Exhibit 10.7
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OPERATING AGREEMENT
BETWEEN
[HOST OWNING ENTITY]
("OWNER")
AND
MARRIOTT SENIOR LIVING SERVICES, INC.
("OPERATOR")
FOR
THE
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MARRIOTT SENIOR LIVING COMMUNITY
AT CITY, STATE
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EXECUTED AS OF JUNE 21, 1997
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OPERATING AGREEMENT
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TABLE OF CONTENTS
ARTICLE 1 DEFINITION OF TERMS............................................. 1
Section 1.01 Definition of Terms......................................... 1
ARTICLE 2 APPOINTMENT OF OPERATOR......................................... 16
Section 2.01 Appointment; Exclusive License.............................. 16
Section 2.02 Authority of Operator; Right of Possession.................. 16
Section 2.03 Management Functions........................................ 17
Section 2.04 Limitations on Authority of Operator........................ 20
Section 2.05 Title Encumbrances.......................................... 21
Section 2.06 Licenses and Permits........................................ 21
Section 2.07 Credit...................................................... 21
Section 2.08 Representations and Warranties of Owner..................... 22
Section 2.09 Representations and Warranties of Operator.................. 22
ARTICLE 3 OWNERSHIP OF RETIREMENT COMMUNITY............................... 23
Section 3.01 Ownership of Retirement Community........................... 23
ARTICLE 4 TERM............................................................ 23
Section 4.01 Term........................................................ 23
Section 4.02 Actions to be Taken Upon Termination........................ 24
Section 4.03 Performance Termination..................................... 25
Section 4.04 Owner's Termination Option.................................. 27
ARTICLE 5 COMPENSATION OF OPERATOR........................................ 28
Section 5.01 Base Fee, Incentive Fee..................................... 28
ARTICLE 6 FINANCING OF THE RETIREMENT COMMUNITY........................... 28
Section 6.01 Amendments of Management Agreement.......................... 28
Section 6.02 Notice and Opportunity to Cure.............................. 29
Section 6.03 Assignment of Management Agreement.......................... 30
Section 6.04 Subordination of Management Agreement....................... 31
Section 6.05 Non-Disturbance Agreement................................... 31
Section 6.06 Attornment.................................................. 32
Section 6.07 No Modification or Termination of Agreement................. 33
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OPERATING AGREEMENT PAGE i
Section 6.08 Owner's Right to Finance the Retirement Community........... 33
Section 6.09 Sale/Leaseback Transactions................................. 33
Section 6.10 REIT Transactions........................................... 34
ARTICLE 7 WORKING CAPITAL AND FIXED ASSET SUPPLIES........................ 35
Section 7.01 Working Capital............................................. 35
Section 7.02 Fixed Asset Supplies........................................ 36
ARTICLE 8 REPAIRS, MAINTENANCE AND REPLACEMENTS........................... 36
Section 8.01 Routine Repairs and Maintenance............................. 36
Section 8.02 FF&E Reserve................................................ 37
Section 8.03 Building Alterations, Improvements, Renewals,
and Replacements...................................................... 39
Section 8.04 Liens....................................................... 41
Section 8.05 Ownership of Replacements................................... 41
ARTICLE 9 BOOKKEEPING AND BANK ACCOUNTS................................... 42
Section 9.01 Books and Records........................................... 42
Section 9.02 Retirement Community Accounts, Expenditures................. 44
Section 9.03 Annual Operating Projection................................. 44
Section 9.04 Operating Losses............................................ 45
ARTICLE 10 PROPRIETARY MARKS; TRADEMARK LICENSE; INTELLECTUAL PROPERTY..... 45
Section 10.01 Proprietary Marks........................................... 45
Section 10.02 Trademark License........................................... 46
Section 10.03 Purchase of Inventories and Fixed Asset Supplies............ 46
Section 10.04 Computer Software and Equipment............................. 47
Section 10.05 Intellectual Property....................................... 47
Section 10.06 Breach of Covenant.......................................... 47
ARTICLE 11 POSSESSION AND USE OF RETIREMENT COMMUNITY...................... 47
Section 11.01 Quiet Enjoyment............................................. 47
Section 11.02 Use......................................................... 48
Section 11.03 Central Administrative Services............................. 48
Section 11.04 Owner's Right to Inspect.................................... 49
Section 11.05 Indemnity................................................... 49
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OPERATING AGREEMENT PAGE ii
ARTICLE 12 INSURANCE....................................................... 50
Section 12.01 Interim Insurance........................................... 50
Section 12.02 Property and Operational Insurance.......................... 50
Section 12.03 General Insurance Provisions................................ 51
Section 12.04 Cost and Expense............................................ 52
Section 12.05 Owner's Option to Obtain Certain Insurance.................. 52
ARTICLE 13 TAXES........................................................... 54
Section 13.01 Real Estate and Personal Property Taxes..................... 54
ARTICLE 14 RETIREMENT COMMUNITY EMPLOYEES.................................. 55
Section 14.01 Employees................................................... 55
ARTICLE 15 DAMAGE, CONDEMNATION AND FORCE MAJEURE.......................... 57
Section 15.01 Damage and Repair........................................... 57
Section 15.02 Condemnation................................................ 58
Section 15.03 Force Majeure............................................... 58
ARTICLE 16 DEFAULTS........................................................ 59
Section 16.01 Definition of............................................... 59
Section 16.02 Definition of............................................... 60
Section 16.03 Remedies Upon an Event of Default........................... 60
Section 16.04 Operator's Right to Specific Performance for Owner's
Wrongful Termination.................................................. 61
Section 16.05 Owner's Estate.............................................. 62
ARTICLE 17 ASSIGNMENT...................................................... 62
Section 17.01 Assignment.................................................. 62
ARTICLE 18 SALE OF THE RETIREMENT COMMUNITY................................ 63
Section 18.01 Sale of the Retirement Community............................ 63
Section 18.02 Assumption Agreement of Successor Owner..................... 66
ARTICLE 19 MISCELLANEOUS................................................... 66
Section 19.01 Right to Make Agreement..................................... 66
Section 19.02 Consents.................................................... 67
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OPERATING AGREEMENT PAGE iii
Section 19.03 Relationship Between the Parties............................ 67
Section 19.04 Confidentiality............................................. 68
Section 19.05 Applicable Law.............................................. 68
Section 19.06 Covenants Running With the Land; Recordation................ 68
Section 19.07 Headings.................................................... 68
Section 19.08 Notices..................................................... 68
Section 19.09 Environmental Matters....................................... 69
Section 19.10 Estoppel Certificates....................................... 70
Section 19.11 Arbitration................................................. 71
Section 19.12 Affiliates.................................................. 71
Section 19.13 Equity and Debt Offerings................................... 72
Section 19.14 Restriction on Operator..................................... 72
Section 19.15 Entire Agreement............................................ 74
Section 19.16 Waiver...................................................... 74
Section 19.17 Partial Invalidity.......................................... 75
Section 19.18 Construction................................................ 75
EXHIBITS
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Exhibit A. Legal Description of the Land
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Exhibit B. Existing Title Encumbrances
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Exhibit C. Pro Forma Fees
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Exhibit D. Owner's Initial Cost and Secured Loan Balance
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OPERATING AGREEMENT PAGE iv
OPERATING AGREEMENT
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THIS OPERATING AGREEMENT ("Agreement") is effective as of the 21st day of
June, 1997 ("Effective Date"), by
___________________________________________________________________, with a
mailing address at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ("Owner"), and
MARRIOTT SENIOR LIVING SERVICES, INC. ("Operator"), a Delaware corporation, with
a mailing address at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
R E C I T A L S :
A. Owner is the [owner/lessee] of the Retirement Community (as hereafter
defined);
B. Operator is in the business of managing and operating senior living
residence facilities and communities;
C. Operator is the owner of the Proprietary Marks that are used to
identify retirement communities in the Marriott Retirement Community System;
D. Operator desires to assure itself that it will be able to conduct and
enhance its business at Owner's Retirement Community by obtaining from Owner an
irrevocable (but subject in every respect to all of the provisions of this
Agreement, including those providing for termination prior to the expiration of
the full Term) license to operate Operator's business in Owner's Retirement
Community;
E. Owner desires to assure that it will have the benefit of Operator's
experience, services and Proprietary Marks in establishing, enhancing and
maintaining a successful Retirement Community.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE 1
DEFINITION OF TERMS
SECTION 1.01 DEFINITION OF TERMS
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" means the four (4) week accounting periods having the
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same beginning and ending dates as Operator's four (4) week accounting periods,
except that an Accounting Period may occasionally contain five (5) weeks when
necessary to conform Operator's accounting system to the calendar. In the event
that the Effective Date is not the first day of Operator's four (4) week
accounting periods, the first Accounting Period under
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OPERATING AGREEMENT PAGE 1
this Agreement shall consist of the first four (4) week accounting period of
Operator commencing after the Effective Date and the period from the Effective
Date until the commencement of such first four (4) week accounting period.
"Additional Invested Capital" shall mean the cumulative total, as of any
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given date during the Term, of the following: (i) any contribution made by
Owner pursuant to Section 7.01A (provided that Additional Invested Capital shall
be decreased by any return to Owner of excess Working Capital pursuant to
Section 7.01B); (ii) any expenditures made by Owner pursuant to Section 8.03,
and any expenditures by Owner pursuant to Section 19.09; (iii) any contributions
by Owner to the FF&E Reserve (beyond the funding described in Section 8.02B),
other than those contributions which are reimbursed to Owner under Section
8.02F; (iv) consideration paid and reasonable costs incurred by Owner or any
Affiliate of Owner in connection with the purchase of any interest (direct or
indirect) held in Owner by any party which is not an Affiliate of Owner;
(v) consideration paid and reasonable costs incurred by Owner or any Affiliate
of Owner in connection with the acquisition of the fee interest in any Land in
the event the Retirement Community is subject to an Existing Lease (less that
portion of the then current Owner's Investment representing the capitalized
value of the Existing Lease at the time of the acquisition of said fee
interest), (vi) Expansion Payments paid pursuant to the Expansion Agreement or
Stock Purchase Agreement, and (vii) any additional amounts advanced or funded by
Owner pursuant to this Agreement which do not constitute Owner Deductions.
"Affiliate" means any individual or entity directly or indirectly through
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one or more intermediaries, controlling, controlled by or under common control
with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of more than fifty percent (50%) of the voting rights
attributable to the shares of the controlled corporation, and, with respect to
an entity that is not a corporation, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Agreement" shall mean this Operating Agreement as the same may be amended
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from time to time.
"Agreement Year" shall mean an annual period; the first Agreement Year
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shall commence on the Effective Date and each subsequent Agreement Year shall
commence on the succeeding anniversaries of the Effective Date.
"Annual Financial Report" shall have the meaning specified in Section 9.01.
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"Annual Operating Projection" shall have the meaning set forth in
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Section 9.03.
"Area A" shall have the meaning set forth in Section 19.14D.
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"Area B" shall have the meaning set forth in Section 19.14D.
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"Base Fee" shall have the meaning set forth in Section 5.01A.
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OPERATING AGREEMENT PAGE 2
"Bonus Fee" shall have the meaning set forth in Section 5.01B.
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"Building Estimate" shall have the meaning set forth in Section 8.03A.
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"Business Day(s)" means Monday through Friday except for New Year's Day,
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President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
"Canceled Term" shall have the meaning set forth in Section 4.04.
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"Capital Expenditures" shall have the meaning set forth in Section 8.03A.
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"Capitalization Multiple" shall mean the number ten (10).
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"Case Goods" means furniture and furnishings used in the Retirement
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Community, including, without limitation: chairs, beds, chests, headboards,
desks, lamps, tables, television sets, mirrors, pictures, wall decorations and
similar items.
"Central Administrative Services" shall have the meaning set forth in
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Section 11.03.
"Central Administrative Services Fee" shall have the meaning set forth in
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Section 11.03.
"Consumer Price Index" or "CPI" means the Consumer Price Index from time to
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time issued by the United States Government Bureau of Labor Statistics for Urban
Wage Earners and Clerical Workers, All Items, for the United States of America
(1982-84=100), or if the aforesaid Consumer Price Index is not at such time so
prepared and published, any comparable index selected by Owner and reasonably
satisfactory to Operator (a "Substitute Index") then prepared and published by
an agency of the Government of the United States, appropriately adjusted for
changes in the manner in which such index is prepared and/or year upon which
such index is based. Any dispute regarding the selection of the Substitute
Index or the adjustments to be made thereto shall be settled by arbitration in
accordance with Section 19.11. Except as otherwise expressly stated herein,
when a number or amount is required to be "adjusted by the Consumer Price
Index", or similar terminology, such adjustment shall be equal to the percentage
increase or decrease (except that for purposes of this Agreement, the Consumer
Price Index shall not be reduced below its level as of the Effective Date) in
the Consumer Price Index which is issued for the month in which such adjustment
is to be made (or, if the Consumer Price Index for such month is not yet
publicly available, the Consumer Price Index for the most recent month for which
the Consumer Price Index is publicly available) as compared to the Consumer
Price Index which was issued for the prior month in which the Effective Date
occurred unless another base month is indicated herein.
"Coverage Ratio" shall mean the number one and one-quarter (1.25), or one
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and two-tenths (1.2) in the case of a mortgage issued or insured by an agency of
the United States Government, or ▇▇▇▇▇▇ ▇▇▇ or ▇▇▇▇▇▇▇ Mac or lending
institutions established by the federal government.
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OPERATING AGREEMENT PAGE 3
"Cure Notice" shall have the meaning set forth in Section 4.03B.
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"Day(s)" means one or more calendar days(s).
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"Debt Service" means all installments of principal and interest required to
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be made under any Secured Loan or any replacement thereof.
"Effective Date" shall have the meaning set forth in the Preamble.
