LEASE AGREEMENT
THIS LEASE AGREEMENT (this “Lease”) is made and entered into to be effective as of the 6th day of June, 2007 (“Effective Date”), by and between BEHRINGER HARVARD CORDILLERA, LLC, a Delaware limited liability company (“Lessor”), and BEHRINGER HARVARD RESIDENCES AT CORDILLERA, LLC, a Delaware limited liability company (“Lessee”). B
ARTICLE I
LEASE
1.1 Demise. In consideration of the obligation of Lessee to pay rent as herein provided and in consideration of the other terms, covenants, and conditions of this Lease, Lessor does hereby LEASE, DEMISE, and LET unto Lessee, and Lessee does hereby take and lease from Lessor, the Leased Property (as hereinafter defined), TO HAVE AND TO HOLD the Leased Property, together with all rights, privileges, easements and appurtenances belonging to or in any way appertaining to the Leased Property, for the Term, upon and subject to the terms, conditions and agreements hereinafter contained.
1.2 Leased Property. The “Leased Property” (herein so called) is comprised of the following:
(a) those certain tracts or parcels of land situated in the Cities of Avon and Edwards, Colorado, which are more particularly described in Exhibit A attached hereto and made a part hereof for all purposes, together with all and singular the rights and appurtenances pertaining to such tracts and parcels, including any right, title and interest of Lessor in and to any easements benefiting the Leased Property, adjacent strips or gores, streets, alleys or rights-of-way and all rights of ingress and egress thereto (the foregoing are hereinafter referred to collectively as the “Land”);
(b) all buildings, fixtures and other improvements of every kind located on, or to be constructed, or developed on the Land, including specifically, without limitation, the existing 56-room lodge, approximately 20,000 square feet of spa/fitness center space, approximately 3,000 square feet of meeting/banquet space, 2 existing restaurants and a ski in / ski out condo at the Strawberry Park Beaver Creek lift, the automobile parking garage, all swimming pools, restaurants, hotel rooms, lounges, fitness facilities and various other guest and spa facilities, and all other buildings and improvements as are located thereon (the “Leased Improvements”);
(c) all personal property, tangible or intangible, of any kind whatsoever owned by Lessor and used in connection with the operation of the Leased Improvements, together with all replacements, modifications, alterations and additions thereto;
(d) all machinery, apparatus, vehicles, equipment, artwork, furniture, fittings, fixtures and articles of personal property of every kind and nature whatsoever, including reserve stock and spare parts therefor, owned by Lessor which are located in or on the Leased
1
Improvements or stored offsite and are used or usable in connection with any present or future occupation or operation of the Leased Improvements, including, by way of illustration and not limitation, all furnishings, pictures, chinaware, glassware, silverware, ornaments, uniforms, kitchen appliances and utensils, radios, television sets, mirrors, linens, towels, sheets, blankets, telephones, and all similar and related articles owned by Lessor and located in or upon or used in connection with the operation or maintenance of the Leased Improvements, together with all replacements, modifications, alterations and additions thereto; and
(e) all oral or written agreements or leases pursuant to which any portion of the Land or Facility is used or occupied by anyone other than Lessor.
1.3 Assignment and Assumption of Contracts; Initial Transaction.
(a) Effective upon the Commencement Date, Lessor hereby transfers and assigns to Lessee, and Lessee assumes and covenants to perform all of Lessor’s obligations under, the following agreements and contracts to which the Leased Property remains subject on the Commencement Date (the “Assigned Agreements”):
(i) All contracts for the use or occupancy of guest rooms and apartment units and/or the meeting, dining, banquet, and health facilities of the Facility;
(ii) All service contracts, maintenance contracts, equipment leases, purchase orders and other contracts pertaining to the ownership, maintenance, operation, provisioning or equipping of the Facility, including warranties and guaranties relating thereto;
(iii) All licenses and permits (to the extent assignable) used in or relating to the ownership, occupancy or operation of any part of the Facility; and
(iv) Any developer’s, declarant’s, or owner’s interests under any operating agreements or reciprocal easement agreements or other similar agreements affecting and/or benefiting the Facility.
This Lease is executed by Lessor and accepted by Lessee on the understanding that Lessee will and does hereby assume and agree to perform all of Lessor’s obligations under all the Assigned Agreements.
(b) As between Lessor and Lessee, Lessor shall be entitled to all income and shall be responsible for the payment or settlement of all expenses of the Leased Property accruing prior to the Commencement Date. Lessee shall act as Lessor’s agent for the collection of all such income and shall remit the same to Lessor promptly upon Lessee’s receipt thereof. Lessee shall notify Lessor of all such expenses and shall act as Lessor’s payment agent for such expenses using funds provided by Lessor from time to time.
2
ARTICLE II
DEFINITIONS
2.1 Definitions. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP, (c) all references in this Lease to designated “Articles”, “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (d) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision:
Affiliate. As used in this Lease the term “Affiliate” of a person shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any other person that owns, beneficially, directly or indirectly, ten percent (10%) or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, partner or trustee of such person, or (d) any person controlling, controlled by or under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term “person” means and includes individuals, corporations, general and limited partnerships, limited liability companies, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition, “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests, by contract or otherwise.
Base Rate. The prime rate (or base rate) reported in the Money Rates column or comparable Section of The Wall Street Journal as the rate then in effect for corporate loans at large U.S. money center commercial banks, whether or not such rate has actually been charged by any such bank. If no such rate is reported in The Wall Street Journal or if such rate is discontinued, then Base Rate shall mean such other successor or comparable rate as Lessor may reasonably designate.
