SECOND AMENDMENT TO MODIFIED INDUSTRIAL GROSS LEASE
THIS SECOND AMENDMENT TO MODIFIED INDUSTRIAL GROSS LEASE (this “Second Amendment”) is made as of June 26, 2009, by and between DOOLITTLE WILLIAMS, LLC, a California limited liability company (“Landlord”), and ENERGY RECOVERY, INC., a Delaware corporation (“Tenant”).
A. Landlord and Tenant entered into that certain Modified Industrial Gross Lease dated as of November 25, 2008 (the “Original Lease”), relating to certain premises described in the Lease.
B. Landlord and Tenant subsequently entered into that certain First Amendment to Modified Industrial Gross Lease dated as of May 28, 2009 (the “First Amendment”). The Original Lease as amended by the First Amendment is referred to herein collectively as the “Lease”.
C. Landlord and Tenant now desire to further amend the Lease to, among other things, add additional space to the leased Premises, all as more fully set forth below.
D. All capitalized terms used in this Second Amendment shall have the respective meanings given to them in the Lease unless otherwise defined herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby amend the Lease on the terms hereof effective as of the date hereof, notwithstanding anything to the contrary contained therein:
1. Expansion of Warehouse Premises.
(a) The increment of space in the Warehouse located at 2250 Williams Street, San Leandro, California which is adjacent to the existing Warehouse Premises and which is labeled “Expansion Space” on the attached Exhibit 2, consisting of approximately 45,000 rentable square feet, shall be defined and referred to herein as the “Expansion Space” and shall be added to the Premises covered by the Lease on the terms and conditions set forth herein. Landlord and Tenant agree that for the purpose of the Lease, as amended by this Second Amendment, the Expansion Space shall be conclusively deemed to contain 46,250 square feet.
(b) As used herein, the “Expansion Commencement Date” shall mean the date on which Landlord tenders possession of the Expansion Space to Tenant following the vacating of the Expansion Space by the existing tenant, Portfolio Productions, Inc., a California corporation, dba Sitcom (“Sitcom”) and otherwise in the condition required by this Second Amendment. Landlord estimates that the Expansion Commencement Date will occur on August 1, 2009 (the “Estimated Expansion Date”); provided, however, that if Landlord is unable to
tender possession of the Expansion Space to Tenant in the condition required by Section l(d) of this Second Amendment by the Estimated Expansion Date, then: (i) the validity of this Second Amendment shall not be affected or impaired thereby; (ii) Landlord shall not be in default hereunder or be liable for damages therefor; and (iii) Tenant shall accept possession of the Expansion Space on the date when Landlord tenders possession thereof to Tenant in the condition required by Section l(d) of this Second Amendment. The term of the lease of the Expansion Space shall begin on the Expansion Commencement Date and shall be coterminous with the Term as defined in Sections 1 and 3.02 of the Lease (i.e. ten (10) years from the Commencement Date, as that term is defined in the Lease and amended by Section 7 below of this Second Amendment).
(c) As of the Expansion Commencement Date, the definition of “Warehouse Premises” in the Defined Terms of the Lease shall be modified to provide that the “Warehouse Premises” contains a total of 63,750 rentable square feet consisting of the 17,500 rentable square feet in the originally demised Warehouse Premises (referred to in this Second Amendment as the “Original Warehouse Premises”) and the Expansion Space consisting of 46,250 rentable square feet; provided, however, that in the event the Expansion Commencement Date should occur earlier than the Commencement Date for the rest of the Premises, then the term “Warehouse Premises” as used in the Lease as amended by this Second Amendment shall apply to the Expansion Space only prior to the occurrence of the Commencement Date. The Expansion Space shall remain a portion of the “Warehouse Premises” throughout the Term of the Lease (including any exercised Renewal Terms).
(d) Tenant shall accept the Expansion Space in its “AS IS” state and condition and Landlord shall have no obligation to make or pay for any improvements or renovations in or to the Expansion Space or to otherwise prepare the Expansion Space for Tenant’s occupancy except that Landlord shall, at Landlord’s sole cost and expense, prior to the Expansion Commencement Date, remove Sitcom’s racks from the Expansion Space and repair any damage caused by the rack removal or the vacating of the Expansion Space by Sitcom.
2. Demising Wall; Alterations; Restoration; Letter of Credit; Permits.
(a) All costs associated with the improvement and alteration of the Expansion Space (collectively, the “Expansion Space Alterations”) shall be borne solely by Tenant. Such Expansion Space Alterations expressly include (i) the installation of a demising wall (the “Demising Wall”) to separate the Expansion Space from the remainder of the Warehouse that will remain occupied by Sitcom (the “Sitcom Remainder Space”) and (ii) any required seismic upgrades of the Warehouse (the “Seismic Upgrade Work”). All Expansion Space Alterations shall be performed in compliance with the terms of Sections 8.02 and 7.05 of the Lease.
(b) Tenant shall engage Engineered Construction Services Corporation (“ECS”) as the construction manager for the Expansion Space Alterations, including without limitation the construction of the Demising Wall. Tenant shall obtain an estimate of ECS’s fees for the construction management services to be provided in conjunction with the Expansion Space Alterations, following which Tenant shall contract directly with ECS for such work.
(c) The Demising Wall shall be erected between the Expansion Space and the Sitcom Remainder Space with minimal disruption to Sitcom’s use of and access to its premises, including minimizing all dust and noise impacting the Sitcom Remainder Space. Further, Tenant shall provide appropriate security for Sitcom’s warehouse inventory located in the Sitcom Remainder Space throughout the process of construction of the Demising Wall. Provided that Tenant manages the process of construction of the Demising Wall in a commercially reasonable manner, Tenant shall not be liable to Sitcom or otherwise for payment of any claims asserted by Sitcom for business interruption resulting from performance of any of the Expansion Space Alterations, including the Demising Wall construction and the Seismic Upgrade Work.
