May 1, 1997
Mr. Charles W. Wolcott
President and Chief Executive Officer
American Industrial Properties REIT
6220 N. Beltline Road, Suite 205
Irving, Texas 75063
Re: Agreement among MS Real Estate Special
Situations Inc. ("MSRE"), Morgan Stanley Asset Management Inc.
("MSAM") and American Industrial Properties REIT ("AIP")
Dear Charles:
This letter sets forth the agreement among MSRE, MSAM and
AIP regarding an investment in AIP. If you agree to the terms set
forth below, please sign below where indicated.
1. Issuance of Debt. Subject to the terms and conditions
set forth herein, MSRE on behalf of itself and MSAM on behalf of
the clients (the "Clients") identified on Schedule A hereto
(collectively, the "Purchasers") agree, severally and not
jointly, to commit to purchase at one or more closings up to
$20,000,000 in aggregate amount of senior convertible debt
securities (the "Debt") of AIP, subject to the Purchaser Share
Ownership Limitation (as defined in Paragraph 14).
2. Funding and Use of Proceeds. AIP will use the net
proceeds from each issuance of the Debt for the acquisition of
certain real estate properties that AIP will identify and
disclose to MSRE and MSAM before the Debt, the proceeds of which
will be used to acquire the specified properties, is acquired.
Each property acquisition must be approved by (i) MSAM prior to
the meeting of shareholders referred to in Paragraph 4 below, or
after such shareholder meeting, (ii) the Investment Committee of
the Board of Trust Managers, which Investment Committee shall
consist of three Trust Managers, including one designee of each
of MSAM and USAA Real Estate Company ("Realco"). If MSAM or the
Investment Committee of the Board of Trust Managers, as the case
may be, approves the purchase of a property, the Purchasers
shall purchase Debt from AIP in amounts necessary to enable AIP
to purchase such property; provided, however, in no event will
the Purchasers be required to acquire more than the aggregate
amount of the Debt.
3. Interest Rate. The Debt is non-interest bearing,
except as provided in Paragraph 10 below.
4. Conversion Date and Conversion Price. At the meeting
of shareholders to be held on or about June 30, 1997, AIP
shareholders will vote on (i) a proposal to increase the total
authorized common shares of beneficial interest of AIP (the
"Common Shares") to 500,000,000 ("Proposal One") and (ii) a
proposal to approve the issuance to the Purchasers of the Common
Shares upon conversion of the Debt and if Proposal One is not
approved, the authorization of an additional number of Common
Shares necessary to enable the Purchasers to convert the Debt
into the number of Common Shares referred to below. Immediately
upon approval of the shareholders ("Shareholder Authorization"),
the Debt will be converted into up to 8,163,265 Common Shares, at
$2.45 per Common Share; it being understood that the actual
number of shares to be issued upon the conversion of the Debt
will depend upon the aggregate amount of the Debt then
outstanding.
5. Registration Rights. AIP will grant the Purchasers
demand and "piggyback" registration rights with regard to the
Common Shares that are to be issued upon conversion of the Debt.
Such registration rights will be granted pursuant to a
registration rights agreement between AIP and the Purchasers
substantially in the same form of the Registration Rights
Agreement between AIP and Realco. AIP will pay all expenses in
connection with the registration of the Purchasers' Common Shares
then owned or are entitled to be acquired upon conversion of the
Debt.
6. Preemptive Rights. In the event AIP issues additional
Common Shares (specifically excluding any conversion by Realco of
debt owned by it into Common Shares, any issuances under any AIP
employee benefit plan and issuances of Common Shares to the
partners in Realco affiliated entities in connection with any
merger of such entities with and into AIP) after the issuance of
the Debt, the Purchasers shall have the right to purchase a
proportionate share (on a fully-diluted basis) of any share
issues (the "Preemptive Rights"). Notwithstanding the foregoing,
with respect to each Common Share offering and sale by AIP in the
amount of $10 million or more, the amount of shares Purchasers
may purchase under such Preemptive Rights shall be reduced by 5%
of the total shares outstanding (on a fully-diluted basis) after
each such sale. The Purchasers' Preemptive Rights will
immediately terminate once AIP achieves a Minimum Equity
Capitalization. For purposes of this Agreement, "Minimum Equity
Capitalization" shall mean $150 million as calculated using the
average closing price of AIP's Common Shares for the most recent
10 trading days multiplied by the current number of issued and
outstanding Common Shares and Common Share equivalents; provided,
however, that "Minimum Equity Capitalization" shall not in any
event include operating partnership unite in excess of $50
million.
