Exhibit 10.31
OPTION AGREEMENT
(126 th Street &
Meridian II Medical Complex)
THIS OPTION AGREEMENT (this
“Agreement”) is made as of August 16, 2004 by and
among, Kite Realty Group L.P., a Delaware limited partnership
(“Kite Realty”), Kite 126th Street Medical II, LLC, an
Indiana limited liability company (“Optionor”) and
Alvin E. Kite, Jr., John A. Kite, Paul W. Kite and Thomas K.
McGowan (each a “Member” and, collectively, the
“Members”).
R E C I T A L S
WHEREAS, Kite Realty, the general
partner of which is Kite Realty Group Trust, a Maryland real estate
investment trust (the “REIT”), and the REIT are
engaging in various related transactions pursuant to which, among
other things, (i) Kite Realty will acquire interests in various
entities that own or lease real estate properties in which certain
persons affiliated with the REIT, including the Members, have
interests, (ii) the REIT will acquire interests in certain service
businesses currently owned by persons affiliated with the REIT,
including certain of the Members and (iii) the REIT will
effect an initial public offering of its common shares and
contribute the proceeds therefrom for a like number of units of
partnership interest in Kite Realty (the
“Kite IPO,” and together with the other
transactions described above, the “Kite IPO
Transactions”);
WHEREAS, 126 th Street
Medical II, LLC, an Indiana limited liability company (the
“LLC”), currently owns that certain real property as
described in Exhibit A hereto (the “Land”)
and the buildings, structures and other improvements situated on
the Land or hereinafter constructed or acquired (the
“Property”);
WHEREAS, Optionor is a member and
currently owns a fifty percent (50%) limited liability company
interest (the “Percentage Interest”) in the
LLC;
WHEREAS, each Member currently owns
the ownership interest in Optionor set forth in Exhibit B
hereto (the “Member Interests”); and
WHEREAS, As part of the Kite IPO
Transactions, Optionor desires to grant to Kite Realty an option to
acquire all of the right, title and interest in and to
Optionor’s membership interest in the LLC, including, without
limitation, all of Optionor’s Percentage Interest, voting
rights and interests in the capital, profits and losses arising out
of such Percentage Interest (such right, title and interest
hereinafter collectively referred to as the “LLC
Interest”), on the terms and conditions specified in this
Agreement.
NOW, THEREFORE, in consideration of
the foregoing and the mutual covenants and conditions set forth
herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as
follows:
ARTICLE I – THE
OPTION
1.1
Grant of Option
. Optionor hereby grants to
Kite Realty an option to acquire all right, title and interest of
Optionor in and to the LLC Interest free and clear of
any encumbrances on the LLC Interest (other than
encumbrances with respect to the Project Indebtedness (as defined
in Section 3.1) or any Entity Indebtedness (as defined in Section
5.2)) on the terms and conditions set forth herein (the
“Option”).
1.2
Commencement of Option
. Kite Realty shall have the
right to exercise the Option at any time after the date upon which
the Property reaches 85% occupancy until the expiration of the
Option pursuant to Section 1.3. Notwithstanding the
foregoing, in the event the Kite IPO is not consummated prior to
January 1, 2005, this Agreement shall become null and void and no
party shall have any liability to the other parties hereunder with
respect to the transactions contemplated hereby.
1.3
Expiration of Option
. Subject to Section 6.1
hereof, the Option shall expire on the fourth anniversary of the
date of commencement of construction of the planned development on
the Property (the “Option Term”). Optionor shall
promptly notify Kite Realty in writing of such date of
commencement.
1.4
Consents . The consummation of the transactions
contemplated by this Agreement is subject to any consents required
under the organizational documents of the LLC, any consents
required under the “Project Indebtedness” and any
“Entity Indebtedness” and (a) in the case of the
transfer of the LLC Interest, any other consents required to be
obtained prior to the transfer of the LLC Interest, or (b) in the
case of the transfer of the Member Interests pursuant to Section
5.2, any other consents required to be obtained prior to the
transfer of the Member Interests.
1.5
Subordination
. The Option granted by this
Agreement and the rights of Kite Realty hereunder are and shall be
subordinate to the Project Indebtedness and any Entity
Indebtedness.
ARTICLE II – PROCESS FOR
EXERCISE OF THE OPTION
2.1
Exercise . Subject to Section 1.2 hereof, the
Option may be exercised during the Option Term by delivery of
written notice by Kite Realty to Optionor (the “Exercise
Notice”), stating that the Option is exercised on the terms
set forth in this Agreement. The Exercise Notice shall
specify the name of the First Appraiser (as defined in Section
3.1(a)(ii)). The date upon which the Exercise Notice is
delivered by Optionor in accordance with this Agreement is
hereinafter referred to as the “Exercise Date.”