Brand Standards. The operating standards set forth and defined in the Management Agreement.
Business Days. Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the municipality wherein the Leased Property is located are closed.
CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.
Claims. Collectively, any claims, demands, actions (including enforcement proceedings initiated by an government agency), penalties, suits, administrative proceedings, and
3
liabilities (including the costs of defense, settlement, appeal, and reasonable attorneys’ fees and costs).
Code. The Internal Revenue Code of 1986, as amended.
Consolidated Financials. For Lessee and its consolidated Subsidiaries, (a) for any fiscal month, consolidating balance sheet and statement of operations, (b) for any fiscal quarter, consolidating statement of operations, and (c) for any fiscal year, consolidating balance sheet, consolidating statement of operations and working capital statement for each such period and for the period from the beginning of the respective fiscal year to the end of each such period, together with the notes to any such yearly statement, all in such detail as may be reasonably required by Lessor, and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, and prepared in accordance with GAAP and audited annually by a firm of independent certified public accountants approved by Lessor. Consolidated Financials shall be prepared on the basis of a December 31 fiscal year of Lessee, or on such other basis as Lessor shall designate. Any cost for such audit shall be borne by Lessee.
Consumable Supplies. Office supplies, cleaning supplies, uniforms, laundry and valet supplies, engineering supplies, fuel, stationery, soap, matches, toilet and facial tissues, and such other supplies as are consumed customarily on a recurring basis in the operation of the Facility, together with food and beverages that are to be offered for sale to guests and to the public.
Developer. TP Cordillera, LLC, a Delaware limited liability company.
Development Agreements. Those certain agreements between Landlord and Developer regarding the Land, the Leased Improvements and other land and improvements located adjacent to the Leased Property.
Development Projects. The projects described in and to be undertaken pursuant to the Development Agreements.
Emergency Situations. Fire, any other casualty, or any other events, circumstances or conditions which threaten the safety or physical well-being of the Facility’s guests or employees or which involve the risk of material property damage or material loss to the Facility.
Environmental Authority. Any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Hazardous Materials Law.
Environmental Liabilities: Any and all actual or potential obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney’s fees,
4
fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of:
(a) the failure to comply at any time with all Hazardous Materials Laws applicable to the Leased Property;
(b) the presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property;
(c) a Release or threatened Release of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property;
(d) the identification of Lessee, Lessor or any Predecessor as a potentially responsible party under CERCLA or under any other Hazardous Materials Law;
(e) the presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Hazardous Materials Law on, in, at or under the Leased Property or any adjacent site or facility; or
(f) any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof or any adjoining property.
Facility. The hotel and/or other facilities offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property.
First Class Operating Standards. Operating standards of other facilities comparable in size to the Leased Property which represent the highest quality of hotels and/or resorts in the United States, including without limitation, the operation of the Leased Property (but not necessarily all facilities thereof) on a seven days a week, twenty-four hour a day basis with adequate staffing to provide first-class staffing, and health, fitness, food, beverage, housekeeping, banquet, parking, bellmen and porter services; provided that such standard of operation shall never be lower than the standard of operation existing at the date hereof with respect to the Leased Property.
Food Sales. Shall mean (i) gross revenue from the sale of food and non-alcoholic beverages that are prepared at the Facility and sold or delivered on or off the Facility by Lessee, its permitted subtenants, licensees, or concessionaires whether for cash or for credit, including in respect of guest rooms, banquet rooms, meeting rooms and other similar rooms, and (ii) gross revenue from the rental of banquet, meeting and other similar rooms. Such gross revenue constituting Food Sales shall include sales by Lessee and its permitted subtenants, licensees and concessionaires, but gross revenues from subleases, licenses or similar arrangements for space within the Facility in which the items described in subparagraphs (i) and (ii) above are sold which are entered into by Lessor, by any prior owner of the Leased Property, or by Lessee, in
5
compliance, but only in compliance, with Section 21.1 with parties who are not Affiliates of Lessee, shall be classified as Hotel Revenues and shall only include rents received by Lessee under such existing subleases, licenses or similar arrangements. Such gross revenue shall be determined in a manner consistent with the Uniform System and shall not include the following:
(a) Vending machine sales;
(b) Any gratuities or service charges added to a customer’s bill or statement in lieu of a gratuity which is paid directly to an employee;
(c) Non-alcoholic beverages sold from a bar or lounge;
(d) Credits, rebates or refunds; and
(e) Sales taxes or taxes of any other kind imposed on the sale of food or nonalcoholic beverages.
Franchise Agreement. Any franchise agreement or license agreement with a franchisor under which the Facility is hereafter operated, if any.
Franchisor. Any franchisor under a franchise or license agreement under which the Facility is operated.
GAAP. United States generally accepted accounting principles as are at the time applicable and otherwise consistently applied by Lessor.
Gross Revenues. All gross revenues, gross receipts, and gross income (including rental payments) of any kind derived directly or indirectly by Lessee from or in connection with the Facility whether on a cash basis or credit, paid or collected, determined in accordance with GAAP and the Uniform System, and all proceeds paid under any policy of business or rental interruption insurance but excluding, however: (i) funds furnished by Lessor, (ii) federal, state and municipal excise, sales, and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes and paid over to federal, state or municipal governments, (iii) gratuities, (iv) proceeds of insurance and condemnation (other than proceeds from any business or rental interruption insurance), (v) proceeds from sales other than sales in the ordinary course of business, (vi) all loan proceeds from financing or refinancings of the Facility or interests therein or components thereof, (vii) judgments and awards, except any portion thereof arising from normal business operations of the Facility, (viii) items constituting “allowances” under the Uniform System, and (ix) any amount paid pursuant to a sublease of all or a portion of the Leased Property if the rental to be paid by the sublessee thereunder is based, in whole or in part, on the income or profits derived by the business activities of the sublessee.