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"Employee Claims" means any and all claims (including all fines, judgments,
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penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and
expenses, and costs of settlement with respect to any such claim) by any
employee or employees of Operator against Owner or Operator with respect to the
employment at the Retirement Community of such employee or employees. "Employee
Claims" shall include, without limitation, the following: (i) claims which are
eventually resolved by arbitration, by Litigation or by settlement; (ii) claims
which also involve allegations that any applicable employment-related contracts
affecting the employees at the Retirement Community have been breached; and
(iii) claims which involve allegations that one or more of the Employment Laws
has been violated; provided, however, that "Employee Claims" shall not include
claims for worker compensation benefits (which shall be governed by Article 12
hereof) or for unemployment benefits.
"Employment Laws" means any federal, state or local law (including the
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common law), statute, ordinance, rule, regulation, order or directive with
respect to employment, conditions of employment, benefits, compensation, or
termination of employment that currently exists or may exist at any time during
the Term of this Agreement, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers
Adjustment and Retraining Act, the Occupational Safety and Health Act, the
Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988
and the Americans With Disabilities Act of 1990.
"Environmental Laws" shall mean: (i) the Comprehensive Environmental
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Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 et seq., as
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now or hereafter amended, and the Resource Conservation and Recovery Act of
1976, as now or hereafter amended; (ii) the regulations promulgated thereunder,
from time to time; and (iii) all federal, state and local laws, rules and
regulations (now or hereafter in effect) dealing with the use, generation,
treatment, management, storage, disposal or abatement of Hazardous Materials or
protection of human health or the environment.
"Event of Default" shall have the meaning set forth in Section 16.02.
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"Existing Mortgage" shall mean the Mortgages listed on Exhibit D, but for
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purposes of this Agreement shall not include any amendments or modifications
thereof that would materially adversely affect the interests of Operator after
the Effective Date.
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OPERATING AGREEMENT PAGE 4
"Existing Title Encumbrances" shall have the meaning set forth in
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Section 2.05A.
"Expansion Agreement" means that certain Expansion Agreement of even date
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herewith between Owner and Marriott Senior Living Services, Inc.
"Expansion Units" shall have the meaning set forth in the Expansion
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Agreement between the parties of even date herewith.
"Extended Term" shall have the meaning set forth in Section 4.01.
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"FF&E" means furniture, furnishings, fixtures, Soft Goods, Case Goods,
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vehicles and equipment (including, but not limited to, telephone systems,
facsimile machines, communications and computer systems hardware) but shall not
include Fixed Asset Supplies or any Software.
"FF&E Estimate" shall have the meaning set forth in Section 8.02C.
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"FF&E Reserve" shall have the meaning set forth in Section 8.02A.
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"FF&E Reserve Payment" shall have the meaning set forth in Section 8.02B.
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"First Mortgage" shall mean any Mortgage which is a first lien on the
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Retirement Community having priority over all other Mortgages that may then
encumber the Retirement Community.
"Fiscal Year" means Operator's Fiscal Year which now ends at midnight on
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the Friday closest to December 31 in each calendar year; the new Fiscal Year
begins on the Saturday immediately following said Friday. Any partial Fiscal
Year between the Effective Date and the commencement of the first full Fiscal
Year shall constitute a separate Fiscal Year. A partial Fiscal Year between the
end of the last full Fiscal Year and the Termination of this Agreement shall,
for purposes of this Agreement, constitute a separate Fiscal Year. If
Operator's Fiscal Year is changed in the future, appropriate adjustment to this
Agreement's reporting and accounting procedures shall be made upon mutual
consent of Owner and Operator; provided, however, that no such change or
adjustment shall alter the Term of this Agreement or in any way reduce the
distributions of Operating Profit or other payments due Owner hereunder, and
Operator shall bear (not as an Operating Expense) any incidental accounting
costs imposed on Owner necessitated by any such change in Operator's Fiscal
Year. Fiscal Year shall not include any portion of a Fiscal Year prior to the
Effective Date or after the Termination of this Agreement.
"Fixed Asset Supplies" means supply items included within "Property and
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Equipment" under the Uniform System of Accounts, including linen, china,
glassware, silver, uniforms, and similar items.
"Force Majeure" means acts of God, acts of war, civil disturbance,
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governmental action (including the revocation or refusal to grant licenses or
permits, where such revocation or refusal
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OPERATING AGREEMENT PAGE 5
is not due to the fault of the party whose performance is to be excused for
reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or
any other causes beyond the reasonable control of either party.
"Foreclosure" shall mean any exercise of the remedies available to a
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Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Retirement Community. The term
"Foreclosure" shall include, without limitation, any one or more of the
following events, if they occur in connection with a default under a Secured
Loan: (i) a transfer by judicial foreclosure or exercise of a power of sale;
(ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court
of a receiver to assume possession of the Retirement Community; (iv) a transfer
of either ownership or control of the Owner, by exercise of a stock pledge or
otherwise; (v) if title to the Retirement Community is held by a tenant under a
ground lease, an assignment of the tenant's interest in such ground lease; or
(vi) any similar judicial or non-judicial exercise of the remedies held by the
Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
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the Retirement Community is transferred by means of a Foreclosure.
"Future Title Encumbrance" shall have the meaning set forth in
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Section 2.05B.
"GAAP" means Generally Accepted Accounting Principles as adopted by the
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American Institute of Certified Public Accountants.
"Gross Revenues" shall mean, for each Accounting Period, all revenues and
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receipts of every kind derived by Owner from operating the Retirement Community
and all departments and parts thereof, including, but not limited to: income
(from both cash and credit transactions) from monthly occupancy fees (including
the amortized portion of the "endowment" or like one-time payments received
under "lifecare" or like contracts with residents), health care fees and
ancillary services fees received pursuant to various agreements with residents
of the Retirement Community; income from food and beverage, and catering sales;
income from vending machines; and proceeds, if any, from business interruption
or other loss of income insurance, all determined in accordance with GAAP;
provided, however, that Gross Revenues shall not include: (i) gratuities to
employees at the Retirement Community; (ii) federal, state or municipal excise,
sales or use taxes or similar taxes imposed at the point of sale and collected
directly from residents or guests of the Retirement Community or included as
part of the sales price of any goods or services; (iii) proceeds from the sale
of FF&E and any other capital asset; (iv) interest received or accrued with
respect to the monies in any operating or reserve accounts of the Retirement
Community; (v) any cash refunds, rebates or discounts to residents of the
Retirement Community, or cash discounts and credits of a similar nature, given,
paid or returned in the course of obtaining Gross Revenues or components
thereof; (vi) proceeds from any Sale of the Retirement Community, or any other
capital transaction; (vii) proceeds of any financing transaction affecting the
Retirement Community; (viii) any endowment or like one-time payments received
under lifecare or like contracts with residents, except as specifically set
forth above in this paragraph; (ix) security deposits until such time as the
same are applied to rent and other charges due and payable; (x) awards of
damages, settlement proceeds and other payments
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OPERATING AGREEMENT PAGE 6
received by Owner in respect of any Litigation; (xi) proceeds of any
condemnation; (xii) proceeds of any casualty insurance, other than loss of rents
or business interruption insurance; (xiii) any Shortfall Payment made by
Operator to Owner pursuant to Section 4.03B; and (xiv) payments under any policy
of title insurance.
"Hazardous Materials" shall have the meaning set forth in Section 19.09D
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hereof.
"Holder" means any holder, from time to time, of any Secured Loan.
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"Impositions" means all real estate and personal property taxes, levies,
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assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01B) including, without limitation, the
following: all water, sewer or similar fees, rents, rates, charges, excises or
levies; vault license fees or rentals; license fees; permit fees; inspection
fees and other authorization fees and other governmental charges of any kind or
nature whatsoever, whether general or special, ordinary or extraordinary,
foreseen or unforeseen, or hereinafter levied or assessed of every character
(including all interest and penalties thereon), which at any time during or in
respect of the Term of this Agreement may be assessed, levied, confirmed or
imposed on Owner or Operator with respect to the Retirement Community or the
operation thereof, or otherwise in respect of or be a lien upon the Retirement
Community (including, without limitation on any of the FF&E, Inventories or
Fixed Asset Supplies now or hereafter located therein). Impositions shall not
include any income or franchise taxes payable by Owner or Operator.
"Incentive Fee" shall have the meaning set forth in Section 5.01A.
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"Initial Term" shall have the meaning set forth in Section 4.01.
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"Intellectual Property" means: (i) all Software; and (ii) all manuals,
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instructions, policies, procedures and directives issued by Operator to its
employees at the Retirement Community regarding the procedures and techniques to
be used in operating the Retirement Community.
"Interim Report" shall have the meaning specified in Section 9.01C.
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"Inventories" means "Inventories" as defined by GAAP, such as provisions in
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storerooms, refrigerators, pantries and kitchens; medical supplies; other
merchandise intended for sale; fuel; mechanical supplies; stationery; and other
expensed supplies and similar items.
"Land" means the land described in Exhibit A.
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"Legal Requirement" means any federal, state or local law, code, rule,
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ordinance, regulation or order of any governmental authority having jurisdiction
over the business or operation of the Retirement Community or the matters which
are the subject of this Agreement, including any resident care or health care,
building, zoning or use laws, ordinances, regulations or orders, environmental
protection laws and fire department rules.
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OPERATING AGREEMENT PAGE 7
"License(s)" means any license, permit, decree, act, order, authorization
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or other approval (including Medicare/Medicaid certification to the extent
applicable) or instrument which is necessary in order to operate the Retirement
Community in accordance with Legal Requirements or pursuant to the Marriott
Standards and otherwise in accordance with this Agreement.
"Litigation" means: (i) any cause of action commenced in a federal, state
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or local court; or (ii) any claim brought before an administrative agency or
body (for example, without limitation, employment discrimination claims)
relating to the Retirement Community and/or the ownership and/or operation
thereof.
"Management Analysis Report" shall mean a relatively brief, narrative
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report on the state of business and affairs of the Retirement Community,
prepared on an annual basis by Operator and delivered to Owner at the time of
delivery of the Annual Financial Report, which shall include a narrative
description regarding the preceding Fiscal Year of: (i) the Retirement
Community's operating performance, including significant variations from the
Annual Operating Projection; (ii) an analysis of any significant variation of
the actual resident fees and occupancy from what was set forth in the Annual
Operating Projection; (iii) a review of the competitive retirement community
market; (iv) a description of any significant promotional or other marketing
programs in which the Retirement Community participated, which were not included
as part of the Annual Operating Projection for the preceding Fiscal Year; and
(v) such other supplementary information as Owner or Operator shall reasonably
deem necessary to an understanding of the operation of the Retirement Community.
"Marriott Retirement Community System" means at any particular time the
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entire system or group of full service (that is consisting of both independent
living and health care accommodations and services) retirement communities then
owned and/or operated or managed by Operator (or one or more of its Affiliates),
under the "Marriott" name.
"Marriott Standards" means from time to time both the operational standards
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(for example, staffing levels, accounting and fiscal management, resident care
and health care policies and procedures, accounting and financial reporting
policies and procedures) and the physical standards (for example, quality of
FF&E, frequency of FF&E replacement) that are then generally and consistently
(but not necessarily, absolutely or without exception) applied at or to
retirement communities in the Marriott Retirement Community System which are of
comparable size, age and market orientation as the Retirement Community,
(provided, however, that the Marriott Standards shall in no event be lower than
(i) what is required, from time-to-time during the Term, by Legal Requirements,
or (ii) the operational and physical standards, as of the date in question, of
comparable retirement communities in the quality segment of the retirement
communities industry in the state in which the Retirement Community is located).
"Mortgage" means any mortgage, deed of trust, or deed to secure debt or
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other security instrument recorded against the Project as security for a Secured
Loan.
"Mortgagee" means the Holder, from time to time, of a Mortgage or any
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replacement of a Mortgage.
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OPERATING AGREEMENT PAGE 8
"Net Operating Profit" means Operating Profit less Owner's Priority.
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"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
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the jurisdiction in which the Retirement Community is located, executed and
delivered by a Holder (which agreement shall by its terms be binding upon all
assignees of such Holder), for the benefit of Operator, pursuant to which, in
the event such Holder (or its assignee) comes into possession of or acquires
title to the Retirement Community as a result of a Foreclosure, such Holder (and
its assignees) shall (x) recognize Operator's rights under this Agreement, and
(y) shall not name Operator as a party in any Foreclosure action or proceeding,
and (z) shall not disturb Operator in its right to continue to manage the
Retirement Community pursuant to this Agreement; provided, however, that at such
time, (i) this Agreement has not expired or otherwise been earlier terminated in
accordance with its terms, and (ii) there are no outstanding Events of Default
by Operator, and (iii) no material event has occurred and no material condition
exists which, after notice or the passage of time or both, would entitle Owner
to terminate this Agreement (excluding events which would constitute an Event of
Default, which are to be governed exclusively by clause (ii) hereof).