(d) Landlord acknowledges and agrees that Tenant shall be permitted to perform, subject to compliance with Sections 8.02 and 7.05 of the Lease, the following alterations to the Expansion Space as part of the Expansion Space Alterations:
(i) increase the roof height of the Warehouse in a partial section over an area of the Expansion Space that will house a large spray dryer;
(ii) dig an open trench pit for an iso-static press;
(iii) dig an approximately 150-foot trench, approximately 12-20 inches deep, for a kiln transfer car system;
(iv) build a heat-resistant room for kiln exhaust equipment;
(v) modify the roof structure to accommodate HVAC systems;
(vi) add additional gas capacity up to 36 million BTU per hour;
(vii) upgrade the electrical system to accommodate multiple pieces of machinery;
(viii) install a dust collection system;
(ix) add a water tank/berm system (transferred to the Expansion Space from phase 1 construction in the original Warehouse Premises);
(x) modify the plumbing system as required;
(xi) perform concrete floor work as required;
(xii) add bathroom and office space as needed to accommodate staff needs; and
(xiii) perform such other work as may be required to adapt the Expansion Space to Tenant’s industrial needs.
(e) Consistent with the terms of Section 8.02 of the Lease, Tenant shall be obligated to restore the Expansion Space to its original condition existing prior to performance of
the Expansion Space Alterations, including removal of the concrete block portion of the Demising Wall; provided, however, that Tenant’s obligations under Section 8.02 with respect to the Expansion Space expressly exclude the obligations (i) to return the roof to its original height, (ii) to remove or undo any Seismic Upgrade Work and (iii) to remove the parking corridor (as set forth in Section 10.06) along the north wall (as shown on the attached Exhibit 2). Notwithstanding the foregoing, Landlord shall have the option, by not less than twelve (12) months’ notice to Tenant, to authorize Tenant to leave some or all of the Expansion Space Alterations in place upon surrender of the Expansion Space at the end of the Term.
(f) If, upon the date that is twelve (12) months before the expiration of the Term, Tenant’s cash assets on hand as reported by its most recent Form 10Q, is less than Three Million Dollars ($3,000,000) or upon an uncured material financial default by Tenant (including without limitation Tenant’s failure to pay rent when due following receipt of any applicable notice required by the Lease), Landlord shall require Tenant to deliver to Landlord an irrevocable standby letter of credit in an amount equal to $250,000.00 (the “Letter of Credit”) to secure Tenant’s obligations to restore the Premises as required by Section 8.02 of the Lease and the foregoing Section 2(e) of this Second Amendment, which Letter of Credit shall (1) be addressed to Landlord, (2) be in a form reasonably satisfactory to Landlord (3) be issued by a federally insured financial institution with minimum assets of Ten Billion Dollars ($10,000,000,000.00) (the “Minimum Assets”), upon which presentment may be made in a local office of the financial institution, (4) allow for partial and multiple draws thereunder, and (5) have an expiration date not earlier than thirty (30) days after the scheduled Term expiration date (as the same may be extended) or in the alternative, have a term of not less than one (1) year. In addition, the Letter of Credit shall provide that, in the event of Landlord’s assignment of its interest in the Lease, the Letter of Credit shall be freely transferable by Landlord to the assignee without charge to Landlord or approval of the issuer. The Letter of Credit shall provide for same day or next business day payment to Landlord upon the issuer’s receipt of a sight draft from Landlord together with Landlord’s certificate signed by two officers or managers certifying that the requested sum is due and payable from Tenant and Tenant has failed to pay, and with no other conditions.
The Letter of Credit shall be replaced by a new Letter of Credit if the issuing financial institution: (i) has assets which fall below the Minimum Assets; (ii) enters into any form of regulatory or governmental proceeding, including without limitation any receivership instituted or commenced by the Federal Deposit Insurance Corporation (the “FDIC”); (iii) is otherwise declared insolvent, is downgraded by the FDIC, is determined to be less than well capitalized by the appropriate Federal banking agency under the prompt corrective action rules of the FDIC, or closes for any reason; or (iv) in any manner communicates (including without limitation communications sent by or on behalf of the FDIC) its unwillingness to honor the terms of the Letter of Credit. If Tenant fails to deliver to Landlord the replacement Letter of Credit within fifty (50) days following Landlord’s written demand for same, Landlord shall be entitled to draw down the entire Letter of Credit and, until Tenant delivers to Landlord the replacement Letter of Credit as required by this paragraph, hold the drawn cash as a security deposit (which need not be segregated from Landlord’s other funds and which shall not accrue interest for Tenant’s benefit, in each case unless otherwise required by applicable law).
In the event that Tenant is in default under the terms and provisions of the Lease with respect to Tenant’s restoration obligations, Landlord shall have the right, at any time after such default, without giving any further notice to Tenant: (1) to make a partial draw upon said Letter of Credit in an amount necessary to cure such default or (2) to draw down the entire amount of such Letter of Credit at such time, and any such amounts received by Landlord shall be held by Landlord (and need not be segregated or accrue interest unless otherwise required by applicable law) and shall be applied in accordance with the terms of the Lease as amended hereby in the same manner as a security deposit to cure Tenant’s default.
To the extent that Landlord has not previously drawn upon the Letter of Credit, and to the extent that Tenant is not otherwise in default of its restoration obligations under the Lea