7. No Additional Debt or Senior Equity. Except as
permitted by Paragraph 8 below, AIP will not issue any additional
debt or senior equity securities prior to achieving a Minimum
Equity Capitalization (as defined above) without the consent of
MSAM; provided, however, AIP may issue debt securities if the
proceeds of such debt securities will be used to acquire real
estate.
8. Additional Private Placement. Notwithstanding
Paragraphs 6 and 7 above, prior to the earlier of (i) June 15,
1997 or (ii) the execution of definitive agreements (as described
in Paragraph 13 below), AIP shall have the right to privately
place senior convertible debt on terms no more favorable than the
terms of the Debt.
9. Appointment of Trust Manager. (a) Effective
immediately after the shareholder meeting, AIP shall increase the
number of its Trust Managers from five to seven, and MSAM shall
have the right to instruct AIP to appoint two Trust Managers
selected by MSAM to fill the vacancies caused by the increase in
the number of Trust Managers. Additionally, until such time as
AIP achieves the equity capitalization described in (b) below,
AIP shall use its best efforts to have such designees elected as
Trust Managers (which efforts shall include, without limitation,
including MSAM's nominee in management's slate for nomination and
election and solicitation of proxies on his or her behalf);
provided that if the Trust Managers selected by MSAM are not
elected by the shareholders of AIP, MSAM shall have full board
observation rights including full and timely notice of all
meetings of the Trust Managers and each of its committees, copies
of all written and other materials disseminated to Trust Managers
and the right to designate a person to attend in person or by
telephone all meetings of the Trust Managers or their committees.
If MSAM receives observation rights pursuant to this Paragraph,
MSAM and its designees shall each execute a confidentiality
agreement in form and substance reasonably acceptable to AIP.
MSAM shall also have observation rights prior to receiving the
required Trust Manager appointment in the event any Debt is to be
purchased prior to the shareholder meeting.
(b) At such time as AIP achieves the Minimum Equity
Capitalization, MSAM shall cause one of its designees to resign
from the AIP Board of Trust Managers. At such time as AIP
achieves equity capitalization of $250 million (calculated in the
same manner as Minimum Equity Capitalization), MSAM shall cause
its remaining designee to resign from the AIP Board of Trust
Managers. Upon achievement of the Minimum Equity Capitalization,
unless Realco purchases an additional $20 million of AIP equity
securities from AIP for cash or real property (including amounts
attributable to any merger of any Realco affiliated entities with
and into AIP), Realco shall be required to cause one of its
designees to resign from the Board of Trust Managers.
(c) AIP agrees to obtain all necessary agreements and
waivers from Realco necessary to effectuate the terms of this
Paragraph 9 as a condition precedent to any funding of the Debt.
10. Absence of Authorized Shares. In the event the AIP
shareholders do not authorize an increase in the authorized
Common Shares as described in Paragraph 4 above, the Debt will
commence bearing interest as of such date at a rate per annum of
10%, which interest shall be payable in kind quarterly in arrears
and the Debt will mature and be fully payable by AIP in cash, two
years from the date of execution of definitive agreements as
described below. Interest on notes received as interest on the
Debt will be payable in cash. Any such notes will be issued on
the same terms as the Debt.
11. Expenses. Upon execution of this agreement by the
parties hereto, AIP will be obligated to reimburse MSAM for all
legal fees incurred by MSAM relating to this transaction, up to a
maximum of $50,000. Otherwise, AIP and MSAM shall pay their own
respective expenses incident to the consummation of this
Agreement and the transactions contemplated hereby.