"Operating Expense(s)" means any or all, as the context requires, of the
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following:
1. All costs of operating the Retirement Community incurred in
accordance with this Agreement, including, without limitation, all salaries,
wages, fringe benefits, payroll taxes and other costs related to Retirement
Community employees, Employee Claims (except to the extent specifically set
forth to the contrary in Section 14.01), all departmental expenses,
administrative and general expenses, the cost of Retirement Community
advertising and business promotion, heat, light, power, electricity, gas,
telephone, cable and other utilities, and routine repairs, maintenance and minor
alterations treated as Operating Expenses under Section 8.01;
2. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Retirement Community;
3. A reasonable reserve for uncollectible accounts receivable as
determined by Operator;
4. All reasonable costs and fees of audit, legal, technical and other
independent professionals or other third parties who are retained by Operator to
perform services required or permitted hereunder; provided Operator will notify
Owner at lease thirty (30) Days in advance of any proposed expenditure under
this paragraph 4 which is in excess of Fifty Thousand Dollars ($50,000.00) (to
be adjusted by the CPI) and which was not specifically identified in the Annual
Operating Projection; and Operator shall consider in good faith any comments
which Owner may have with respect to such proposed expenditure; and provided,
further, that if such expenditure involves immediately-needed repair work to the
Retirement Community or if immediate action is otherwise required, the above-
described requirement regarding thirty (30) Days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances;
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OPERATING AGREEMENT PAGE 9
5. The reasonable cost and expense of technical consultants and
operational experts who are employees of Operator or one of its Affiliates, and
who perform specialized services in connection with non-routine Retirement
Community work; provided, however, that the costs and expenses so incurred shall
only be Operating Expenses to the extent such costs and expenses are reasonable
and competitively priced, as compared to similar work done by outside
consultants or experts; and provided, further, that Operator will notify Owner
at least thirty (30) Days in advance of any proposed expenditure under this
paragraph 5 which is in excess of Fifty Thousand Dollars ($50,000.00) (to be
adjusted by CPI) and which is not specifically identified in the Annual
Operating Projection, and Operator shall consider in good faith any comments
which Owner may have with respect to such proposed expenditure; and provided,
further, that if such expenditure involves immediately-needed repair work to the
Retirement Community or if immediate action is otherwise required, the above-
described requirement regarding thirty (30) Days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances;
6. Costs and expenses for preparation of Medicare and Medicaid cost
reports and billing submissions;
7. The Base Fee and the Bonus Fee, if any;
8. Subject to the limitation set forth below in this definition, the
Central Administrative Services Fee;
9. Insurance costs and expenses as provided in Sections 12.04 and
12.05;
10. All Impositions assessed against the Retirement Community;
11. Payments (other than the lump-sum contribution provided for in
Section 8.02F2) into the FF&E Reserve pursuant to Section 8.02;
12. Such other non-capital costs and expenses incurred by Operator as
are specifically provided for elsewhere in this Agreement or are otherwise
reasonably necessary for the proper and efficient operation of the Retirement
Community in accordance with the Marriott Standards; all as determined in
accordance with GAAP;
13. The reimbursement to Owner of the amount of any Owner Deductions;
14. [RENTAL PAYMENTS UNDER THE EXISTING LEASE]; and
15. Lease payments for any equipment lease to the extent set forth in
Section 8.02D.
It is understood that the term "Operating Expenses" shall not include:
(i) Debt Service payments pursuant to any Secured Loan or any other loans or
borrowings of Owner; nor
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OPERATING AGREEMENT PAGE 10
(ii) except as set forth above, payments pursuant to equipment leases or other
forms of financing obtained for the FF&E located in or connected with the
Retirement Community (such payments shall be paid out of the FF&E Reserve in
accordance with Section 8.02), nor (iii) rental payments pursuant to any ground
lease [OTHER THAN THE EXISTING LEASE], nor (iv) any other payments which are
designated as Owner's responsibility under any of the provisions of this
Agreement and which are not Owner Deductions, all of which shall be paid by
Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve.
Unless otherwise specifically set forth in this Agreement, all the costs and
expenses of the Retirement Community shall be Operating Expenses.
Commencing with the second (2nd) Agreement Year and continuing
thereafter until the earlier of (i) the end of the seventh (7th) Agreement Year,
or (ii) the date on which the ratio of Operating Profit, to the Owner's Priority
amount for any consecutive thirteen (13) Accounting Periods equals or exceeds
one-and-one-quarter (1.25) (but in no event prior to the end of the fourth (4th)
Agreement Year), fifty percent (50%) of the Central Administrative Services Fee
shall be paid as an Operating Expense and fifty percent (50%) shall be paid (and
to the extent paid shall constitute an Operating Expense) only after Owner
receives Owner's Priority for the subject Fiscal Year, and only to the extent of
Operating Profit remaining after payment of the Owner's Priority.
"Operating Profit" shall mean for each Fiscal Year, the excess of Gross
----------------
Revenues over Operating Expenses for such Fiscal Year.
"Operating Loss" shall mean for each Fiscal Year, a negative Operating
--------------
Profit; that is, an excess of Operating Expenses over Gross Revenues.
"Operator" shall have the meaning set forth in the Preamble.
--------
"Owner" shall have the meaning set forth in the Preamble.
-----
"Owner Deduction(s)" shall mean amounts paid by Owner with respect to:
------------------
(i) reasonable third party out-of-pocket costs of any negotiations or Litigation
with respect to any contest of Impositions, (ii) fees and expenses of technical
consultants and operational experts which are retained by Owner, with the
approval of Operator, to give advice with respect to the operation of the
Retirement Community, and (iii) any other amount which under this Agreement
constitutes an Owner Deduction. The amount of any Owner Deductions paid by
Owner shall be reimbursed to Owner (as an Operating Expense) in the Fiscal Year
in which they were paid.
"Owner's Initial Cost" shall have the meaning set forth in Exhibit D.
--------------------
"Owner's Investment" shall mean the sum total, as of any given point in
------------------
time during the Term, of: (i) the Owner's Initial Cost; plus (ii) any
Additional Invested Capital expended by Owner; provided that each expenditure of
Additional Invested Capital shall be added to the Owner's Investment (with
respect to the Fiscal Year or Fiscal Years during which such
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OPERATING AGREEMENT PAGE 11
expenditure(s) occurred) on a pro rata basis, beginning with the first full
Accounting Period after such expenditures occurred, and thereafter over the
remainder of the then current Fiscal Year.
"Owner's Preferred Return" shall mean ten and three-quarters percent
------------------------
(10.75%) through Fiscal Year 1999, eleven percent (11%) for Fiscal Years 2000
through 2003, and eleven and one-half percent (11.5%) thereafter for the
remainder of the Term.
"Owner's Priority" shall mean, with respect to any Fiscal Year (or partial
----------------
Fiscal Year), an amount sufficient to provide to Owner, a simple, non-
compounded, non-cumulative return for such Fiscal Year (or partial Fiscal Year)
on Owner's Investment during such Fiscal Year (or partial Fiscal Year) at an
annual rate equal to Owner's Preferred Return for such Fiscal Year (or partial
Fiscal Year). In the event that the amount of Owner's Investment varies during
such Fiscal Year (or partial Fiscal Year), Owner's Investment for such Fiscal
Year (or partial Fiscal Year) shall be based upon the weighted daily average of
Owner's Investment during such Fiscal Year (or partial Fiscal Year).
"Prime Rate" means the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
--- ---- ------ -------
the Term, no longer so published, the term "Prime Rate" means the average of the
prime interest rates which are announced, from time to time, by the three (3)
largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Project" means the Retirement Community.
-------
"Proprietary Marks" means all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify retirement communities in the Marriott Retirement Community System.
The term "Proprietary Marks" shall also include all trade names, trademarks,
symbols, logos, designs, etc., which are used in connection with the operation
of the Retirement Community during the Term. The term "Proprietary Marks" shall
include all present and future Proprietary Marks, whether they are now or
hereafter owned by Operator or any of its Affiliates, and whether or not they
are registered under the laws of the United States or any other country. The
names "Marriott", "Forum" and "Marriott Retirement Community", and any of the
foregoing used in conjunction with other words or names, are examples of
Proprietary Marks.
"Prospectus" shall have the meaning set forth in Section 19.13.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Operator has received a written notice
(pursuant to Section 19.08 of this Agreement) stating: (i) the name and address
of such Holder; and (ii) that such Holder is a "Qualified Lender" pursuant to
the terms of this Agreement.
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OPERATING AGREEMENT PAGE 12
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) seventy-five percent (75%) of Owner's Investment, or eighty-five
percent (85%) in the case of a mortgage issued or insured by an
agency of the United States Government, or ▇▇▇▇▇▇ ▇▇▇ or ▇▇▇▇▇▇▇ Mac
or lending institutions established by the federal government; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Retirement
Community immediately prior to the date of the incurrence of such
Qualified Loan, plus the existing balance of any expansion payment
debt arising under either the Stock Purchase Agreement or the
Expansion Agreement plus commercially reasonable Transaction Costs
associated with such refinancing up to an amount equal to four
percent (4%) of the principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in
clauses (i), (ii) and (iii) is satisfied, (a) the existing (as of the Effective
Date) balance of any Secured Loan which is secured by a Mortgage shall be deemed
to be a "Qualified Loan"; and (b) any Secured Loan which is secured by a
Mortgage and with respect to which Operator, in it sole discretion, shall have
given its written approval shall be deemed to be a "Qualified Loan" (provided
that an approval by Operator that a given Secured Loan shall be deemed to be a
Qualified Loan hereunder shall only apply to the specific retirement communities
which are described in such approval, and shall not be deemed to be an approval
with respect to other retirement communities, regardless of whether such Secured
Loan by its terms permits the substitution or addition of such other retirement
communities as security for such Secured Loan).
"REIT Transaction" shall have the meaning set forth in Section 6.10.
----------------
"Required Capital Expenditures" shall have the meaning set forth in
-----------------------------
Section 8.03A.
"Retirement Community" means the retirement community which Owner
--------------------
[owns/leases] at the location specified in the Recitals; the term "Retirement
Community" shall include the Land, the improvements now or hereafter situated on
the Land, and all FF&E, Fixed Asset Supplies and Inventories installed therein.
"Retirement Community Retention" shall have the meaning set forth in
------------------------------
Section 12.03F hereof.
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OPERATING AGREEMENT PAGE 13
"ROI Capital Expenditures" shall mean such Capital Expenditures as are
------------------------
required, in Operator's reasonable judgment, to keep the Retirement Community in
a competitive, efficient and economical operating condition (which Operator
shall substantiate by demonstrating a reasonable return on the proposed
investment to be made by Owner), in accordance with the Marriott Standards;
provided that the term "ROI Capital Expenditures" shall in no event include
expenditures which are within the definition of Required Capital Expenditures.
"Sale of the Retirement Community" means any sale, assignment, transfer or
--------------------------------
other disposition, for value or otherwise, voluntary or involuntary, of Owner's
title (or any part thereof) to the Retirement Community or the Land (either fee
or leasehold title, as the case may be). For purposes of this Agreement, a Sale
of the Retirement Community shall also include: (i) a lease (or sublease) of
the entire Retirement Community or Land; and (ii) any sale, assignment,
transfer, or other disposition, for value or otherwise, voluntary or
involuntary, in a single transaction or a series of related transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" means the right to exercise, directly or indirectly, more
than fifty percent (50%) of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of Owner. For purposes of this Agreement, a Sale of the Retirement
Community shall exclude: (i) any condemnation, expropriation of, or injurious
happening to the Retirement Community or any part thereof or interest therein;
(ii) the recovery by Owner of damage awards or insurance proceeds in connection
with any casualty or title insurance claim, (iii) any Foreclosure, (iv) any
Title Encumbrance, (v) any sale, assignment, transfer or other disposition by
Owner of title (fee, leasehold or otherwise) to the Retirement Community to an
Affiliate of Owner, and (vi) any transfer of a controlling interest in Owner to
an Affiliate of Owner.
"Sale/leaseback Transaction" shall have the meaning set forth in
--------------------------
Section 6.09 below.
"Secured Loan" means and includes: (i) any indebtedness of Owner secured by
------------
a Mortgage encumbering the Retirement Community or all or any part of Owner's
interest therein; and (ii) all amendments, modifications, supplements and
extensions of such indebtedness. The total balance of all Secured Loans as of
June 21, 1997, shall have the meaning set forth in Exhibit D.
"Secured Loan Acceleration" shall mean the acceleration of the indebtedness
-------------------------
incurred pursuant to any Secured Loan, as a result of a default under the terms
and conditions of such Secured Loan.
"Settlement Threshold Amount" shall mean the greater of (i) One Hundred
---------------------------
Thousand Dollars ($100,000.00) (as adjusted by the CPI); or (ii) a dollar amount
(to be re-determined whenever reasonably necessary) equal to the highest amount
paid in a representative sampling of Employee Claims which have been settled
within the preceding twelve (12) months, where each of such settlements can be
reasonably characterized as being (i) within the normal course of business at
the Retirement Community, and (ii) within the range of similar settlements at
other
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OPERATING AGREEMENT PAGE 14
retirement communities comparable to the Retirement Community. Any dispute
between the parties as to the appropriate amount under clause (ii) of the
preceding sentence shall be submitted to arbitration under Section 19.11.
"Shortfall Payment" shall have the meaning set forth in Section 4.03B.
-----------------
"Similar Property" means a full-service, retirement community offering the
----------------
continuum of care, that is, independent living (predominantly) accommodations,
assisted living accommodations, licensed nursing accommodations and associated
community, recreational and health care services.
"Soft Goods" means all fabric, textile and flexible plastic products (not
----------
including items which are classified as "Fixed Asset Supplies" under the Uniform
System of Accounts) which are used in furnishing the Retirement Community,
including, without limitation: carpeting, drapes, bedspreads, wall and floor
coverings, mats, shower curtains and similar items.
"Software" means all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Operator in connection with its operations at the
Retirement Community.
"Stock Purchase Agreement" means that certain Stock Purchase Agreement of
------------------------
even date herewith between Host Marriott Corporation and Marriott Senior Living
Services, Inc.
"Subsequent Owner" mean any individual or entity which acquires title to a
----------------
possession of the Retirement Community at or through a Foreclosure.
"Term" means the Initial Term plus any Extended Term.
----
"Termination" means the expiration or sooner cessation of this Agreement.
-----------
"Threshold Amount" shall have the meaning set forth in Section 4.03A1.
----------------
"Title Encumbrance" means any covenant, easement, condition, restriction or
-----------------
agreement affecting title to the Retirement Community and recorded among the
land records of the jurisdiction in which the Retirement Community is situated,
but not including any Mortgage.