Holder. Any holder of any indebtedness of Lessor or any of its Affiliates, any holder of a mortgage, any purchaser of the Leased Property or any portion thereof at a foreclosure sale or any sale in lieu thereof, or any designee of any of the foregoing.
6
Hotel Revenues. Gross Revenues, minus Food Sales and gross revenues from the sale of alcoholic beverages at or from the Leased Property.
Indemnified Party. Either of a Lessee Indemnified Party or a Lessor Indemnified Party.
Indemnifying Party. Any party obligated to indemnify an Indemnified Party pursuant to any provision of this Lease.
Inventory. All “Inventory” as defined in the Uniform System, including, but not limited to, linens, china, silver, glassware and other non-depreciable personal property, and any property of the type described in Section 1221(l) of the Tax Code.
Lease Year. Any twelve-month period from January 1 to December 31 during the Term; provided that the initial Lease Year shall be the period beginning on the Commencement Date and ending on December 31, 2007, and the last Lease Year shall be the period beginning on January 1 of the calendar year in which the Term expires and ending on the expiration of the Term (to the extent any computation or other provision hereof provides for an action to be taken on a Lease Year basis, an appropriate proration or other adjustment shall be made in respect of the initial and final Lease Years to reflect that such periods are less than full calendar year periods).
Legal Requirements. All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use, operation or alteration thereof (whether by Lessee or otherwise), now existing or hereafter enacted and in force, including all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare at the Leased Property; and all permits, licenses and authorizations necessary or appropriate to operate the Leased Property for its Primary Intended Use; and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances hereafter created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property.
Lessee Indemnified Party. Lessee, any Affiliate of Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest in Lessee, the officers, directors, stockholders, partners, members, employees, agents and representatives of any of the foregoing Persons and any corporate stockholder, agent, or representative of any of the foregoing Persons, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative.
Lessor Indemnified Party. Lessor, any Affiliate of Lessor, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest in Lessor, the officers, directors, stockholders, partners, members, employees, agents and representatives of any of the foregoing Persons and of any stockholder, partner, member, agent, or representative of any of the foregoing Persons, and the respective
7
heirs, personal representatives, successors and assigns of any such officer, director, partner, stockholder, employee, agent or representative.
Lessor’s Audit. An audit by Lessor’s independent certified public accountants of the operation of the Leased Property during any Lease Year, which audit may, at Lessor’s election, be either a complete audit of the Leased Property’s operations or an audit of Room Revenues, Food Sales, Beverage Sales and other income realized from the operation of the Leased Property during such Lease Year.
Liquor Licenses. Any liquor license held, from time to time, by Lessee and used for the purchase, sale and service of alcoholic beverages on the Leased Property.
Management Agreement. That certain Hotel Management Agreement for the Lodge and Spa at Cordillera between Colorado Hotel Operator, Inc. and RockResorts International, LLC dated as of May 1, 2005 and as assigned to Lessee by Colorado Hotel Operator, Inc.
Manager means RockResorts International, LLC, a Delaware limited liability company, and any successor Manager approved by Lessor in its sole discretion. At all times during the Term of this Lease, Manager shall be an “eligible independent contractor” as defined in Section 856(d)(9) of the Code.
Overdue Rate. On any date, a rate equal to the Base Rate plus 5% per annum, but in no event greater than the maximum rate then permitted under applicable law.
Owner Agreement. That certain Owner Agreement dated of even date herewith by and among Lessor, Lessee and Manager.
Proceeding. Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution.
Quarter. Each calendar quarter during the Term, provided that the first Quarter of the Term shall commence on the Commencement Date and end on June 30, 2007.
RCRA. The Resource Conservation and Recovery Act, as amended.
Release. A “Release” as defined in CERCLA or in any Hazardous Materials Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Hazardous Materials Law without authorizations or permits.
Rent. Collectively, the Base Rent, Percentage Rent and Additional Charges.
State. The State or Commonwealth of the United States in which the Leased Property is located.
8
Subsidiaries. Corporations or other entities in which a party owns, directly or indirectly, 50% or more of the voting rights or control, as applicable (individually, a “Subsidiary”).
Term. The Initial Term or the Renewal Term, as applicable.
Unavoidable Delay. Delay due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, acts of terrorism, enemy action, civil commotion, fire, unavoidable casualty, condemnation or other similar causes beyond the reasonable control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the reasonable control of either party hereto unless such lack of funds is caused by the breach of the other party’s obligation to perform any obligations of such other party under this Lease.
Uneconomic for its Primary Intended Use. A state or condition of the Facility such that in the judgment of Lessor the Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, such that Lessor intends to, and shall, cease operations from the Facility.
Uniform System. The most current edition of the Uniform System of Accounts for Hotels, as published by the Hotel Association of New York City, Inc., as the same may hereafter be revised, and as the same is interpreted and applied by the Lessor’s independent certified public accountants in connection with any Lessor’s Audit.
Unsuitable for its Primary Intended Use. A state or condition of the Facility such that in the judgment of Lessor the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel comparable in quality and function to that of the Facility prior to the damage or loss.
2.2 Additional Definitions. Other capitalized terms are defined in the Sections of this Lease specified in the Table of Contents.