If the Option is timely exercised, subject to Section 3.1(f), the
LLC Interest shall be conveyed, and the closing date of such
acquisition, transfer and conveyance (the “Closing
Date”) shall occur, within the later of (a) 15 days after the
last day of the month immediately following the month in which the
Exercise Notice is delivered or (b) 45 days after the determination
of the FMV (as defined in Section 3.1) of the Property at the time
in accordance with Section 3.1. The exercise of the
Option is subject to the approval of a majority of the
“independent” members of the Board of Trustees of the
REIT (as defined in the REIT’s Amended and Restated Bylaws),
as general partner of Kite Realty.
2.2
Inspection
. During the term of this
Agreement and following consent of the LLC (which Optionor agrees
to use its commercially reasonable efforts to obtain), Optionor
agrees to permit Kite Realty and Kite Realty’s agents to
enter upon the Property, subject to the rights of any tenants, at
reasonable times to make such surveys, inspections
and tests as may reasonably be necessary in
connection with its examination of the Property. Kite Realty
hereby agrees to repair any damage it or its agents may cause to
the Property as a result of any such inspections or tests or any
other related damage caused by Kite Realty or its agents, and
further agrees to indemnify, defend and hold Optionor,
Optionor’s managers, the LLC and the Members harmless from
and against any and all claims, losses, damages and expenses,
including, without limitation, reasonable attorneys’ fees,
suffered by Optionor, Optionor’s managers, the LLC and/or the
Members as a direct result of the entry by Kite Realty or Kite
Realty’s agents upon, or acts upon, the Property in
connection with any such inspections or tests or any other related
damage caused by Kite Realty or its agents.
2.3
Information
. Optionor agrees to permit
Kite Realty and its agents to review all books, records and other
documentation reasonably requested by Kite Realty with respect to
Optionor, the LLP, the LLC Interest, the Member Interests and/or
the Property, which are in Optionor’s possession and
control. Optionor will provide (or cause to be provided),
upon request from Kite Realty, a report of the status of the LLC
Interest and the Property (to the extent within Optionor’s
possession and control), on a quarterly basis, which report shall
include unaudited financials and such other information and data as
Kite Realty may reasonably request regarding the LLC Interest and
the Property (to the extent within Optionor’s possession and
control); it being understood that, to the extent Kite Realty or
any of its subsidiaries or affiliated companies is providing
administrative services to the LLC and/or Optionor with respect to
the Property and/or the LLC Interest (including, without
limitation, accounting and record-keeping services), Optionor shall
be deemed to have satisfied its obligation under this Section 2.3
to the extent that the information requested by this Section 2.3 is
available to Kite Realty or such subsidiaries or affiliated
companies in connection with the performance of such administrative
services, and such information should be deemed to have been
delivered by Optionor to Kite Realty pursuant to this Section 2.3
(notwithstanding any obligations with respect to such information
– confidential or otherwise – contained in any
agreement providing for the performance of such administrative
services).
ARTICLE III – ACQUISITION
PROCESS
3.1
Acquisition
Consideration .
(a)
The acquisition consideration to be
paid by Kite Realty for the LLC Interest (the “Acquisition
Consideration”) pursuant to an exercise of the Option under
Section 2.1 shall be equal to the lesser of (i) Annualized NOI
divided by 8.5%, less the Project Indebtedness, multiplied by the
Percentage Interest or (ii) the product of (x) the fair market
value of the Property (“FMV”) at the time, as
determined in accordance with this Section 3.1, less the Project
Indebtedness, multiplied by (y) the Percentage Interest.
“Annualized NOI” shall mean the annualized net
operating income for the Property, calculated as follows: the sum
of (i) the net operating income for the Property for the month
immediately prior to the month in which the Exercise Notice is
delivered plus (ii) the net operating income for the Property for
the month in which the Exercise Notice is delivered plus (iii) the
net operating income for the Property for the month immediately
following the month in which the Exercise Notice is delivered,
annualized. “Project Indebtedness” shall mean any
outstanding financing or other arrangements entered into by or on
behalf of the LLC which relate to the Property, including, without
limitation, any mezzanine or bridge
financing, or amendments or extensions
thereof. The transfer of the LLC Interest as contemplated by
this Agreement shall be subject to any Project
Indebtedness.
(i)
FMV for this purpose shall mean the
price at which a willing buyer would buy, and a willing seller
would sell, the Property in an arms-length transaction assuming the
Property is sold in an orderly disposition and each of the buyer
and seller are aware of, and take into account, all relevant
factors which exist at the time.