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
"Working Capital" means assets which are reasonably necessary and used for
---------------
the day-to-day operation of the Retirement Community's business, including,
without limitation, amounts sufficient for the maintenance of change and ▇▇▇▇▇
cash funds, amounts deposited in operating bank accounts, receivables, prepaid
expenses, and funds required to maintain
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OPERATING AGREEMENT PAGE 15
Inventories and pay all Operating Expenses as they become due, less accounts
payable and accrued current liabilities.
ARTICLE 2
APPOINTMENT OF OPERATOR
SECTION 2.01 APPOINTMENT; EXCLUSIVE LICENSE
Owner hereby authorizes and engages Operator to act as the exclusive
operator and manager of the Retirement Community during the Term, with an
exclusive license to operate its retirement community business within the
Retirement Community and with exclusive responsibility and complete and full
control and discretion in the operation, direction, management and supervision
of the Retirement Community, subject only to the limitations expressed herein,
all in accordance with Marriott Standards. Operator accepts said appointment
and agrees to operate and manage the Retirement Community during the Term of
this Agreement in accordance with the terms and conditions set forth
hereinafter. The performance of all activities by Operator hereunder shall be
for the account of Owner.
SECTION 2.02 AUTHORITY OF OPERATOR; RIGHT OF POSSESSION
A. Retirement Community operations shall be under the exclusive
supervision and control of Operator which, except as otherwise specifically
provided in this Agreement, shall be responsible for the proper and efficient
operation of the Retirement Community. Subject to the terms of this Agreement,
Operator shall have discretion and control, free from interference, interruption
or disturbance from Owner or those claiming by, through or under Owner, in all
matters relating to management and operation of the Retirement Community,
including, without limitation, the following: fees and charges for providing
accommodations, food services, health care services, and related services to
residents and their guests; supervision of resident care; health care policies;
credit policies; food and beverage services; employment policies; executing,
modifying and terminating leases, licenses and concessions and agreements for
commercial space within the Retirement Community and the provision of services
to residents to the Retirement Community; receipt, holding and disbursement of
funds; maintenance of bank accounts; procurement of inventories, supplies and
services; promotion and publicity; and, generally, all activities necessary for
operation of the Retirement Community.
B. Operator shall have during the term of this Agreement the exclusive
right of possession of the management office within the Retirement Community and
those areas of the Retirement Community designed for exclusive possession by the
operator of the Retirement Community.
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OPERATING AGREEMENT PAGE 16
SECTION 2.03 MANAGEMENT FUNCTIONS
A. In accordance with Marriott Standards and the other requirements
imposed by this Agreement, Operator shall, in connection with the Retirement
Community, perform each of the following functions:
1. Obtain and keep in full force and effect, either in its own name
on behalf of Owner or in Owner's name, as may be required by the Legal
Requirements, any and all Licenses necessary for the operation of the Retirement
Community, to the extent the same is within the control of Operator (or, if same
is not within the control of Operator, Operator shall use all due diligence and
reasonable efforts to obtain and keep same in full force and effect);
2. Recruit, employ, supervise, direct and discharge all of the
employees at the Retirement Community;
3. Establish and revise, as necessary, resident care and health care
policies and procedures and general administrative policies and procedures,
including policies and procedures for the control of revenue and expenditures,
for the purchasing of supplies and services, for the control of credit, and for
the scheduling of maintenance, and verify that the foregoing policies and
procedures are implemented in a sound manner in accordance with Marriott
Standards;
4. Plan, execute, and supervise repairs and maintenance at the
Retirement Community;
5. Procure such food stuffs, supplies, equipment, furniture and
fixtures (including, FF&E, Fixed Asset Supplies and Inventories), and third-
party services as are necessary to keep, operate and maintain the Retirement
Community in accordance with Marriott Standards;
6. Maintain the operating accounts and pay all Operating Expenses to
the extent funds are available;
7. Prepare and deliver the statements, projections and reports as are
specified herein;
8. Establish prices, rates and charges for services provided at the
Retirement Community;
9. Negotiate, enter into, and administer licenses, concession
agreements and/or agreements with third-party providers of services to residents
at the Retirement Community;
10. Provide the Central Administrative Services;
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OPERATING AGREEMENT PAGE 17
11. Provide, or cause to be provided, risk management services
relating to the types of insurance required to be obtained or provided by
Operator under this Agreement, provided that the costs and expenses of providing
such services are to be paid as described in Section 12.04;
12. Reasonably cooperate with Owner concerning disputes with any
Holder, contests of Impositions and Legal Requirements, adjustments of insurance
claims and condemnation awards, and any other Litigation arising in connection
with the Retirement Community;
13. Reasonably cooperate (provided that Operator shall not be
obligated to enter into any amendments of this Agreement (except as set forth in
Article 6)) with Owner in any attempt(s) by Owner to effectuate a Sale of the
Retirement Community, either directly or through transfers or sales of ownership
interests in Owner (provided that nothing herein shall affect the provisions of
Section 6.05), or to obtain any Secured Loan or other financing, or to purchase
the interests of any equity holders in Owner or the fee interest in the
Retirement Community. Such cooperation shall include, without limitation:
(i) answering any reasonable questions by prospective purchasers, Holders and
lenders; (ii) preparing lists and schedules of leases, concessions, Fixed Asset
Supplies, Inventories, and similar items; and (iii) making such certifications
and representations to Owner, to such purchasers, to such Holders and lenders,
regarding the Retirement Community and the operation thereof, as Owner may
reasonably request (taking into account the extent of Operator's control and
responsibility provided for hereunder). Owner shall promptly reimburse Operator,
from its own funds and not as an Operating Expense, for the reasonable costs and
expenses incurred by Operator in connection with any actions necessary to comply
with the requirements of this Section, provided that such actions are not
otherwise required under other provisions of this Agreement.
14. Arrange for and supervise public relations and advertising, and
prepare and implement annual marketing plans;
15. Endeavor to manage the timing of expenditures to replenish
Inventories, Fixed Asset Supplies, payments on accounts payable and collections
of accounts receivable, so as to avoid or minimize any cash deficits with
respect to Retirement Community operations, which deficits would otherwise
require additional funding of Working Capital by Owner;
16. Maintain the Retirement Community in good repair and condition;
17. See to the performance of all covenants, duties and obligations
of Owner and Operator pursuant to all agreements with residents;
18. Negotiate, execute, administer, renew and/or cancel agreements
with residents of the Retirement Community (either in its name or, as agent for
Owner, in Owner's name, as the case may be, in order to comply with Legal
Requirements and the applicable Licenses) for the services to be rendered to
such residents at the Retirement Community;
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OPERATING AGREEMENT PAGE 18
19. Subject to Owner's prior approval, institute and prosecute such
legal actions against third parties, and settle compromise and/or release such
actions, as necessary and prudent for the successful operation of the Retirement
Community;
20. Exercise its reasonable best efforts to give Owner as early
notice as is practicable of all extraordinary developments with respect to the
operation of the Retirement Community, including, but not limited to, Operator's
forecast of the need for any additional Working Capital or other cash
requirements;
21. Comply with all provisions in the Existing Lease and in any
Existing Mortgage which are by their terms applicable to the operation of the
Retirement Community, provided that with respect to any Mortgage, the provisions
in question do not amend or affect the Operator's rights or obligations under
this Agreement;
22. Comply with all Legal Requirements to the extent the same is
within the control of Operator (or, if same is not within the control of
Operator, Operator shall use all due diligence and reasonable efforts to so
comply), subject to Sections 2.03B and 11.02B; and
23. Promptly notify Owner of receipt by Operator of any notice of a
violation of any Legal Requirements, and formulate and implement an appropriate
plan of correction.
B. The parties understand that certain deficiencies or situations of non-
compliance with various Legal Requirements (such as building codes, OSHA, ADA,
health care regulations and the like) are likely to occur from time to time in
the normal course of business operations. Such occurrences will not otherwise
constitute a Default by Operator hereunder, if same resulted from Owner's action
or inaction either in breach hereunder or of any applicable Legal Requirement,
or so long as all of the following conditions are satisfied: (i) they are not
materially beyond the general experience of similar retirement community
operations in the quality tier of retirement communities (but if the quality
tier then does not include twenty (20) or more communities, then the comparison
shall be against all similar retirement community operations) in the state in
which the Retirement Community is located, in terms of scope, seriousness, or
frequency, (ii) Operator takes all reasonable actions in a timely manner to cure
such deficiencies or situations of non-compliance, and (iii) they do not cause
the revocation, termination or suspension of any material License. The costs of
curing such deficiencies or circumstances of non-compliance shall constitute
Operating Expenses unless incurred by reason of Operator's willful failure,
gross negligence, or Default hereunder, in which event such costs shall be borne
by Operator and Operator shall indemnify and hold harmless Owner in respect of
any such costs (including any penalties and fines for non-compliance). If
Operator or Owner shall receive written notice from any governmental authority
that such authority intends, or may exercise its right, to revoke, terminate or
suspend any material License unless such deficiencies or circumstances are
corrected, then during the thirty (30) Day period prior to the earliest possible
effective date for such revocation, termination, or suspension, Owner shall have
the right to enter onto the Community and to take such action as may be
reasonably necessary to remedy or correct such deficiencies or circumstances,
and the costs thereof shall constitute Operating Expenses.
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OPERATING AGREEMENT PAGE 19
SECTION 2.04 LIMITATIONS ON AUTHORITY OF OPERATOR
Notwithstanding anything contained in this Agreement to the contrary
(unless otherwise stated in this Section 2.04), and in addition to the various
other provisions of this Agreement which prohibit Operator from taking certain
actions or which allow certain actions only if Owner's consent thereto has been
obtained, Operator shall not, without the prior written approval of Owner, which
approval Owner may withhold in its sole discretion, perform any of the following
actions on behalf of Owner:
1. Acquire any land or interest therein;
2. Acquire any capital assets or interest therein except: (i) items
in the approved Building Estimate; and (ii) FF&E, Fixed Asset Supplies and
Inventories (to the extent
the same constitute capital assets) in the ordinary course of business as
expressly provided for in this Agreement;
3. Finance, refinance or mortgage any portion of the Retirement
Community or the revenue due to Owner therefrom;
4. Sell (other than dispositions of FF&E, Fixed Asset Supplies and
Inventories in the ordinary course of business as expressly provided for in this
Agreement), lease (other than as expressly provided for in this Agreement), or
otherwise transfer, or pledge or place any lien or encumbrance on, any part of
the Retirement Community;
5. In the event of a total or partial condemnation, consent to any
award or participate in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Enter into, modify or terminate any lease, concession or license
or other agreement, otherwise permitted under Section 2.02 if (i) a non-
Retirement Community related use is involved, (ii) the term of the proposed
agreement will exceed the lesser of five (5) years or the remaining Term, or
(iii) the proposed agreement involves the exclusive use of more than fifteen
hundred (1,500) square feet within the Retirement Community. For this purpose,
a "non-Retirement Community use" shall mean any use which is not ultimately for
the primary benefit of residents of the Retirement Community;
7. Adjust any claim or settle any Litigation which: (i) is not
covered by any of the insurance policies described in Article 12 and is not an
Employee Claim, and which would result in an Operating Expense or payment in
excess of Twenty Five Thousand Dollars ($25,000.00) in any Fiscal Year, or One
Hundred Thousand Dollars ($100,000.00) in any Fiscal Year in the aggregate for
all such claims, both as adjusted by the CPI; or (ii) would impose on Owner any
material liability or obligation other than the payment of money, or would
require Owner to make any material admission; or
8. Adjust any claim, under the applicable property insurance
policies, regarding injury or damage to the Retirement Community or its
contents, where the estimated cost of restoration is in excess of One Hundred
Thousand Dollars ($100,000.00), as adjusted by the CPI.
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OPERATING AGREEMENT PAGE 20
SECTION 2.05 TITLE ENCUMBRANCES
A. As of the Effective Date, a title report of the Retirement Community
has shown that there are no Title Encumbrances other than those identified in
Exhibit B attached hereto ("Existing Title Encumbrances"). Operator hereby
gives its consent to all Existing Title Encumbrances. All costs, expenses and
charges which are imposed on the Retirement Community under the Existing Title
Encumbrances shall be paid from Gross Revenues as Operating Expenses.
B. Title Encumbrances which are entered into, or become encumbrances on
the Retirement Community and/or the Land, after the Effective Date shall be
referred to in this Agreement as "Future Title Encumbrances." Owner agrees that
it will give Operator written notice of its intention to execute any Future
Title Encumbrances, such notice to be reasonably in advance of the execution
thereof. Owner covenants that, during the Term of this Agreement, there will
not be (unless Operator has given its prior written consent thereto) any Future
Title Encumbrances affecting the Land or the Retirement Community unless
Operator consents thereto, which consent shall not be unreasonably withheld by
Operator, and which consent shall not be required, if such Future Title
Encumbrance (i) would not impose any material financial obligations on the
Retirement Community; (ii) would not prohibit or limit Operator from operating
the Retirement Community, including dining and other facilities customarily a
part of or related to a similar retirement community, in accordance with the
Marriott Standards; and (iii) would not allow Retirement Community facilities
(for example, parking spaces) to be used by persons other than residents,
invitees or employees of the Retirement Community.
C. All financial obligations imposed on Owner or on Operator or on the
Retirement Community pursuant to any Future Title Encumbrances shall be paid by
Owner from its own funds, and not from Gross Revenues or from the FF&E Reserve,
unless Operator has given its prior written consent to such Future Title
Encumbrance, or unless such consent of Operator is not required under
Section 2.05B.