ARTICLE III
TERM
3.1 Initial Term. The initial term (hereinafter called the “Initial Term”) of this Lease shall commence on the effective date of execution of this Lease (the “Commencement Date”) and shall end on December 31, 2008, unless sooner terminated in accordance with the provisions hereof.
3.2 Renewal Term. Notwithstanding anything to the contrary contained in Section 3.1 above or Sections 4.1 and 4.2 and Exhibit “B” below, (a) provided this Lease has not previously been terminated in accordance with the provisions hereof, upon the expiration of the Initial Term of this Lease, this Lease shall automatically renew for the period commencing on January 1, 2009, and expiring on December 31, 2009 (the “Renewal Term”), unless sooner terminated in accordance with the provisions hereof, and (b) during the Renewal Term, the Base
9
Rent, Additional Base Rent and Percentage Rent (each as hereinafter defined) shall together be an amount equal to the fair market rental value of the Leased Property, which fair market rental value shall be determined using the same criteria that was used by Lessor and Lessee to determine the Base Rent, Additional Base Rent and Percentage Rent with respect to the Initial Term of this Lease, except to the extent that Lessor and Lessee determine that such criteria should be modified because they would not result in a determination of fair market rental value because of a change in economic conditions between the Commencement Date and the first day of the Renewal Term. Promptly after the determination of the Base Rent, Additional Base Rent and Percentage Rent applicable during the Renewal Term, Lessor and Lessee shall enter into an amendment to this Lease memorializing the same.
ARTICLE IV
RENT
4.1 Rent. So long as this Lease remains in force and effect, Lessee promises to pay rents to Lessor, in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds, in the manner, at the time, and in the amounts specified below:
(a) Base Rent. Lessee shall pay annual base rent under this Lease (the “Base Rent”) in advance in the monthly installments set forth in the Monthly Base Rent Payment Schedule attached hereto as Schedule 4.1(a) beginning on the Effective Date and continuing on or before the first (1st) day of each and every month thereafter during the Term. Base Rent for any period during the Term which is less than one (1) month shall be a pro-rata portion of the applicable monthly installment.
(b) Additional Base Rent. In addition to the Base Rent, Lessee shall pay additional base rent (the “Additional Base Rent”) in the amounts and at the times set forth in the Additional Base Rent Schedule attached hereto as Schedule 4.1(b).
(c) Percentage Rent.
(i) In addition to the sums payable pursuant to Subparagraphs (a) and (b) above, Lessee shall within forty-five (45) days after the last day of each Lease Year during the Term, pay to Lessor “Percentage Rent” (herein so called) for each Lease Year calculated in accordance with the provisions of this subparagraph (c) and Exhibit B attached hereto, which obligation will survive the expiration or early termination of this Lease for a period of one (1) year.
(ii) The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term, and a final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date, shall be made not later than sixty (60) days after such expiration or termination date.
10
(d) Adjustment of Rents. The parties agree and acknowledge that it is their intent that the Rent paid by Lessee hereunder reflect the fair market rental rate of the Leased Property. Notwithstanding any provision of this Lease to the contrary, during the 18 month period following the Effective Date, Lessor reserves the right to retain a lease consultant to perform a market analysis and prepare a report (a “Rent Report”) recommending the appropriate Rent (including Base Rent, Additional Base Rent and Percentage Rent) for the Leased Property based on such market analysis. Lessor may adjust the Base Rent set forth in Schedule 4.1(a), the Additional Base Rent set forth on Schedule 4.1(b) as well as the Percentage Rent, on a prospective or retroactive basis, based on the recommendations set forth in the Rent Report.
4.2 Confirmation of Percentage Rent.
(a) Lessee shall submit to Lessor within twenty (20) days after the last day of each Quarter a written statement signed and certified by Lessee to be correct, showing Gross Revenues during the preceding Quarter and specifically allocating the amounts attributable to Hotel Revenues and Food & Beverage Revenues and the calculation of Percentage Rent for such period. Lessee shall submit to Lessor within twenty (20) days after the end of each Lease Year a written statement signed and certified by Lessee to be correct, showing Gross Revenues during such preceding Lease Year and the calculation of Percentage Rent for such Lease Year (the “Annual Gross Revenues Report”). In addition, within ninety (90) days after the end of each Lease Year, Lessee will provide to Lessor, at Lessee’s expense, an audited Statement of Gross Revenues for the preceding Lease Year (the “Annual Audited Gross Revenues Statement”). Lessee’s monthly and annual written statement of Gross Revenues shall contain such detail and breakdown as Lessor may reasonably require. If, after notice from Lessor and the expiration of the cure period provided for herein, Lessee fails to submit the aforesaid report and statement to Lessor when due, Lessor, in addition to any other remedies Lessor has, shall have the right to retain a certified public accountant, at Lessee’s sole expense, to prepare such statements and to perform all inspections and audits related thereto. In the event that either the Annual Gross Revenues Report or Annual Audited Gross Revenues Statement discloses that the actual Percentage Rent exceeds the prior payments of Percentage Rent to Lessor with respect to such year, Lessee shall within thirty (30) days of notice from Lessor remit the difference to Lessor, together with interest thereon at the Base Rate from the date due until paid. In the event the advance payments of Percentage Rent paid to Lessor with respect to a calendar year exceed the actual Percentage Rent based upon the Annual Gross Revenues Report or Annual Audited Gross Revenues Statement, Lessor shall apply such overpayment to the next payment of Percentage Rent due hereunder (or, in the event that the Lease is expired or otherwise terminated, then Lessor shall remit the overpayment to Lessee within thirty (30) days of notice from Lessee).
