent, that such amendments will achieve such result or otherwise permit the avoidance of characterization of Partnership income as UBTI to Tax Exempt Partners.  Any allocation made pursuant to this Section 5.01(g) shall be deemed to be a complete substitute for any allocation otherwise provided for in this Agreement, and no further amendment of this Agreement or approval by any Limited Partner shall be required to effectuate such allocation.  In making any such allocations under this Section 5.01(g) (“ New Allocations ”), the General Partner is authorized to act in reliance upon advice of counsel to the Partnership or the Partnership’s regular certified public accountants that, in their opinion, after examining the relevant provisions of the Code and any current or future proposed or final Treasury Regulations thereunder, the New Allocation will achieve the intended result of this Section 5.01(g).

New Allocations made by the General Partner in reliance upon the advice of counsel or accountants as described above shall be deemed to be made in the best interests of the Partnership and all of the Partners, and any such New Allocations shall not give rise to any claim or cause of action by any Partner against the Partnership or any General Partner.  Nothing herein shall require or obligate the General Partner, by implication or otherwise, to make any such amendments or undertake any such action.

5.02        Distributions of Cash.

(a)           The Partnership shall distribute cash on a quarterly (or, at the election of the General Partner, more frequent) basis, in an amount determined by the General Partner in its sole and absolute discretion, to the Partners who are Partners on the Partnership Record Date with respect to such quarter (or other distribution period) in the following manner: (i) first, to the General Partner in an amount equal to the GP Minimum Return with respect to the fiscal year of the General Partner; (ii) second, to the Limited Partners pro rata among them in proportion to the their respective Unpaid Return, if any, owing to each such Limited Partners with respect to prior fiscal years, in an amount equal to their respective Unpaid Return for such prior fiscal years owing to each such Limited Partner; (iii) third, after the establishment of reasonable cash reserves to meet REIT Expenses and other obligations of the Partnership, as determined in the sole and absolute discretion of the General Partner, to the General Partner and the Limited Partners in such aggregate amount as may be determined by the General Partner in its sole and absolute discretion to be allocated among the General Partner and the Limited Partners such that each Limited Partner will receive an amount equal to its LP Return for such fiscal year; and (iv)

21

 

finally, to the Partners in accordance with and in proportion to their respective Percentage Interests; provided, however, that if a new or existing Partner acquires an additional Partnership Interest in exchange for a Capital Contribution on any date other than a Partnership Record Date, the cash distribution attributable to such additional Partnership Interest relating to the Partnership Record Date next following the issuance of such additional Partnership Interest shall be reduced to the proportion thereof which equals (i) the number of days that such additional Partnership Interest is held by such Partner divided by (ii) the number of days between such Partnership Record Date and the immediately preceding Partnership Record Date.  Notwithstanding the foregoing, however, the Original Limited Partners may, in their sole and absolute discretion, elect to defer any distribution to be made to it, in which case the amount so deferred shall be deemed to be an additional Capital Contribution made on behalf of the Original Limited Partners under Section 4.02(c) hereof, to be distributed to the Original Limited Partners upon liquidation of the Partnership under Section 5.06 hereof, or at such time as the Original Limited Partners may otherwise be allowed to withdraw from the Partnership after the Transfer Restriction Date.

(b)           Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, the requirements of Sections 1441, 1442, 1445 and 1446 of the Code.  To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to a Partner or its assignee (including by reason of Section 1446 of the Code), either (i) if the actual amount to be distributed to the Partner or assignee equals or exceeds the amount required to be withheld by the Partnership, the amount withheld shall be treated as a distribution of cash in the amount of such withholding to such Partner or assignee, or (ii) if the actual amount to be distributed to the Partner or assignee is less than the amount required to be withheld by the Partnership, the amount required to be withheld shall be treated as a loan (a “ Partnership Loan ”) from the Partnership to the Partner or assignee on the day the Partnership pays over such amount to a taxing authority.  A Partnership Loan shall be repaid through withholding by the Partnership with respect to subsequent distributions to the applicable Partner or assignee.  In the event that a Limited Partner (a “ Defaulting Limited Partner ”) fails to pay any amount owed to the Partnership with respect to the Partnership Loan within 15 days after demand for payment thereof is made by the Partnership on the Limited Partner, the General Partner, in its sole and absolute discretion, may elect to make the payment to the Partnership on behalf of such Defaulting Limited Partner.  In such event, on the date of payment, the General Partner shall be deemed to have extended a loan (a “ General Partner Loan ”) to the Defaulting Limited Partner in the amount of the payment made by the General Partner and shall succeed to all rights and remedies of the Partnership against the Defaulting Limited Partner as to that amount.  Without limitation, the General Partner shall have the ri