SECTION 2.06 LICENSES AND PERMITS
Owner agrees upon request by Operator to sign promptly and without charge
applications for Licenses, permits or other instruments necessary for operation
of the Retirement Community and to provide such information and perform such
acts relative to the ownership of the Retirement Community as are required by
law, regulation or governmental practice in order for Operator to obtain and/or
maintain any License, permit, instrument, certificate, certification or approval
with respect to the proper operation of the Retirement Community. Costs
incurred by Owner in complying with this Section 2.06 shall constitute an
Owner's Deduction.
SECTION 2.07 CREDIT
In no event shall either party borrow money in the name of, or pledge the
credit of, the other.
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SECTION 2.08 REPRESENTATIONS AND WARRANTIES OF OWNER
A. Owner represents and warrants to Operator as follows:
1. Owner is in good standing under the laws of the state in which it
is organized, and has full power and authority to own its properties, is duly
qualified or licensed to do business as a foreign corporation in the
jurisdiction in which the Retirement Community is located, and has obtained or
will exercise reasonable efforts to obtain and maintain all material Licenses to
own the Retirement Community as it is operated on the Effective Date in
accordance with the terms of this Agreement.
2. Owner has full power and authority to enter into this Agreement
and to carry out its obligations set forth herein. Owner has taken all action
required by law, its organizational documents, or otherwise to be taken to
authorize the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of Owner enforceable in accordance with its terms, except that such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditor's rights,
and the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
SECTION 2.09 REPRESENTATIONS AND WARRANTIES OF OPERATOR
A. Operator represents and warrants to Owner as follows:
1. Operator is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has full cooperate power
and authority to own its properties, is duly qualified or licensed to do
business as a foreign corporation in the jurisdiction in which the Retirement
Community is located, and has obtained all material Licenses to manage or
operate the Retirement Community as it is operated on the Effective Date in
accordance with the terms of this Agreement.
2. Operator has full power and authority to enter into this Agreement
and to carry out its obligations to set forth herein. Operator has taken all
action required by law, its Articles of Incorporation, its Bylaws, or otherwise
to be taken to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement is a valid
and binding agreement of Operator enforceable in accordance with its terms,
except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditor's rights, and the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
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OPERATING AGREEMENT PAGE 22
ARTICLE 3
OWNERSHIP OF RETIREMENT COMMUNITY
SECTION 3.01 OWNERSHIP OF RETIREMENT COMMUNITY
A. Owner hereby covenants that throughout the Term of this Agreement, it
will use commercially reasonable efforts to have, keep and maintain good and
marketable [fee/leasehold] title to the Retirement Community, free and clear of
any and all liens, encumbrances or other charges, except for the following:
1. Mortgages which are given to secure any one or more Secured Loans
provided that Owner has complied with the provisions of Article 6;
2. Liens for Impositions or other public charges not yet due or which
are being contested in good faith;
3. Existing Title Encumbrances and Future Title Encumbrances
permitted pursuant to Section 2.05 of this Agreement; and
4. [THE EXISTING LEASE.]
B. Owner shall pay and discharge, at or prior to the due date, any and all
installments of principal and interest due and payable upon any Secured Loan
encumbering the Retirement Community. Operator shall have no liability for the
payment of any debt service or other costs or payments of whatever nature due
with respect to any Secured Loans or the Retirement Community and any such
liability shall be solely that of Owner.
ARTICLE 4
TERM
SECTION 4.01 TERM
The "Term" shall consist of an "Initial Term" and the "Extended Term". The
"Initial Term" shall begin on the Effective Date, and, unless sooner terminated,
shall continue until the expiration of the thirtieth (30th) Agreement Year. The
Term shall thereafter be extended by Operator, at its option (on the same terms
and conditions contained herein) for one additional period of five (5) Agreement
Years ("Extended Term"), provided that (i) such extension option, if exercised,
shall be void and of no effect unless, for the last three (3) Agreement Years of
the Initial Term, Owner received an average annual return on the actual level of
Owner's Investment (adjusted for seventy-five percent (75%) of CPI), of at least
eleven and one-half percent (11.5%), and (ii) as of the date of Operator's
notice of exercise, and as of the last day of the Initial Term, there are no
outstanding Events of Default by Operator. If Operator elects to exercise this
option to extend, it shall give written notice to that effect to Owner, pursuant
to Section 19.08, not more than twenty-four (24) months and not less than twelve
(12) months prior to the expiration of the Initial Term.
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Notwithstanding the foregoing, if the Retirement Community is subject to an
Existing Lease, and the term of the Existing Lease shall expire prior to the
expiration of the Term of this Agreement, then the Term of this Agreement shall
expire effective as of the date of expiration of the term of the Existing Lease
unless Owner has either (i) obtained an extension of the term of the Existing
Lease, in which event this Agreement shall continue in effect to the earlier of
(a) the expiration of the Term, or (b) the expiration of the extended term of
the Existing Lease, or (ii) purchased fee title to the Retirement Community, in
which event this Agreement shall continue in effect to the end of the Term.
SECTION 4.02 ACTIONS TO BE TAKEN UPON TERMINATION
Upon any Termination of this Agreement, the following shall be applicable:
A. Operator shall, within sixty (60) Days after Termination of this
Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Retirement Community, which, to the extent appropriate, satisfies
the requirements of an Annual Financial Report, along with a statement of any
sums due from one party to the other pursuant hereto, dated as of the date of
Termination. Within thirty (30) Days after the receipt by Owner of such final
accounting statement, the parties will make whatever cash adjustments are
necessary pursuant to such final statement. The cost of preparing such final
accounting statement shall be an Operating Expense, unless the Termination
occurs as a result of a default by either party, in which case the defaulting
party shall pay such cost. Operator and Owner acknowledge that there may be
certain adjustments for which the information is not available at the time of
the final accounting and the parties agree to readjust such amounts and make the
necessary cash adjustments when such information becomes available; provided,
however, that (unless and except for ongoing disputes of which each party has
received notice or refunds or underpayments of Impositions) all accounts shall
be deemed final one hundred and eighty (180) Days after Termination;
B. As of the date of the final accounting referred to in Section 4.02A,
Operator shall release and transfer to Owner (or to any purchaser as may be
provided herein) any funds then remaining in the FF&E Reserve and any other of
Owner's funds which are held or controlled by Operator with respect to the
Retirement Community with the exception of funds to be held in escrow pursuant
to Sections 12.04 and 14.01G and otherwise in accordance herewith;
C. Operator shall make available to Owner such books and records
respecting the Retirement Community (including those from prior years, subject
to Operator's reasonable records retention policies) as will be needed by Owner
to prepare the accounting statements, in accordance with GAAP consistently
applied, for the Retirement Community for the year in which the Termination
occurs and for any subsequent year. If such books and records are contained in
Software, Operator shall provide suitable hard-copy of said information to
Owner, but shall not be required to turn over said Software to Owner. Such
books and records shall not include: (i) employee records which must remain
confidential either under applicable law or under reasonable system-wide
corporate policies of Operator; or (ii) any Intellectual Property;
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OPERATING AGREEMENT PAGE 24
D. Operator shall (to the extent permitted by law) assign to Owner or to
the new operator all operating licenses and permits for the Retirement Community
which have been issued in Operator's name; provided that if Operator has
expended any of its own funds in the acquisition of any of such licenses or
permits, Owner shall reimburse Operator therefor if it has not done so already;
E. Upon Termination, Owner shall adopt a new name for the Property that
does not include the "Forum" ▇▇▇▇ or a confusingly similar term and shall take
steps to change the name of the property to the new name and to eliminate all
use of the "Forum" ▇▇▇▇ in connection with the Property including but not
limited to: acquisition of any required name changes or governmental approvals;
replacement of all signage, collateral, fixtures, furnishing, equipment,
advertising materials, stationery, supplies, forms or other articles that
display the "Forum" ▇▇▇▇; and notification of any telephone, facsimile or other
business directory (including any Internet site or register). Owner shall have
a phase-out period of two (2) years from the date of termination or expiration
of this Operating Agreement to complete its transition to the new property name.
During the two (2) year phase-out period, Owner shall pursue in good faith the
gradual discontinuance of the "Forum" ▇▇▇▇ and may exhaust any inventory of
items existing as of the date of termination or expiration of this Operating
Agreement which contain or display the "Forum" ▇▇▇▇, but Owner may not order or
develop any additional material which contain or display the "Forum" ▇▇▇▇ during
the phase-out period, or at any time after the termination or expiration of this
Operating Agreement. Upon expiration of the phase-out period, Owner shall make
no further use whatsoever of the "Forum" ▇▇▇▇, including distribution or display
of any materials bearing the "Forum" ▇▇▇▇;
F. Operator shall cooperate with Owner in effecting a smooth transition of
operations at the Retirement Community to Owner or Owner's designee; and
G. The provisions of this Section 4.02 shall survive any Termination.
SECTION 4.03 PERFORMANCE TERMINATION
A. Subject to the provisions of Section 4.03 B below, Owner shall have the
option to terminate this Agreement if:
1. With respect to each of any two (2) consecutive Fiscal Years
during the Term commencing with Fiscal Year 2000, Operating Profit is less than
eight percent (8%) of the Owner's Investment (the "Threshold Amount"); and
2. The fact that the Retirement Community is not meeting the test set
forth in Section 4.03A1 is not the result of either: (i) a Force Majeure; or
(ii) any major renovation of the Retirement Community.
B. Such option to terminate shall be exercised by serving written notice
thereof on Operator no later than sixty (60) Days after the receipt by Owner of
the Annual Financial Report for the second (2nd) of the two (2) Fiscal Years
referred to in Section 4.03A1. If Operator does
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OPERATING AGREEMENT PAGE 25
not elect to avoid such Termination pursuant to Section 4.03B below, this
Agreement shall terminate as of the end of the fourth (4th) full Accounting
Period following the date on which Operator receives Owner's written notice of
its intent to terminate this Agreement; provided that such period of time shall
be extended as required by applicable Legal Requirements pertaining to the
termination of the employment of the employees at the Retirement Community.
Owner's failure to exercise its right to terminate this Agreement pursuant to
Section 4.03A with respect to any given Fiscal Year shall not be deemed an
estoppel or waiver of Owner's right to terminate this Agreement with respect to
subsequent Fiscal Years to which this Section 4.03A may apply.
1. Upon receipt of a written notice of Termination sent by Owner to
Operator pursuant to Section 4.03B, Operator shall have the option, to be
exercised by written notice (the "Cure Notice") to Owner within sixty (60) Days
after receipt of said Termination notice from Owner, to avoid such Termination
by electing either (i) to pay to Owner an amount equal to the difference between
the Threshold Amount for the two consecutive Fiscal Years that gave rise to the
Cure Notice and the Operating Profit for the same two consecutive Fiscal Years
(the "Shortfall Payment"), or (ii) to reduce the Base Fee payable to Operator
pursuant to Section 5.01B during the two (2) full Fiscal Years immediately
following the two (2) Fiscal Years referred to in Section 4.03A1 from five
percent (5%) of Gross Revenues to two percent (2%) of Gross Revenues. In the
event Operator elects to avoid such Termination by sending to Owner a Cure
Notice, the two consecutive Fiscal Years referred to in Section 4.03A1 with
respect to which such election was made shall thereafter not be treated, for
purposes of subsequent elections by Owner pursuant to Section 4.03A, as Fiscal
Years in which the circumstances described in Section 4.03A1 have occurred. If
Operator exercises such option to send to Owner a Cure Notice, then any Owner's
election to terminate this Agreement under Section 4.03 shall be canceled and of
no force or effect and this Agreement shall not terminate. The preceding
sentence, however, shall not affect the right of Owner, as to each subsequent
Fiscal Year to which Section 4.03A applies, to again elect to terminate this
Agreement, pursuant to the provisions of Section 4.03A.
2. Upon receipt of a second written notice of Termination sent by
Owner to Operator pursuant to Section 4.03B, Operator shall have the option, to
be exercised by written notice (the "Second Cure Notice") to Owner within sixty
(60) Days after receipt of such Termination notice from Owner, to avoid such
Termination by electing to reduce the Base Fee payable to Operator pursuant to
Section 5.01B during the two (2) full Fiscal Years immediately following the two
(2) Fiscal Years referred to in Section 4.03A1 from five percent (5%) of Gross
Revenues to two percent (2%) of Gross Revenues. In the event Operator elects to
avoid such Termination by sending to Owner a Second Cure Notice, the two
consecutive Fiscal Years referred to in Section 4.03A1 with respect to which
such election was made shall thereafter not be treated, for purposes of
subsequent elections by Owner pursuant to Section 4.03A, as Fiscal Years in
which the circumstances described in Section 4.03A1 have occurred. If Operator
exercises such option to send Owner a Second Cure Notice, then any Owner's
election to terminate this Agreement under Section 4.03 shall be canceled and of
no force or effect and this Agreement shall not terminate. The preceding
sentence, however, shall not affect the right of Owner, as to each subsequent
Fiscal Year to which Section 4.03A applies to again elect to terminate this
Agreement, pursuant to the provisions of Section 4.03A.
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OPERATING AGREEMENT PAGE 26
3. In the event that for any Fiscal Year Operator reduces the Base
Fee pursuant to Section 4.03B1 or 2, then in calculating Operating Expenses for
such Fiscal Year for purposes of determining the Incentive Fee and other
compensation to Operator, such reduction shall not be taken into account and the
Base Fee shall be deemed to be five percent (5%) of Gross Revenues.
4. Upon receipt of a third written notice of Termination sent by
Owner to Operator pursuant to Section 4.03A, then notwithstanding the provisions
of Section 4.03B1 and 2, Operator shall have no options to prevent such
Termination as set forth in such Sections.