(b) The acceptance by Lessor of the estimated payments of Percentage Rent or any additional payment of Percentage Rent (pursuant to subparagraph (a) above) shall not prejudice Lessor’s right, at Lessor’s sole cost and expense (except as expressly provided below), to an examination of Lessee’s records of Gross Revenues for any period for which Lessee is required to maintain records to verify Gross Revenues. Lessor shall have the right to examine Lessee’s records during all regular business hours upon reasonable prior notice. Lessee, upon
11
reasonable prior notice, shall make available to Lessor for examination any other records required to be maintained hereunder. If the audit of the books and records by Lessor (the “Lessor’s Gross Revenues Audit”) discloses that Gross Revenues were underreported by Lessee for any period covered by such Audit, Lessee shall promptly pay to Lessor, the cost of the Lessor’s Gross Revenues Audit, as Additional Rent, in addition to any deficiency in Percentage Rent that may be due, plus interest thereon at the Base Rate from the date due until paid. If the Lessor’s Gross Revenues Audit or the Annual Audited Gross Revenues Statement for two (2) consecutive Lease Years discloses that Gross Revenues were underreported by Lessee by five percent (5%) or more for each such Lease Year, Lessor shall have the option, exercisable within sixty (60) days of its discovery of the discrepancy, to consider such event as an Event of Default. The provisions of this Section shall survive the expiration of the Term or the earlier termination of this Lease for a period of one (1) year thereafter. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Gross Revenues Audit shall, if not otherwise settled by the parties, be submitted to arbitration pursuant to the provisions of Section 38.2.
(c) Lessee shall maintain in a manner and form satisfactory to Lessor, during the Term, and for a period of three (3) consecutive years thereafter, complete and accurate general books of account, which shall reflect Gross Revenues, and which shall include, if used by Lessee, without limitation, original invoices, sales records, sales slips, sales checks, sales reports, cash register tapes, records of bank deposits, inventory records prepared as of the close of the Lessee’s accounting period, sales and occupation tax returns and all other original records and other pertinent papers which will enable Lessor to determine the Gross Revenues derived by Lessee during the Term. Such records for the three (3) most recent years shall be maintained at the Leased Property or Lessee’s corporate headquarters. The provisions hereof shall survive the expiration of the Term or the earlier termination of this Lease.
4.3 Additional Charges. In addition to the Base Rent and the Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and Impositions (as defined hereinbelow) that Lessee expressly assumes or agrees to pay under this Lease, and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) of this Section 4.3, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 4.3 being additional rent hereunder and being referred to herein collectively as the “Additional Charges”) and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as are available in the case of non-payment of the Base Rent or the Percentage Rent. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee.
4.4 Net Lease Provisions. The rent shall be paid absolutely net to Lessor so that this Lease shall yield to Lessor the full amount of the installments of Base Rent, Percentage Rent, and all Additional Charges throughout the Term, all as more fully set forth herein, but subject to
12
any other provisions of this Lease that expressly provide for adjustment or abatement of rent or other charges or expressly provide that certain expenses or maintenance shall be paid or performed by Lessor.
4.5 Place and Manner of Payment. Subject to the further provisions hereof, the rent hereunder shall be payable to Lessor at the original or changed address of Lessor set forth in Article XXIX hereof or to such other address or to such other person at such address as Lessor may designate from time to time in writing.
4.6 Late Charge. If Lessor fails to pay any regular monthly installment of Base Rent, any quarterly installment of Additional Base Rent, any quarterly installment of Percentage Rent, or any Additional Charges within ten (10) days after such installment or charge is due, then in addition to the past due amount Lessee shall pay to Lessor a late charge of five percent (5%) of the installment or amount due in order to compensate Lessor for the extra administrative expenses incurred.
4.7 Annual Budget. Not later than sixty (60) days prior to the commencement of each Lease Year, Lessee shall prepare and submit to Lessor an operating budget (the “Operating Budget”) and a capital budget (the “Capital Budget”) prepared in accordance with the requirements of this Section 4.7. The Operating Budget and the Capital Budget (together, the “Annual Budget”) shall be prepared in accordance with the Uniform System and GAAP to the extent applicable and show by month and quarter and for the year as a whole in the degree of detail specified by the Uniform System and GAAP for monthly statements, and in accordance with the detail level of monthly financial statements, the following:
(a) Lessee’s reasonable estimate of Gross Revenues (including room rates and Hotel Revenues) for the forthcoming Lease Year itemized on schedules on a monthly and quarterly basis as approved by Lessor and Lessee, together with the assumptions, in narrative form, forming the basis of such schedules.
(b) An estimate of any amounts Lessor will be requested to provide for capital improvements during the current and the next three (3) Lease Years, subject to the limitations set forth in Article XXXV.
(c) A cash flow projection.
(d) A narrative description of the program for marketing and managing the Facility for the forthcoming Lease Year, including, among other things, details as to competitor performance, demand analysis, estimated market penetration by market segment, target accounts, marketing and advertising budgets, changes in personnel policies, staffing levels, major events plans, franchise issues and other matters affecting the performance and operation of the Facility, and containing a detailed budget itemization of proposed expenditures by category and the assumptions, in narrative form, forming the basis of such budget itemization.
(e) Lessee’s reasonable estimate for each month of the Lease Year of Percentage Rent, including Hotel Revenues, Food Sales, Beverage Sales and other income.
13
(f) A description of the status of any negotiations relating to a collective bargaining agreement, if any, affecting Facility employees.