12. Binding Agreement. Subject to the terms and conditions
set forth herein, AIP, MSRE and MSAM severally acknowledge that
this Agreement constitutes the legally valid and binding
obligation of AIP, MSRE and MSAM, respectively, enforceable
against AIP, MSRE and MSAM, respectively, in accordance with its
terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other
similar laws and equitable principles relating to or limiting
creditors' rights generally.
13. Definitive Agreement. Upon execution of this
agreement, the parties hereto shall promptly begin preparation of
definitive agreements to further document the agreements
hereunder, including, but not limited to, an investment
agreement, a note and a registration rights agreement, the terms
of which shall be governed by the laws of the State of New York
(collectively, the "Purchase Agreements"). The parties agree
that the Purchase Agreements shall be in substantially the same
forms as the agreements between AIP and Realco (copies of which
agreements have previously been provided to counsel to MSAM and
MSRE) with such modifications required to reflect the terms of
this agreement and as the parties may otherwise agree.
14. Conditions. (a) The obligation of the Purchasers to
each purchase of the Debt is subject to the following conditions
being satisfied on or before each Closing Date (as defined in the
definitive Purchase Agreements):
(i) the Purchase Agreements described in paragraph 13
shall be in execution form;
(ii) the Purchasers and AIP shall have received at
each closing customary closing certificates, schedules, opinions
and other closing documents in form and substance satisfactory to
MSAM and AIP;
(iii) Since December 31, 1996, there shall have been
no material adverse change or any development involving a
material adverse change in the condition (financial or otherwise)
of AIP and its subsidiaries, taken a whole, or in the earnings,
business, prospects or operations of AIP and its subsidiaries,
taken as a whole; and
(iv) MSAM shall have completed its due diligence
investigation of AIP and its subsidiaries, which investigation
shall be in scope, and with results reasonably satisfactory to
MSAM, and MSAM shall have been given access to the management,
records, books of account, contracts and properties of AIP and
its subsidiaries and shall have received such financial, business
and other information regarding AIP and its subsidiaries as it
shall have reasonably requested.
(b) MSAM covenants that it shall complete its
environmental, lease and engineering due diligence on or before
May 5, 1997. Upon completion of such due diligence, MSAM shall
give written notice to AIP of completion of the due diligence and
shall state whether anything they discovered while conducting
such due diligence shall cause it to terminate its obligation to
acquire the Debt under Paragraph 14(a)(iv) above.
(c) Notwithstanding anything contained in this
agreement to the contrary, at no time will the Purchasers be
required to acquire Debt to the extent that such purchase would
result in the Purchasers owning, in the aggregate, in excess of
37.8% of AIP's Common Shares outstanding immediately after such
purchase, assuming solely the conversion of the Debt owned by the
Purchasers and not on a fully-diluted basis.
15. Indemnification. In partial consideration of the
commitment of the Purchasers hereunder, AIP agrees to indemnify
and hold harmless each Purchaser and any of their respective
affiliates, directors, officers, agents and employees and each
other person, if any, controlling each Purchaser or any of their
affiliates (an "Indemnified Person") from and against any losses,
claims, damages or liabilities (or actions in respect thereof) to
which such Indemnified Person may become subject in connection
with the matters which are the subject of the commitment made
hereunder (including any use or proposed use of the proceeds from
the sale of the Debt) and will reimburse any Indemnified Person
for all reasonable expenses (including the reasonable fees of
counsel) as they are incurred by any such Indemnified Person in
connection with investigating, preparing or defending any such
action or claim pending or threatened, whether or not such
Indemnified Person is a party hereto. AIP shall not be
responsible for any losses, claims, damages, liabilities or
expenses resulting from such Indemnified Person's gross
negligence or willful misconduct. AIP also agrees that no
Indemnified Person shall have any liability (whether direct or
indirect, in contract or tort or otherwise) to AIP for or in
connection with the commitment hereunder except for losses,
claims, damages, liabilities or expenses to the extent that a
court of competent jurisdiction or arbitration panel shall have
finally determined that such losses, claims, damages, liabilities
or expenses resulted from such Indemnified Persons's gross
negligence or willful misconduct. In the event that the
foregoing indemnity is unavailable or insufficient to hold an
Indemnified Person harmless, AIP shall contribute to amounts paid
or payable by such Indemnified Person in respect of such losses,
claims, damages, liabilities and expenses in such proportion as
appropriately reflects the relative benefits received by, and
fault of AIP, on the one hand, and the Purchasers, on the other
hand in connection with the matters as to which such losses,
claims, damages, liabilities or expenses relate. The agreement
of AIP in this paragraph shall be in addition to any liability
AIP may otherwise have and shall survive termination of this
Agreement.