(ii)
In the Exercise Notice, Kite Realty
shall designate an appraiser (the “First Appraiser”) to
determine FMV for the Property. Optionor then shall have 10
days after receiving such notice to designate a second appraiser
(the “Second Appraiser”) by written notice to Kite
Realty. If Optionor fails to timely designate the Second
Appraiser, FMV shall be determined by the First Appraiser.
The First Appraiser and the Second Appraiser each shall separately
determine FMV in accordance with Section 3.1(a) and shall provide a
detailed written valuation report to each of Optionor and Kite
Realty within 45 days after the last day for designating the
Second Appraiser. The designation of the First Appraiser
shall be approved by a majority of the members of the Board of
Trustees of the REIT, which majority must include a majority of
“independent” trustees, as defined in the REIT’s
Amended and Restated Bylaws. If only one appraiser timely
submits a proper valuation report, its FMV determination shall be
final, binding and conclusive for purposes of this Agreement.
If both appraisers timely submit proper valuation reports, and
their FMV determinations vary by 10% or less, FMV shall be equal to
the average of the two FMV determinations. If both appraisers
timely submit proper valuation reports, and their FMV
determinations vary by more than 10%, the two appraisers shall
promptly appoint a third appraiser (the “Third
Appraiser”), which shall independently determine FMV in
accordance with Section 3.1(a) and shall provide a detailed written
valuation report to each of Optionor and Kite Realty within 45 days
after its appointment. FMV shall then be equal to the average
of the two closest FMV determinations submitted by the three
appraisers. FMV as determined in accordance with
Section 3.1(a) shall be final, binding and conclusive for
purposes of this Agreement.
(iii)
In preparing its FMV determination,
each appraiser shall be provided with the same Property-specific
source documents and information and the same access to
personnel. Each appraiser shall determine a single point
estimate of FMV, not a range of values. Only qualified real
estate appraisers with at least five years’ prior experience
in the valuation of properties comparable to the Property in the
area in which such Property is located, and that do not have any
financial interest in any entities affiliated with the Members
(excluding any existing or prior agreement or contractual
arrangement to provide advisory or appraisal services to any such
Members or any affiliates thereof), may be validly appointed to
serve as an appraiser hereunder. Subject to Section 3.1(f),
each of Optionor and Kite Realty shall pay all fees and costs of
the appraiser designated by it and one-half of all fess and costs
of the Third Appraiser, if any.
(b)
On the Closing Date, the Acquisition
Consideration shall be payable by Kite Realty, in the form of units
of limited partnership interest in Kite Realty
(“Units”) or cash, in the sole and absolute discretion
of Kite Realty. The value of Units shall be their
“Market Value” as defined in this Section 3.1(b), and
the number of Units shall be rounded to the nearest whole number of
Units to avoid the issuance of fractional Units. The term
“Market Value” shall mean the average closing price of
the common shares of
beneficial interest, $0.01 par value per share,
of the REIT (or any successor thereto) (“Common
Shares”) for the 10 consecutive trading days immediately
preceding (but not including) the Closing Date. For purposes
of determining Market Value, one Unit shall equal one Common Share,
subject to any adjustments required under the Amended and Restated
Agreement of Limited Partnership of Kite Realty, as may be amended
and/or restated from time to time (the “Partnership
Agreement”), or to reflect stock splits, reclassifications,
dividends in-kind and the like.
(c)
On the Closing Date, all reserves
held by or on behalf of Optionor as required by applicable lenders
or otherwise with respect to the Property or the LLC Interest shall
either be (i) retained by or returned to Optionor, or
(ii) transferred to Kite Realty in which event a credit shall
be applied to increase the Acquisition Consideration by the amount
of such transferred reserves.
(d)
In exercising the Option, Kite
Realty will use reasonable commercial efforts to cooperate with
Optionor and the Members to minimize any taxes, fees or prepayment
penalties payable in connection with such exercise or the
assumption or repayment of indebtedness relating to the LLC
Interest; provided that, except as otherwise set forth in this
Agreement, such cooperation shall not require Kite Realty to
unreasonably delay the Closing Date or require Kite Realty to
assume additional liabilities or incur any material amount of
out-of-pocket expenses.
(e)
Pursuant to the Partnership
Agreement, Units are exchangeable into Common Shares. It is
currently anticipated that such Common Shares will be entitled to
certain registration rights consistent with the REIT’s
practice at the time such Units are issued and subject to any
restrictions or agreements affecting such rights to which the REIT
or Kite Realty is bound.