(g) A description of the current legal status of pending or threatened suits, actions, proceedings, inquiries or investigations concerning the Facility.
(h) Statistical information for the Hotel, such as Average Daily Rate (“ADR”), Revenue Per Available Room (“REVPAR”) and occupancy.
(i) Capital Budget, listing amounts by project and estimated expenditure period (i.e. first quarter, second quarter, third quarter or fourth quarter).
(j) Annual working capital position.
(k) Upon the written request of Lessor, any other matter reasonably required by Lessor for inclusion in the Annual Budget.
Lessor shall have thirty (30) days after the date on which it receives the Annual Budget to review, approve, disapprove or change the entries and information appearing in the Annual Budget (other than the Capital Budget). If the parties are not able to reach agreement on the Annual Budget for any Lease Year during Lessor’s thirty (30) day review period, the parties shall attempt in good faith during the subsequent thirty (30) day period to resolve any disputes, which attempt shall include, if requested by either party, at least one (1) meeting of executive level officers of Lessor and Lessee. In the event the parties are still not able to reach agreement on the Annual Budget for any particular Lease Year after complying with the foregoing requirements of this Section 4.7, the parties shall adopt such portions of the Operating Budget and the Capital Budget as they may have agreed upon, and any matters not agreed upon shall be submitted to arbitration as provided in Section 38.2 hereof. Pending the agreement of the parties, (i) if the Operating Budget has not been agreed upon, the Leased Property will be operated in a manner consistent with the prior Lease Year’s Operating Budget without adjustment until a new Operating Budget is adopted, and (ii) if the Capital Budget has not been agreed upon, no capital expenditures shall be made unless the same are set forth in a previously approved Capital Budget or are specifically required by Lessor or are otherwise required to comply with Legal Requirements or to make emergency expenditures.
The Capital Budget shall be subject to the approval of Lessor in its sole and absolute discretion. Notwithstanding Lessor’s approval of the Capital Budget, no capital expenditures shall be made except upon Lessor’s authorization, other than emergency expenditures. Subject to any required approvals by any Holder or a ground lessor, Lessor agrees that the Capital Budget shall provide for and Lessor shall authorize and approve, capital expenditures necessary to cause the Hotel to comply with the Brand Standards so long as the Management Agreement remains in place. Any dispute as to same shall be resolved by arbitration pursuant to Section 38.2.
14
Lessee shall operate the Leased Property consistent with the Annual Budget and shall promptly report to Lessor in writing any actual or anticipated deviation from the Operating Budget or Capital Budget of any material or long term consequence.
4.8 Books and Records. Lessee shall keep full and adequate books of account and other records reflecting the results of operation of the Facility on an accrual basis, all in accordance with the Uniform System and GAAP and the obligations of Lessee under this Lease. The books of account and all other records relating to or reflecting the operation of the Facility shall be kept either at the Facility or at Lessee’s offices in Dallas, Texas and shall be available to Lessor and its representatives and its auditors or accountants, at all reasonable times upon prior notice for examination, audit, inspection, and transcription. All of such books and records pertaining to the Facility including, without limitation, books of account, guest records and front office records, at all times shall be the property of Lessee but shall not be removed from the Facility or Lessee’s offices without Lessor’s prior written approval. Upon termination or expiration of this Lease, Lessee shall deliver copies of all such books and records to Lessor. Lessor shall be entitled to make copies during the Term of any or all such books and records for its own files. Lessee’s obligations under this Section 4.8 shall survive termination of this Lease for any reason.
4.9 Changes in Operations. Without Lessor’s prior written consent, not to be unreasonably withheld, conditioned or delayed, Lessee shall not (i) provide food and/or beverage operations at the Facility if not presently provided, (ii) discontinue any food and/or beverage operations which are presently provided, or (iii) convert a subtenant, licensee or concessionaire to an operating department of the Facility or vice versa.
4.10 Allocation of Revenues. In the event that individuals or groups purchase rooms, food and beverage and/or the use of other hotel facilities or services together or as part of a package, Lessee agrees that revenues shall be allocated among Room Revenues, Food Sales, Beverage Sales and/or other revenue categories, as applicable, in a reasonable manner consistent with the historical allocation of such revenues.
ARTICLE V
QUIET ENJOYMENT
5.1 Quiet Enjoyment. Lessor has full right to make this Lease and, subject to the terms and provisions of this Lease and provided Lessee pays all Rent and complies with the terms of this Lease, Lessee shall have quiet and peaceable enjoyment of the Leased Property during the Term. Except as otherwise specifically provided in this Lease, Lessee, to the maximum extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the rent, or setoff against the rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to or destruction of the Leased Property or any portion thereof from whatever cause, (b) the lawful or unlawful prohibition of, or restriction upon Lessee’s use of the Leased Property, or any portion thereof, or the interference with such use by any person, corporation, partnership or other entity or by reason of eviction by paramount title, (c) any claim
15
which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee of or transferee of Lessor, or (e) for any other cause whether similar or dissimilar to any of the foregoing other than a discharge of Lessee from any such obligations as a matter of law. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (i) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (ii) entitle Lessee to any abatement, reduction, suspension or deferment of the rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless all the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default.
5.2 Lessor Cooperation. Lessor shall cooperate with Lessee in the performance of its obligations under this Lease and shall deliver such information and execute such agreements or instruments as may be reasonably necessary for Lessee to perform its obligations under this Lease.