5. If Operator does not exercise (or is unable to exercise) its
option to send a Cure Notice or a Second Cure Notice, then this Agreement shall
be terminated as of the date set forth in Section 4.03B. Notwithstanding the
foregoing, the provisions of Section 4.03B1 and 4.03B2 shall cease to apply and
Operator shall not have the right to deliver any further Cure Notices after such
time that Operator has delivered a Cure Notice on two (2) separate occasions.
SECTION 4.04 OWNER'S TERMINATION OPTION
Owner shall have the option to terminate this Operating Agreement prior to
the expiration of the Term otherwise specified in Section 4.01, (i) by giving
Operator at least one hundred twenty (120) Days prior notice, and (ii) by, and
upon, the payment to Operator of the termination fee (the "Termination Fee")
herein specified. The Termination Fee shall be determined by (i) taking the
average, annual, total of the Central Administrative Services Fee, the Base Fee,
and the Incentive Fee paid to Operator for the immediately preceding three (3)
Fiscal Years, or if less than three (3) such Fiscal Years have been completed,
the pro-forma fees set forth on Exhibit C shall be substituted for that portion
of the three (3) year period for which actual figures are not available,
(ii) increasing said dollar amount annually by the average increase in the CPI
for the preceding three (3) years, for the "Canceled Term", and
(iii) discounting the resulting annual amounts to their net present value using
a discount rate equal to the then current U.S. Treasury rate for a period most
comparable to the number of years remaining in the Canceled Term. For this
purpose, the "Canceled Term" means the lesser of (i) the number of years
remaining in the Initial Term, plus the Extended Term if Operator has exercised
its extension right prior to the date of Owner's termination notice, or
(ii) fifteen (15) years. Owner's right to terminate this Agreement as set forth
in this Section 4.04 shall be in addition to, and not in lieu of, Owner's right
to terminate this Agreement as set forth in any other provision of this
Agreement, (ii) shall not be subject to the options of Operator set forth in
Section 4.03B, and (iii) may be exercised by Owner irrespective of whether a
Default or Event of Default exists on the part of Owner.
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OPERATING AGREEMENT PAGE 27
ARTICLE 5
COMPENSATION OF OPERATOR
SECTION 5.01 BASE FEE, INCENTIVE FEE AND BONUS FEE
A. In consideration of services to be performed hereunder, Operator shall
receive during each Fiscal Year (or portion thereof) on a non-cumulative basis,
a base fee (the "Base Fee") and an incentive fee (the "Incentive Fee") as
provided below.
1. The Base Fee shall be an amount equal to five percent (5%) of
Gross Revenues, and shall constitute an Operating Expense.
2. The Incentive Fee shall be an amount equal to twenty percent (20%)
of Net Operating Profit for such Fiscal Year.
B. As further consideration for the services to be performed hereunder,
Operator shall receive for the Fiscal Year 1998, a bonus fee (the "Bonus Fee")
to wit, if Operating Profit for the Fiscal Year 1998 exceeds
$______________________________________ (the "Bonus Threshold"), Operator shall
receive a Bonus Fee, payable only from and to the extent of any excess of
Operating Profit over the Bonus Threshold, equal to one percent (1%) of Gross
Revenues.
ARTICLE 6
FINANCING OF THE RETIREMENT COMMUNITY
SECTION 6.01 AMENDMENTS OF MANAGEMENT AGREEMENT
A. If requested by any Qualified Lender or prospective Qualified Lender,
Operator agrees to execute and deliver any amendment of this Agreement which is
reasonably required by such Qualified Lender or prospective Qualified Lender,
provided that Operator shall be under no obligation to amend this Agreement if
the result of such amendment would be: (i) to reduce, defer or delay the amount
of any payment to be made to Operator hereunder; (ii) to materially increase
Operator's obligations under this Agreement; (iii) to change the Term of this
Agreement; (iv) to cause the Retirement Community to be operated other than
pursuant to the Marriott Standards; (v) to amend materially either Section 8.02
or Article 14; or (vi) to otherwise materially affect Operator's rights and/or
obligations under this Agreement. Any such amendment shall take effect as of
the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01 A, if a Qualified Lender
or prospective Qualified Lender requests that Operator enter into an amendment
of this Agreement, and if such amendment would impose additional duties (for
example, an increase in the reporting requirements or in the record-keeping
requirements, or adding the obligation to prepare parallel accounting statements
using a different fiscal year) on Operator or would otherwise adversely affect
Operator's rights under this Agreement, but not to the degree described in
clauses (i)
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OPERATING AGREEMENT PAGE 28
through (vi) of Section 6.01A, Operator hereby agrees that it will execute and
deliver such requested amendment of this Agreement, provided that Owner
compensates Operator for the additional burden imposed by such amendment. It is
understood that the word "burden", as used in the preceding sentence, shall
encompass not only additional work to be performed by Operator, but also the
adverse effect on the Incentive Management Fee which would be caused by
requiring increased services by third parties. Any dispute as to whether
Operator is entitled to any compensation pursuant to this Section 6.01B, or as
to the amount of such compensation, shall be resolved by arbitration pursuant to
Section 19.11.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article 12, shall be governed exclusively by
Article 12.
D. Notwithstanding any other provision of this Agreement, Operator shall
continue to provide the necessary information regarding the operation of the
Retirement Community (in such form as may be required by any Qualified Loan
existing as of the Effective Date) so that Owner may comply with all reporting,
accounting and similar obligations imposed by any Qualified Loan existing as of
the Effective Date, without any additional fee or compensation, and upon request
from time-to-time shall provide such explanations and back-up as may be
reasonably requested.
SECTION 6.02 NOTICE AND OPPORTUNITY TO CURE
A. In the event of (i) a Default by Owner in the performance or observance
of any of the terms and conditions of this Agreement, or (ii) any other
occurrence which entitles Operator to terminate this Agreement, and in the event
that Operator gives written notice thereof to Owner pursuant to Article 16 of
this Agreement, Operator shall also give a duplicate copy (herein referred to as
the "First Notice") of such notice to each Qualified Lender, at the address
previously provided to Operator. Any such notice will be sent in the manner
described in Section 19.09 hereof. In addition, in the event that such Default
is not cured within the applicable cure period under Article 16 of this
Agreement, and Operator intends to exercise its remedy of terminating this
Agreement, Operator shall send a second notice (the "Second Notice") to each
Qualified Lender, to the same address and in the same manner applicable to the
First Notice, stating Operator's intention to terminate this Agreement.
Operator shall forbear from taking any action to terminate this Agreement for a
period of thirty (30) Days after the service of the First Notice, and for an
additional period of thirty (30) Days after the service of the Second Notice (if
such Second Notice is required, as set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Operator agrees to accept performance by any Qualified Lender with
the same force and effect as if same were performed by Owner, in accordance with
the provisions and within the cure periods prescribed in this Agreement (except
that each Qualified Lender shall have such additional cure periods, not
available to Owner, as are set forth in this Section 6.02).
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OPERATING AGREEMENT PAGE 29
C. No notice given by Operator to Owner shall be effective as a notice
under Article 16 of this Agreement unless the applicable duplicate notice to
each Qualified Lender which is required under Section 6.02A (either the First
Notice or the Second Notice, as the case may be) has been given. It is
understood that any failure by Operator to give such a duplicate notice (either
the First Notice or the Second Notice, as the case may be) to any Qualified
Lender shall not itself be a Default by Operator under this Agreement, but
rather shall operate only to void the effectiveness of any such notice by
Operator to Owner under Article 16 of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Operator from exercising any of its rights or remedies against
Owner with respect to any Default by Owner under this Agreement.
SECTION 6.03 ASSIGNMENT OF MANAGEMENT AGREEMENT
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to this Agreement, including the
right to all distributions payable to Owner hereunder. If, pursuant to any such
assignment (or subsequent loan documentation entered into between Owner and a
Qualified Lender with a similar purpose), and provided that Operator has
previously received a copy of such assignment and such subsequent documentation,
Operator may receive (from time to time) a notice or notices from such Qualified
Lender directing Operator to pay to such Qualified Lender subsequent
distributions under Section 9.01C of this Agreement which would otherwise be
payable to Owner, Operator shall comply with any such notice. Operator shall
continue to make payments in compliance with any such notice from such Qualified
Lender until Operator receives written instructions to the contrary from such
Qualified Lender. Owner hereby gives its consent to any such payments by
Operator to such Qualified Lender which are in compliance with any such notice.
The foregoing consent by Owner shall be deemed to be irrevocable until the
entire Qualified Loan has been discharged, as evidenced either by the
recordation of a satisfaction or release executed by such Qualified Lender, or
by the delivery of a written statement to that effect from such Qualified Lender
to Operator. Operator shall comply with the direction set forth in any such
notice without any necessity to investigate why such Qualified Lender sent such
notice, or to confirm whether or not Owner is in fact in default under the terms
of such Qualified Loan. If Operator receives such notices from more than one
Qualified Lender, Operator shall (at its option) either (i) comply with the
provisions of the notice sent by the Qualified Lender whose Qualified Loan has
the senior lien priority, or (ii) institute Litigation for a declaratory
judgment to determine to whom payments under this Agreement shall be made (in
which case, the costs and expenses of such Litigation, including attorneys'
fees, shall be Operating Expenses).
SECTION 6.04 SUBORDINATION OF MANAGEMENT AGREEMENT
A. This Agreement, and Operator's right to continue to manage and
operate the Retirement Community pursuant to this Agreement, are and shall be
subject and subordinate to the lien of any Qualified Loan (i.e., upon a
Foreclosure of any such Qualified Loan, such Qualified Lender, at its option,
unless it has otherwise agreed to the contrary in a Non-
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OPERATING AGREEMENT PAGE 30
Disturbance Agreement, shall have the right to terminate this Agreement).
Notwithstanding the foregoing, during the Term of this Agreement, all debt
service (including increased or accelerated payments after a default) payable
with respect to any Qualified Loan shall be paid exclusively from Owner's
portion of Operating Profit.
B. Section 6.04A is intended to be, and is, fully effective and binding,
as between Operator and any such Qualified Lender; however, Operator agrees to
execute such confirmatory documentation (in recordable form in the jurisdiction
in which the Retirement Community is located) as such Qualified Lender shall
reasonably request.
C. Notwithstanding the possible termination of this Agreement which is
set forth in the foregoing provisions of this Section 6.04, it is understood
that, until such time as this Agreement is validly terminated either (i)
pursuant to the applicable provision of this Agreement, or (ii) pursuant to a
Foreclosure of a Qualified Loan (assuming that such termination does not breach
any binding Non-Disturbance Agreement), the Holder of each Qualified Loan will
not disturb any of the rights of Operator under this Agreement to operate the
Retirement Community in accordance with this Agreement (including the right of
Operator to collect all Gross Revenues and to make expenditures in accordance
with this Agreement).
SECTION 6.05 NON-DISTURBANCE AGREEMENT
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in time; and (ii) the concessions which
Operator is, as of that point in time, reasonably prepared to make in order to
satisfy the objectives of lenders in connection with the lender-manager
relationship after a Foreclosure. In no event, however, shall the failure of
Owner to obtain such a Non-Disturbance Agreement affect or modify any of the
responsibilities of Operator toward Qualified Lenders which are contained
elsewhere in this Article 6.
B. Notwithstanding Section 6.05 A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non-Disturbance Agreement pursuant to which Operator's rights under
this Agreement will not be disturbed as a result of a loan default stemming from
non-monetary factors which (i) relate to Owner and do not relate solely to the
Retirement Community, and (ii) are not Defaults by Operator under Article 16 of
this Agreement. If Owner desires to obtain a Qualified Loan, Operator, on
written request from Owner, shall promptly identify those provisions in the
proposed loan documents which fall within the categories described in clauses
(i) and (ii) above, and Operator shall otherwise assist in expediting the
preparation of an agreement between the prospective Holder and Operator which
will implement the provisions of this Section 6.05B.
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SECTION 6.06 ATTORNMENT
A. Operator agrees that, subject to the provisions of Section 6.06B, upon
a Foreclosure of any Qualified Loan, provided that this Agreement has not
expired or otherwise been earlier terminated in accordance with its terms,
Operator shall attorn to any Subsequent Owner and shall remain bound by all of
the terms, covenants and conditions of this Agreement for the balance of the
remaining Term (including any Renewal Terms) with the same force and effect as
if such Subsequent Owner were the "Owner" under this Agreement; provided,
however, that Operator shall be under no such obligation to so attorn, and, to
the contrary, shall thereupon have the right to terminate this Agreement on
thirty (30) Days' prior written notice to both Owner and such Subsequent Owner:
(i) if such Subsequent Owner would not qualify as a permitted transferee under
Section 18.01A of this Agreement; or (ii) unless such Subsequent Owner, within
twenty (20) Days after the Foreclosure Date (or, in the event such Subsequent
Owner acquires title to the Retirement Community after the Foreclosure Date,
within twenty (20) Days after the date of such acquisition of title to the
Retirement Community), assumes all of the obligations of the "Owner" under this
Agreement which arise from and after the Foreclosure Date (or such later date of
acquisition of title to the Retirement Community), pursuant to a written
assumption agreement which shall be delivered to Operator. Upon the written
request of any Qualified Lender, Operator shall periodically execute and deliver
a statement, in a form reasonably satisfactory to such Qualified Lender,
reaffirming Operator's obligation to attorn as set forth in this Section 6.06A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Operator has an interest in
being informed, within a reasonable period of time after a Secured Loan
Acceleration, of whether or not such Qualified Lender intends to exercise such
right of termination. Accordingly, if, by no later than that date (the "Post-
Foreclosure Decision Date") which is ninety (90) Days after the date of any
Secured Loan Acceleration, Operator has not received a Non-Disturbance Agreement
executed by the Holder of such Secured Loan, Operator shall, as of the Post-
Foreclosure Decision Date and thereafter, no longer be under any obligation to
attorn (pursuant to the provisions of Section 6.06 A) with respect to any
Foreclosure of that Secured Loan, and Operator shall have the option to
terminate this Agreement, by written notice to both Owner and the Holder of each
existing Qualified Loan, at any time within the sixty (60) Day period
immediately following the Post-Foreclosure Decision Date.