(f)
Kite Realty may decide at any time
after delivery of an Exercise Notice, but before the Closing Date,
not to proceed with the acquisition of the LLC Interest as
specified in the Exercise Notice; provided, that if Kite Realty
revokes such Exercise Notice following the date on which the Second
Appraiser is appointed pursuant to Section 3.1(a)(ii), Kite Realty
shall bear all of the costs and expenses of the appraisers incurred
up to the date on which Kite Realty notifies Optionor and such
appraisers of such revocation; and, provided further, that if
a final FMV determination is made in accordance with Section 3.1
prior to Kite Realty’s revocation of such Exercise Notice,
such FMV determination shall be deemed to constitute the FMV of the
Property for purposes of subsequent exercises of the Option for a
period of six months following the date of such revocation; it
being understood that any such decision not to proceed shall not
result in the termination of this Agreement (including, without
limitation, the Option).
3.2
Acquisition
Documentation . On
or prior to the Closing Date (subject to Section 3.1(f)), Optionor,
the Members and Kite Realty shall acknowledge, execute,
deliver and/file (as the case may be) the closing documentation
described on Exhibit C hereto (the “Closing
Documentation”). Optionor, the Members and Kite Realty
shall thereafter additionally acknowledge, execute, deliver and/or
file (as the case may be) any and all other documents, agreements
or instruments reasonably necessary or appropriate to effectuate
the acquisition, transfer and conveyance of the LLC Interest in
accordance with the terms of this Agreement.
3.3
Withholding
. Optionor shall execute upon
the conveyance of the LLC Interest such certificates or affidavits
reasonably necessary to document the inapplicability of any federal
or state tax withholding provisions, including, without limitation,
those referred to in Section 7.4 below. If Optionor
fails to provide such certificates or affidavits, Kite Realty may
withhold a portion of the Acquisition Consideration as required by
the Internal Revenue Code of 1986, as amended (the
“Code”) or applicable state law.
3.4
Taxes . If the transactions contemplated by this
Agreement are consummated, then the following shall
apply:
(a)
Acquisition is Treated as
Contribution . If
the Acquisition Consideration consists in whole or in part of
Units, the transfer, assignment and exchange contemplated by this
Agreement shall constitute a “Capital Contribution” to
Kite Realty pursuant to Article IV of the LLC Agreement and is
intended to be governed by Section 721(a) of the Code, and the
parties agree to report this transaction consistent with such
treatment.
(b)
Cooperation and Tax
Disputes . Optionor
and the Members, on the one hand, and Kite Realty, on the other
hand, shall provide each other with such cooperation and
information relating to the LLC Interest, the Member Interests, and
to the extent within Optionor’s possession and control, the
LLC and the Property, as the parties reasonably may request in
(i) filing any tax return, amended tax return or claim for tax
refund, (ii) determining any liability for taxes or a right to
a tax refund or (iii) conducting or defending any proceeding
in respect of taxes. Any time after the date hereof, Kite
Realty shall promptly notify Optionor or the Members, as
applicable, in writing upon receipt by Kite Realty or any of its
affiliates of notice of (i) any pending or threatened tax
audits or assessments with respect to the LLC Interest or the
Member Interests and (ii) any pending or threatened federal,
state, local or foreign tax audits or assessments of Kite Realty or
any of its affiliates, in each case which may affect the
liabilities for taxes of Optionor or any of the Members with
respect to any tax period ending on or before the Closing
Date. Optionor and each Member shall promptly notify Kite
Realty in writing upon receipt by Optionor or such Member, as the
case may be, of notice of any pending or threatened federal, state,
local or foreign tax audits or assessments relating to the income,
properties or operations of the Optionor or the LLC, the Property,
the LLC Interest or any of the Member Interests. Each of Kite
Realty, on the one hand, and Optionor and/or the Members, on the
other hand, may participate at its own expense in the prosecution
of any claim or audit with respect to taxes attributable to any
taxable period ending on or before the Closing Date, provided, that
Optionor and/or the Members shall collectively have the right to
control the conduct of any such audit or proceeding or portion
thereof for which Optionor and/or such Members, as the case may be,
have acknowledged liability (except as a partner of Kite Realty)
for the payment of any additional tax liability, and Kite Realty
shall have the right to control any other audits and
proceedings. Notwithstanding the foregoing, neither Kite
Realty, on the one hand, nor Optionor and/or the Members, on the
other hand, may settle or otherwise resolve any such claim, suit or
proceeding which could have an adverse tax effect on the other
party or its direct or indirect owners without the written consent
of the other party, suc