ARTICLE VI
IMPOSITIONS
6.1 Payment of Impositions. Subject to the provisions of Article XII relating to permitted contests, Lessee will pay, or cause to be paid, all Impositions (as defined hereinbelow) before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will promptly furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. If any such Imposition may, at the option of the obligor, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and in such event, shall pay such installments during the Term (subject to Lessee’s right of contest pursuant to the provisions of Article XII) as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. If any refund shall be due in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default shall have occurred hereunder and be continuing. If an Event of Default shall have occurred and be continuing, any such refund shall be paid over to or retained by Lessor. Any such funds retained by Lessor due to an Event of Default shall be applied as provided in Article XVI. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports.
6.2 Notice of Impositions. Lessor shall give prompt notice to Lessee of all Impositions payable by Lessee hereunder of which Lessor at any time has knowledge, provided
16
that Lessor’s failure to give any such notice shall in no way diminish Lessee’s obligations hereunder to pay such Impositions, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives notice of any Imposition which it is obligated to pay.
6.3 Adjustment of Imposition. Impositions imposed in respect of the tax-fiscal period during which the Term terminates shall be adjusted and prorated between Lessor and Lessee, whether or not such Imposition is imposed before or after such termination, and Lessee’s obligation to pay its prorated share thereof after termination shall survive such termination.
6.4 Utility Charges. Lessee will be solely responsible for obtaining and maintaining utility services to the Leased Property and will pay or cause to be paid all charges for electricity, gas, oil, water, sewer and other utilities used in the Leased Property during the Term.
6.5 Insurance Premiums. Lessee will pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article XIII.
6.6 Definition of Impositions. The term “Impositions,” as used herein, means, collectively, all taxes (including, without limitation, all ad valorem, personal property, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Lessor or Lessee or Lessee’s business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term and also any assessments imposed on the Leased Property by any property owners’ association, condominium association or other such private association, or otherwise as a result of private deed restrictions affecting the Leased Property), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other such charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term may be assessed or imposed on the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interests therein, or any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Nothing contained in this definition of Impositions shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor or any other person, or (2) any net revenue tax of Lessor or any other person, or (3) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof, or (4) any single business, gross receipts (other than tax on any rent received by Lessor from Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Lessor, except to the extent that any tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to the first sentence of the definition and that is in effect at any time during the Term is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof.
17
ARTICLE VII
CONDITION, USE
7.1 Condition of the Leased Property. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property “as is” in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of or claims against the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT; provided, however, to the extent permitted by law, Lessor hereby assigns to Lessee all of Lessor’s rights to proceed against any predecessor-in-title, contractor, subcontractor or supplier for breaches of warranties or representations or for latent defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor’s or Lessee’s name, all at Lessee’s sole cost and expense. Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligation and liabilities against or incurred by Lessor in connection with such cooperation.
7.2 Use of the Leased Property.
(a) Subject to the provisions of Articles XIV, XV, and XXI and Section 7.2(e), Lessee covenants and agrees that it will during the Term (i) proceed with all due diligence and will exercise its best efforts to obtain and to maintain all licenses, permits, certificates and approvals needed to use and operate the Leased Property in the manner required under this Lease and under applicable local, state and federal law, except to the extent the same are the responsibility of the Developer under the Development Agreement; (ii) operate continuously the Leased Property in accordance with the Primary Intended Use; (iii) keep in full force and effect and comply with all the provisions of all agreements assigned to Lessee pursuant to the terms hereof, and (iv) not terminate or amend any agreements constituting part of the Leased Property without the consent of Lessor (the agreements described in subsections (iii) and (iv) herein called (the “Service Contracts”), such consent to not be unreasonably withheld, delayed or conditioned.
(b) Lessee shall use or cause to be used the Leased Property only for its current uses as a hotel (together with all other existing or incidental uses, including restaurant, retail, office, movie theater, bar, fitness center, spa, conference center and other such uses) and for such other uses as may be necessary or incidental to such use or such other use as otherwise approved by Lessor (the “Primary Intended Use”). Lessee shall not use the Leased Property or any portion thereof for any other use, nor change any names under which the Leased Property is operated, without the prior written consent of Lessor, which consent may be granted, denied or
18
conditioned in Lessor’s sole discretion, except as may be expressly permitted under Section 7.2(e). No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any Article which may be prohibited by law or fire underwriter’s regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee’s Personal Property.
(c) Lessee shall not commit or suffer to be committed any waste on the Leased Property (normal wear and tear excepted), nor shall Lessee cause or permit any nuisance thereon.
(d) Lessee shall neither suffer nor permit the Leased Property or any portion thereof to be used in such a manner as (1) might reasonably tend to impair Lessor’s (or Lessee’s, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, except as necessary in the ordinary and prudent operation of the Facility on the Leased Property.
(e) Notwithstanding anything to the contrary in this Lease but subject to Article XXXV, Lessee shall have the authority, without Lessor’s prior written consent, to do the following:
(i) enter into, extend, modify, or terminate leases or subleases of commercial, office, retail, spa, restaurant or other incidental uses at the Leased Property; provided that (A) such incidental uses comply with the Primary Intended Use, (B) such lease does not exceed 7,500 rentable square feet, (C) the term of such lease is not in excess of five (5) years, (D) such lease is on market terms and at market rental rates and (E) rental payments under any such lease are not based on the net income or profits of the tenants.