SECTION 6.07 NO MODIFICATION OR TERMINATION OF AGREEMENT
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
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OPERATING AGREEMENT PAGE 32
SECTION 6.08 OWNER'S RIGHT TO FINANCE THE RETIREMENT COMMUNITY
Owner shall have the right, from time to time, without Operator's prior
consent or approval, to obtain Qualified Loans, and to encumber the Retirement
Community with Mortgages securing such Qualified Loans. Owner shall not,
without the prior consent of Operator, have the right to obtain Secured Loans
which are not Qualified Loans.
SECTION 6.09 SALE/LEASEBACK TRANSACTIONS
Any single transaction or related series of transactions in which (i)
Owner's interest in the Retirement Community is sold or transferred by the then
Owner ("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases
the Retirement Community to the Seller (as "tenant"), is hereby defined as a
"Sale/leaseback Transaction". With respect to each Sale/leaseback Transaction
during the Term of this Agreement, the following provisions will apply: (a) the
sale or transfer of the Retirement Community will be considered a Sale of the
Retirement Community; however, the Seller (as tenant under the aforesaid lease),
not the Buyer, shall thereafter be treated as the "Owner" for purposes of this
Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage
financing placed (either at the time of the transaction or later) on the Buyer's
interest in the Retirement Community will be treated as a Secured Loan, and the
proceeds of each such Secured Loan will be aggregated with all outstanding
Secured Loans, which encumber either the Buyer's interest in the Retirement
Community or the Seller's leasehold interest in the Retirement Community, for
purposes of determining whether a given Secured Loan qualifies as a Qualified
Loan; (c) payments pursuant to such lease shall not be treated as Operating
Expenses, except for Impositions and similar items which would have been treated
as Operating Expenses in the absence of such Sale/leaseback Transaction; and
(d) all subsequent sales, transfers or assignments of either Buyer's interest in
the Retirement Community or Seller's interest in the Retirement Community will
be treated as Sales of the Retirement Community. Owner will not enter into any
Sale/leaseback Transaction unless Operator and the proposed Buyer have
previously executed a mutually satisfactory attornment agreement pursuant to
which, as of the date of the termination of Seller's leasehold interest, the
provisions of this Agreement will (unless there has been an Event of Default or
other event entitling either party to terminate this Agreement) be binding both
on Operator and on Buyer (as the successor"Owner"); such attornment agreement
will also contain an immediately-effective provision which will incorporate the
terms of Section 6.06 of this Agreement, binding both on Operator and on Buyer.
SECTION 6.10 REIT TRANSACTIONS
Any single transaction or related series of transactions pursuant to which
(i) Owner by election, reorganization, merger, consolidation, stock transfer,
transfer of title to the Retirement Community or otherwise) is or becomes a
"Real Estate Investment Trust" or "Qualified REIT Subsidiary," or the partner in
a partnership in which the general partner is a "Real Estate Investment Trust"
or "Qualified REIT Subsidiary," as such terms are defined in the Internal
Revenue Code of 1986 ("Code"), and (ii) in connection therewith, Owner, as
landlord ("Landlord"), enters into a lease ("Operating Lease") of all or
substantially all of the Retirement
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OPERATING AGREEMENT PAGE 33
Community to an operating company ("Tenant"), and transfers to the Tenant
certain non-real estate assets (such as FF&E) included within the Retirement
Community, shall constitute a "REIT" Transaction." With respect to each REIT
Transaction during the Term of this Agreement, the following provisions shall
apply:
A. The reorganization, merger, consolidation, stock transfer, or transfer
of title to the Retirement Community shall, to the extent the same constitutes a
Sale of the Retirement Community, be subject to all requirements of Article 18;
however, from and after the consummation of the REIT Transaction, the Tenant,
not the Landlord, shall be treated as the "Owner" for purposes of this
Agreement.
B. Any consideration paid in connection with the REIT Transaction shall
not constitute a Secured Loan, but any mortgage financing placed (either at the
time of the REIT Transaction or later) on the Landlord's interest in the
Retirement Community will be treated as a Secured Loan, and the proceeds of each
such Secured Loan will be aggregated with all outstanding Secured Loans, which
encumber either the Landlord's interest in the Retirement Community or the
Tenant's leasehold interest in the Retirement Community, for the purposes of
determining whether a given Secured Loan qualifies as a Qualified Loan.
C. Payments pursuant to the Operating Lease shall not be treated as
Operating Expenses, except for Impositions and similar items which would have
been treated as Operating Expenses in the absence of such REIT Transaction.
D. All subsequent sales, transfers or assignments of either the
Landlord's interest in the Retirement Community of the Tenant's leasehold
interest in the Retirement Community will be treated as a Sale of the Retirement
Community, to the extent applicable.
E. Owner will not enter into any REIT Transaction unless on or before
consummation of the REIT Transaction, Operator and the proposed Landlord execute
a mutually satisfactory attornment agreement pursuant to which, as of the date
of termination of the Operating Lease, the provisions of this Agreement will
(unless there has been an Event of Default or other event entitling either party
to terminate this Agreement) be binding both on Operator and on Landlord (as the
successor "Owner"); such attornment agreement will also contain an immediately
effective provision which will incorporate the terms of the Section 6.06 of this
Agreement, binding on both Operator and on Landlord.
F. If requested by the Landlord or Tenant, Operator agrees to execute and
deliver any amendment to this Agreement which is reasonably required for the
REIT Transaction to comply with the requirements of the Code, provided that
Operator shall be under no obligation to amend this Agreement if the result of
such amendment would be: (i) to reduce, defer or delay the amount of any
payment to be made to Operator hereunder; (ii) to materially increase Operator's
obligations under this Agreement; (iii) to change the Term of this Agreement;
(iv) to cause the Retirement Community to be operated other than pursuant to the
Marriott Standards; (v) to amend materially either Section 8.02 or Article 14;
or (vi) to otherwise materially affect
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OPERATING AGREEMENT PAGE 34
Operator's rights and/or obligations under this Agreement. Any such amendment
shall take effect as of the consummation of the REIT Transaction.
ARTICLE 7
WORKING CAPITAL AND FIXED ASSET SUPPLIES
SECTION 7.01 WORKING CAPITAL
A. As of the Effective Date, Owner has provided the funds necessary to
supply the Retirement Community with Working Capital in an amount mutually
approved by Owner and Operator, and Owner shall from time to time thereafter
promptly advance, upon request of Operator, any additional funds necessary to
maintain Working Capital at levels generally consistent with the Marriott
Standards, and as reasonably determined by Operator to be necessary to satisfy
the needs of the Retirement Community as its operation may from time to time
require, or that may be necessary, by reason of delays in collecting accounts
receivable or otherwise, for the Retirement Community to have sufficient cash on
hand to pay its accounts payable and meet its cash expenditures when the timing
of collection of accounts receivable and other funds will be insufficient to
meet the Retirement Community's cash requirements. Any such request by Operator
shall be accompanied by a detailed explanation of the reasons for the request.
If Owner fails to respond to any such request within sixty (60) Days after
Owner's receipt thereof, Operator shall be entitled, at its option, without
affecting other remedies which may be available pursuant to Article 16, to
either: (i) deduct the necessary additional Working Capital from any funds that
are then payable or may thereafter become payable to Owner hereunder; or
(ii) unless prohibited by any Secured Loan, lend Owner the necessary additional
Working Capital from Operator's own funds, which loan will bear interest at the
Prime Rate (compounded annually), and will be secured by a security interest
(subordinated to any Secured Loan) encumbering all Working Capital previously or
thereafter provided by either Owner or Operator, and will be repaid from any
subsequent distributions to Owner pursuant to the terms of this Agreement.
B. Operator will manage the Working Capital of the Retirement Community
prudently and in accordance with the Marriott Standards. Operator shall review
and analyze the Working Capital needs of the Retirement Community on an annual
basis. If Operator reasonably determines that there is excess Working Capital,
such excess shall be returned to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital.
SECTION 7.02 FIXED ASSET SUPPLIES
Prior to the Effective Date, Owner has supplied the Retirement Community
with Fixed Asset Supplies. In the event that any additional funds are necessary
to maintain Fixed Asset Supplies at levels determined by Operator to be
necessary to operate the Retirement Community
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OPERATING AGREEMENT PAGE 35
in accordance with the Marriott Standards, such funds shall be provided from
Gross Revenues and treated as an Operating Expense. Fixed Asset Supplies shall
remain the property of Owner throughout the Term of this Agreement, except for
Fixed Asset Supplies purchased by Operator pursuant to Section 10.03.
ARTICLE 8
REPAIRS, MAINTENANCE AND REPLACEMENTS
SECTION 8.01 ROUTINE REPAIRS AND MAINTENANCE
A. Operator shall maintain the Retirement Community in good repair and
condition and in conformity with Legal Requirements and Marriott Standards and
shall make or cause to be made such routine and preventative maintenance,
repairs and minor alterations, the cost of which can be expensed under GAAP, as
it, from time to time, deems necessary for such purposes. The cost of such
maintenance, repairs and alterations shall be paid from Gross Revenues and shall
be treated as an Operating Expense in determining Operating Profit.
B. Operator shall (pursuant to a schedule which shall be subject to the
reasonable approval of both Owner and Operator) arrange for and coordinate
routine and other appropriate inspections of the structure, exterior facade,
roof, parking areas, and other significant physical components of the Retirement
Community, and of the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, and vertical transportation elements of the Retirement
Community. The costs of such inspections shall be treated as Operating
Expenses.
C. Operator shall submit to Owner (at the same time as the submission of
the Annual Operating Projection) a signed copy of an annual report summarizing
all significant preventative maintenance activities (including repairs,
alterations and inspections conducted at the Retirement Community) on all
building components of the Retirement Community during the previous twelve (12)
calendar months.
SECTION 8.02 FF&E RESERVE
A. Operator shall establish a reserve account (the "FF&E Reserve") in a
bank designated by Operator and approved by Owner (which approval shall not be
unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Retirement Community's FF&E; and
2. Certain routine repairs and maintenance to the Retirement
Community building which are normally capitalized under GAAP such as exterior
and interior repainting, resurfacing building walls, floors, roofs and parking
areas, and replacing folding walls and the like, but which are not major
repairs, alterations, improvements, renewals or replacements to the Retirement
Community building's structure or exterior facade or to its mechanical,
electrical, heating, ventilating, air conditioning, plumbing or vertical
transportation systems, the cost of which shall be governed exclusively by
Section 8.03.
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OPERATING AGREEMENT PAGE 36
B. Throughout the Term, Operator shall transfer into the FF&E Reserve the
amounts required in Section 8.02E and F (the "FF&E Reserve Payment"). All
amounts transferred into the FF&E Reserve shall be paid from Gross Revenues and
shall constitute Operating Expenses.
C. Each year, at the same time as Operator submits the Annual Operating
Projection, Operator shall prepare an estimate (the "FF&E Estimate") of the
expenditures necessary for (i) replacements and renewals to the Retirement
Community's FF&E, and (ii) repairs to the Retirement Community of the nature
described in Section 8.02A2, during the ensuing Fiscal Year, and shall submit
such FF&E Estimate to Owner for its review. Operator shall also prepare
tentative forecasts of such expenditures with regard to the four (4) subsequent
Fiscal Years. Operator will at all times give good faith consideration to
Owner's suggestions regarding any FF&E Estimate. In the event such forecasts
project a deficit in the FF&E Reserve at some point during the current Fiscal
Year or during such four (4) subsequent Fiscal Years, Owner and Operator will
work together in good faith to prepare alternative forecasts for such Fiscal
Years which will reduce or eliminate such deficit, but also take into account
the needs of the Retirement Community during such periods of time. All
expenditures from the FF&E Reserve will be (as to both the amount of each such
expenditure and timing thereof) both reasonable and necessary, given the
objective that the Retirement Community will be maintained and operated in
accordance with the Marriott Standards.
D. Operator shall from time to time make such (1) replacements and
renewals to the Retirement Community's FF&E, and (2) repairs to the Retirement
Community of the nature described in Section 8.02A2, as it deems necessary,
provided that Operator shall not expend more than the balance in the FF&E
Reserve without the prior approval of Owner. Operator will endeavor to follow
the applicable FF&E Estimate, but shall be entitled to depart therefrom, in its
reasonable discretion, provided that: (A) such departures from the applicable
FF&E Estimate result from circumstances which could not reasonably have been
foreseen at the time of the submission of such FF&E Estimate; and (B) such
departures from the applicable FF&E Estimate result from circumstances which
require prompt repair and/or replacement or are necessary to comply with Legal
Requirements; and (C) Operator has submitted to Owner a revised FF&E Estimate
setting forth and explaining such departures. At the end of each Fiscal Year,
any amounts remaining in the FF&E Reserve shall be retained in the FF&E Reserve,
and shall be carried forward to the next Fiscal Year. Upon a Sale of the
Retirement Community, funds in the FF&E Reserve will not be affected (or, if
withdrawn, will be replaced as set forth in Section 18.01G), and all
dispositions of such funds (both before and after such Sale of the Retirement
Community) will continue to be made exclusively pursuant to the provisions of
this Agreement. Proceeds from the sale of FF&E no longer necessary to the
operation of the Retirement Community shall be deposited in the FF&E Reserve, as
shall any interest which accrues on amounts placed in the FF&E Reserve. Neither
(i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on
amounts held in the FF&E Reserve, shall either (x) result in any reduction in
the required contributions to the FF&E Reserve set forth in subsection B above,
or (y) be included in Gross Revenues. The only items of FF&E which Operator is
authorized to lease (rather than purchase) shall be telephones, office equipment
(such as copiers and the like), and shuttle vans. If Operator enters into a
lease described in the preceding sentence, Operator
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OPERATING AGREEMENT PAGE 37
shall give Owner notice of such lease either prior to or promptly after entering
into such lease. Lease payments with respect to telephones and office equipment
shall be Operating Expenses; lease payments with respect to shuttle vans shall
be paid from the FF&E Reserve. If Operator proposes that items of FF&E other
than telephones and office equipment or shuttle vans should be leased rather
than purchased, Operator shall submit such proposal (which proposal shall
include, without limitation, an indication as to whether the rental which is
owed under such lease will be treated as an Operating Expense or paid from the
FF&E Reserve) to Owner for Owner's approval (not to be unreasonably withheld).