16. Termination. The commitment of the Purchasers
hereunder shall terminate on June 1, 1997 unless (i) the
Purchasers and AIP shall have extended the term hereof in
writing, or (ii) the Purchaser and AIP shall have executed the
Purchase Agreements; provided that such commitment shall
terminate at 5:00 (New York time) on May 2, 1997 if this
agreement has not been accepted by AIP at or prior to such time
and date. Notwithstanding Paragraph 9 above, MSAM's right to
designate two Trust Managers shall terminate upon termination of
the commitment hereunder. If any MSAM designees are serving as
Trust Managers at the time of termination of the commitment, MSAM
shall take all action necessary to cause its designees to resign
from the Board.
17. Limitation of Liability. AIP acknowledges and
understands that MSAM is acting as agent on behalf of the Clients
and that MSAM shall not have any liability to AIP, and shall not
be obligated to purchase any portion of the Debt with respect to
which any Client was obligated to but did not purchase.
18. REIT Qualification. The convertibility of the Debt
into Common Shares is expressly conditioned on the assurance from
the Purchasers that upon issuance of the Debt and at all times
thereafter the ownership of the Purchasers is such that neither
the Debt nor the Common Shares into which the Debt may be
converted will result in any Purchaser actually or constructively
owning directly or indirectly more than 9.8% of the number or
value of the Common Shares of AIP after application of the
provisions of Section 544 of the Internal Revenue Code of 1986 as
amended (the "Code") as modified by Section 856(h) of the Code
(based upon the most recent report filed by AIP with the
Securities and Exchange Commission).
19. Pension-Held REIT. For purposes of Section 856(h)(3)
of the Code, AIP hereby represents that at any time during the
shorter of (i) the two-year period ending immediately prior to
the First Note Closing Date (as defined in the Purchase
Agreements) or (ii) the period during which AIP was in existence,
to the best of AIP's knowledge, no "qualified trust" has held,
directly or indirectly, more than 10% of the interests in the
Company. In addition, AIP covenants and agrees that (i) it will
duly and promptly notify MSAM upon becoming aware that any
"qualified trust" holds or is expected to hold, directly or
indirectly, more than 10% of the interests in the Company, and
(ii) it will provide MSAM such information and/or verification as
MSAM shall reasonably request in order to verify whether the
Company constitutes a "pension-held REIT" as defined under
Section 856(h)(3)(C) of the Code.
20. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of
New York.
21. Arbitration. In the event of a dispute hereunder which
cannot be resolved by the parties, such dispute shall be settled
by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association and judgment on the
award rendered by the arbitration panel may be entered in any
court or tribunal of competent jurisdiction. Any arbitration
occurring under this Paragraph 21 shall be held in New York, New
York in the first instance, in Dallas, Texas in the second
instance, and continuing in that order with respect to each
dispute occurring hereunder.
Sincerely,
Morgan Stanley Asset Management, Inc.
As Attorney-in-fact for each of the Clients
listed on Schedule A hereto
By: /s/ Russell Platt
Title:
MS Real Estate Special Situations, Inc.
By: /s/ Russell Platt
Title:
AGREED TO AND ACCEPTED BY:
American Industrial Properties REIT
/s/ Charles W. Wolcott
Charles W. Wolcott
President and Chief Executive Officer
Dated: May 1, 1997