(ii) enter into any Service Contract, license, concession and equipment lease (A) which has a term of less than two (2) years, including renewals, unless it is terminable within two (2) years from the date of its execution without cause, and either without cost or penalty or if with a penalty, such penalty is less than Twenty-Five Thousand Dollars ($25,000.00); provided that Lessee may not enter into any Service Contract which expires later than the third anniversary of the Commencement Date unless such Service Contract is terminable without cost or penalty upon no more than ninety (90) days prior notice, and (B) which binds Lessee to aggregate payments per year of not more than Fifty Thousand Dollars ($50,000.00), adjusted for CPI.
7.3 Lessor to Grant Easements, Etc. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee’s cost and
19
expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of a certificate from Lessee stating that such grant, release, dedication, transfer, petition or amendment is not detrimental to the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property.
7.4 Inventory; Supplies; Lessee’s Personal Property.
(a) Upon commencement of the Term, Lessor shall transfer to Lessee all Nonconsumable Inventory and Consumable Supplies located at the Facility on the Commencement Date (the “Initial Inventory”). On the Commencement Date, Lessee shall be required to ensure that the Leased Property contains (i) a sufficient amount of Consumable Supplies and Non-Consumable Inventory and (ii) a reasonably adequate amount of kitchen equipment, bar equipment, refrigeration equipment, furniture, furnishings, color television sets, carpets, drapes, rugs, floor coverings, mattresses, pillows, bedspreads and the like, in each case, to furnish each guest room substantially consistent with First Class Operating Standards and is otherwise reasonably required to operate the Leased Property in the manner contemplated by this Lease and in compliance with First Class Operating Standards and all Legal Requirements (provided that Lessor shall not be required to provide, at commencement of the Term or otherwise, any items to be furnished pursuant to the Development Agreements). Throughout the Term, Lessee shall be required to maintain Inventory consistent with First Class Operating Standards and as is otherwise required to operate the Leased Property in the manner contemplated by this Lease and in compliance with all Legal Requirements. All Inventory shall be the property of Lessee, subject to Lessee’s obligations under Section 7.4(b). Lessee may (and shall as provided hereinbelow), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Property, any items of personal property (including Inventory) owned by Lessee (collectively, the “Lessee’s Personal Property”). Lessee may, subject to the second sentence of this Section 7.4(a) and the conditions set forth in Section 7.4(b) below, remove any of Lessee’s Personal Property at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee’s Personal Property, other than Inventory, not removed by Lessee within thirty (30) days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(d), including repair of all damage to the Leased Property caused by the removal of Lessee’s Personal Property.
20
(b) Upon the expiration or earlier termination of the Term for any reason, Lessee shall surrender the Leased Property to Lessor with a quality of Nonconsumable Inventory and Consumable Supplies substantially equal to the Initial Inventory and in an amount of not less than ninety percent (90%) of the Initial Inventory.
7.5 FFE. Lessor shall establish and maintain a reserve (the “FFE Reserve”) equal to the lesser of (a) the amount required by any Holder, or (b) an amount equal to the following percent of Gross Revenues (or such other amount as may be specified in the Annual Budget for such year): (i) one percent (1%) during the first and second Lease Years; (ii) two percent (2%) during the third Lease Year; (iii) three percent (3%) during the fourth Lease Year; and (iv) four percent (4%) during each Lease Year thereafter. If at any time during the Term, any item of FFE (defined below) requires replacement, (a) if such amounts were not included in the Annual Budget, upon a written request therefor from Lessee and approval of such expenditures by Lessor (which approval shall not be unreasonably withheld or delayed), or (b) if such amounts were not included in the Annual Budget, Lessor shall promptly advance sufficient funds from the FFE Reserve to enable Lessee to purchase the required replacements. Lessee shall make no expenditure for replacement of FFE in excess of the amounts in the FFE Reserve without first obtaining the approval of Lessor. Any additions to or replacements of furniture, fixtures, and equipment located at the Leased Property shall become part of the FFE, which is owned by Lessor. Throughout the Term of this Lease, Lessee shall, at its sole cost and expense, cause all of the items of FFE to be in proper working order and in good condition (ordinary wear and tear excepted). The term “FFE” shall have the meaning as set forth in the Uniform System and shall include, without limitation, all vehicles, furniture, furnishings and hotel equipment (including office equipment, exercise equipment, medical and/or health equipment, and property management equipment as necessary).
7.6 Lessee’s Obligation to Manage. At all times during the Term, Lessee shall be responsible for the management and operation of the Leased Property through the Manager or a successor manager approved by Lessor in its sole discretion, and in no event shall Lessor have any obligation with respect to the management or operation of the Leased Property.
7.7 Cash Accounts; Working Capital. On the Commencement Date, Lessor shall transfer to Lessee cash and funds deposited in banks (“Cash”) in the sum of $50,000 and working capital equal to zero (0) (“Working Capital”) as set forth in the Preliminary Statement of Cash and Working Capital (the “Preliminary Statement”) to be initialed by Lessor and Lessee and attached to this Lease as Exhibit C. Upon the expiration or early termination of this Lease, Lessee shall (a) pay over to Lessor the same amount of Cash that existed on the Commencement Date; and (b) restore the amount of Working Capital to zero (0). If, notwithstanding the requirement in the preceding sentence, the Leased Property is returned to Lessor with positive Working Capital, Lessor shall have the right to audit Lessee’s and the Leased Property’s books and records and, upon confirmation of such amount by Lessor, Lessor shall pay to Lessee the amount of positive Working Capital. If the Leased Property is returned to Lessor with negative Working Capital, Lessor shall have the right to audit Lessee’s and the Leased Property’s books and records and, upon confirmation of such amount by Lessor, Lessee will pay to Lessor the amount of negative Working Capital.
21