In connection with the foregoing, it is understood that the failure of a
Qualified Lender to approve such leasing proposal shall justify Owner in
withholding its approval thereof, regardless of whether withholding such
approval would otherwise be deemed to be unreasonable.
E. The amount of the FF&E Reserve Payment shall be determined as follows:
1. Two and sixty-five one hundredths percent (2.65%) of Gross
Revenues during the period from the Effective Date to the expiration of the
Fiscal Year 2002;
2. Two and eighty-five one hundredths percent (2.85%) of Gross
Revenues during the period from the first day of the Fiscal Year 2003 to the
last day of the Fiscal Year 2007;
3. Three and one-half percent (3.5%) of Gross Revenues during the
period from the first day of Fiscal Year 2008 to the last day of the Term.
F. The percentage contribution for the FF&E Reserve which is described
in Section 8.02E is an estimate based upon Operator's prior experience with
other comparable retirement communities. As the Retirement Community ages, this
percentage may not be sufficient to keep the FF&E Reserve at the levels
necessary to make the replacements and renewals to the Retirement Community's
FF&E, or to make the repairs to the Retirement Community of the nature described
in Section 8.02A2, which are required to maintain the Retirement Community in
accordance with the Marriott Standards. If any FF&E Estimate which is prepared
in accordance with Section 8.02C would require funding in excess of the
applicable percentage of Gross Revenues which is set forth in Section 8.02E
above, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02E up to the level set forth in such FF&E Estimate, in order to
provide the additional funds required, such increases to be treated as Operating
Expenses, or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case such lump-sum contribution plus interest (at the Prime
Rate plus one percentage point (1%) per annum), shall be reimbursed to Owner
from Gross Revenues in equal installments over the period of the next five (5)
calendar years beginning as of the date of such contribution, and such
installment repayments shall be an Operating Expense).
If Owner elects not to agree to either option 1 or option 2 above (or Owner
does not respond with respect to either option) within thirty (30) Days after
the submission of such FF&E Estimate (or, if Owner has elected option 2, if
Owner fails to fund the required amount within a sixty (60) Day period after the
date of such election), Operator shall be entitled, at its option, to
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OPERATING AGREEMENT PAGE 38
terminate this Agreement upon one hundred and twenty (120) Days' written notice
to Owner (with a copy to each Qualified Lender); however, such failure by Owner
shall not be deemed a Default by Owner under Article 16, and Operator shall not
be entitled to any remedies with respect to such failure other than such
termination of this Agreement. If Operator so elects to terminate this
Agreement, it shall notify Owner of such election within the sixty (60) Day
period following either: (x) the date of receipt of Owner's election not to
agree to either option 1 or option 2 above, or the expiration of the aforesaid
thirty (30) Day period without Owner making an election with respect to either
option; or (y) if Owner has elected option 2, the date of the expiration of the
aforesaid sixty (60) Day period without Owner funding the required amount.
However, if Owner elects not to fund an FF&E Estimate that is specifically
needed to meet Legal Requirements, such failure shall constitute a Default under
Article 16 and Operator shall have recourse to all the remedies therein
specified.
SECTION 8.03 BUILDING ALTERATIONS, IMPROVEMENTS, RENEWALS, AND REPLACEMENTS
A. Operator shall prepare an annual estimate (the "Building Estimate") of
the expenditures necessary for major repairs, alterations, improvements,
renewals and replacements to the structure or exterior facade of the Retirement
Community, or to the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, or vertical transportation elements of the Retirement
Community (the foregoing expenditures, together with all other repair and
maintenance expenditures which are classified as capital expenditures under
GAAP, shall be collectively referred to as "Capital Expenditures"). Operator
shall submit each such Building Estimate to Owner for its approval at the same
time the Annual Operating Projection is submitted. Except with respect to the
items described in Section 8.02A2, Operator shall not make any Capital
Expenditures without the prior written consent of Owner. Owner shall not
unreasonably withhold its consent with respect to Capital Expenditures which are
required by reason of any Legal Requirement, or required under Operator's
current life-safety standards (provided that, in order for any such life-safety
standards to be "required" within the meaning of this Section 8.03A, such
standards must be both required and in the process of being implemented at a
majority of the retirement communities which are comparable to the Retirement
Community then either owned or operated by Operator), or otherwise required for
the continued safety of residents or prevention of material damage to property,
including the removal of Hazardous Materials in compliance with all
Environmental Laws pursuant to Section 19.09. All Capital Expenditures which
are described in the preceding sentence shall be referred to in this Agreement
as "Required Capital Expenditures".
B. In the event of (x) an emergency threatening the Retirement Community,
its guests, invitees or employees, or (y) the receipt by Operator of a
governmental order or other Legal Requirement regarding any Required Capital
Expenditures, Operator shall give Owner notice thereof within five (5) Business
Days thereafter or sooner if circumstances reasonably warrant. Operator shall
then be authorized (but not obligated) to take appropriate remedial action
without receiving Owner's prior consent as follows: (i) in an emergency
threatening the Retirement Community, its guests, invitees or employees; or (ii)
if the continuation of the given condition could (in Operator's reasonable
judgment) subject Operator and/or Owner to either criminal or more than de
--
minimis civil liability, and Owner has either failed to remedy the
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OPERATING AGREEMENT PAGE 39
situation or has failed to take appropriate legal action to stay the
effectiveness of any applicable Legal Requirement. Operator shall cooperate with
Owner in the pursuit of any such action and shall have the right to participate
therein. Owner shall reimburse Operator for any costs incurred by Operator in
connection with any such remedial action within thirty (30) Days after Owner's
receipt of notice from Operator of the amount of such costs.
C. The cost of all Capital Expenditures (including the expenses incurred
by either Owner or Operator in connection with any civil or criminal proceeding
described above, but not including costs of those Capital Expenditures which are
described in Section 8.02A2 hereof) shall be borne solely by Owner, and shall
not be paid from Gross Revenues or from the FF&E Reserve.
D. The failure of Owner to either (i) approve and provide funding for any
proposed Required Capital Expenditure, within thirty Days (30) after Operator's
request therefor, or (ii) in the case of any Legal Requirement which is
described in Section 8.03B, comply therewith or to stay the effectiveness of
such Legal Requirement during the period of any contesting thereof, shall be a
Default by Owner. In such event, Operator shall be entitled (without affecting
its other remedies under Article 16) to terminate this Agreement upon ninety
(90) Days' written notice to Owner (with a copy to each Qualified Lender);
provided, however, that Operator shall have the right to stipulate such shorter
period of time as may be appropriate, given the time periods which are mandated
by Legal Requirements, as described in Section 8.03A or B, or given Operator's
good faith concerns about its own civil and/or criminal liability.
E. Operator shall have the right, from time-to-time, to set forth in any
Building Estimate the recommendations of Operator regarding proposed ROI Capital
Expenditures. Notwithstanding the provisions of Section 8.03C to the contrary,
the cost of all ROI Capital Expenditures shall be paid, to the extent reasonably
possible (given the requirement, set forth in Section 8.02, that the balance in
the FF&E Reserve be maintained in accordance with the Marriott Standards) from
the FF&E Reserve, and Owner shall pay such costs from its own funds only to the
extent there are not adequate funds for such purpose in the FF&E Reserve.
Expenditures which are, pursuant to the preceding sentence, made from the FF&E
Reserve shall not be treated as Additional Invested Capital. Any failure of
Owner to approve and provide funding for any ROI Capital Expenditures, or any
other Capital Expenditures (not including those Capital Expenditures which are
described in Section 8.02A2 hereof) which are not Required Capital Expenditures,
within sixty (60) Days after Operator's request therefor, shall not be a Default
by Owner but shall entitle Operator to terminate this Agreement. Such
Termination shall be evidenced by a written notice to Owner (with a copy to each
Qualified Lender), which notice shall be delivered to Owner no later than ninety
(90) Days after the expiration of the sixty (60) Day period described in the
preceding sentence. The effective date of such Termination shall be the date
stated by Operator in such notice, provided that such effective date shall be no
less than one hundred eighty (180) Days, and no more than three hundred sixty
(360) Days, after the date of such notice.
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OPERATING AGREEMENT PAGE 40
SECTION 8.04 LIENS
Operator and Owner shall use their best efforts to prevent any liens from
being filed against the Retirement Community which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the
Retirement Community. They shall cooperate fully in obtaining the release of
any such liens, and the cost thereof, if the lien was not occasioned by the
fault of either party, shall be treated the same as the cost of the matter to
which it relates. If the lien arises as a result of the fault of either party,
then the party at fault shall bear the cost of obtaining the lien release.
SECTION 8.05 OWNERSHIP OF REPLACEMENTS
All repairs, alterations, improvements, renewals or replacements made
pursuant to this Article 8 shall be the property of Owner. Subject to the
provisions of this Article 8 and Section 18.01G, the funds in the FF&E Reserve
shall be the property of Owner.
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OPERATING AGREEMENT PAGE 41
ARTICLE 9
BOOKKEEPING AND BANK ACCOUNTS
SECTION 9.01 BOOKS AND RECORDS
A. Books of control and account shall be kept on the accrual basis and in
all material respects in accordance with GAAP, with the exceptions provided in
this Agreement. Owner may at reasonable intervals during Operator's normal
business hours examine, copy (including copying any such records contained in
Software), and audit such records. Within seventy-five (75) Days after the end
of each Fiscal Year, Operator shall furnish Owner a financial report in
reasonable detail summarizing the operations of the Retirement Community for
such Fiscal Year and, including a certificate of Operator's chief accounting
officer certifying that such year-end statement is true and correct (the "Annual
Financial Report"). The parties shall, within thirty (30) Business Days after
the receipt of such statement, make any adjustments needed because of the final
figures set forth in the Annual Financial Report, or send a notice of disputed
items or matters in appropriate detail. Final adjustments, if any, will be made
at the time any disputed items or matters are resolved by the parties. If Owner
desires, at its own expense, to audit the Annual Financial Report and supporting
records, Owner shall begin such audit as soon as reasonably possible following
its receipt thereof and shall complete such audit as soon as reasonably possible
thereafter. If Owner does not make an audit or does not otherwise raise
disputed items as aforesaid, then such Annual Financial Report shall be deemed
to be conclusively accepted by Owner as being correct, and Owner shall have no
further right to challenge the correctness of the Annual Financial Report
thereafter, except in the event of fraud by Operator and except as set forth in
Section 9.01B. If any audit by Owner discloses an overpayment of any amounts to
Operator, Operator shall promptly pay Owner such amounts found to be due, plus
interest thereon (at the Prime Rate plus one percentage point (1%) per annum)
from the date such amounts should originally have been paid. If, however, the
audit discloses that Operator has not received any amounts due it, Owner shall
pay Operator such amounts, plus interest thereon (at the Prime Rate plus one
percentage point (1%) per annum) from the date such amounts should originally
have been paid. Any dispute concerning the correctness of an audit shall be
settled as provided in Section 19.11.
B. If Owner's audit discloses an overpayment in the total payment of
amounts due Operator for any Fiscal Year so audited that is in excess of five
percent (5%), Owner may audit the Retirement Community operations and supporting
records for the three (3) preceding Fiscal Years. The costs of such audits
shall be borne by Operator and not be treated as an Operating Expense. Any
error or dispute with respect thereto shall be handled as set forth in Section
9.01A.
C. By the twentieth (20th) Day after the end of each Accounting Period,
Operator shall furnish to Owner and, if required by Owner, to any Holder and to
the lessor under any Existing Lease, a report ("Interim Report") for the
immediately preceding Accounting Period, including the following:
1. A statement of the actual and budgeted Gross Revenue, Operating
Expenses, and Operating Profit for the Accounting Period and for the "year-to-
date";
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OPERATING AGREEMENT PAGE 42
2. A cash flow report;
3. An aged schedule of accounts receivable;
4. An analysis of escrow deposits and a cash reconciliation;
5. An itemized list of all fee delinquencies as of the twentieth
(20th) Day of the current month;
6. An occupancy report; and
7. Such other reports as may be reasonably requested by Owner.
With each Interim Report Operator shall transfer any interim amounts
of Operating Profit due Owner and shall retain any interim Base Fee and
Incentive Fee, if any, due Operator. A final reconciliation and transfer of
funds due Owner and Operator shall be made at the end of each Fiscal Year prior
to issuing the Annual Financial Report, based upon the Operating Profit, Base
Fee, Bonus Fee, CAS Fee and Incentive Fee for the entire Fiscal Year. It is the
intention hereof that Owner receive with respect to each Fiscal Year during the
Term the Operating Profit for such Fiscal Year less the Incentive Fee for such
Fiscal Year and that all computations of Operating Profit, Operating Loss, Base
Fee, Bonus Fee, CAS Fee and Incentive Fee shall be made based upon the entire
Fiscal Year so that any interim payments to Owner or Operator hereunder shall be
subject to final adjustment based upon the results for the entire Fiscal Year.
Each quarterly Interim Report will be accompanied by a statement, by either the
local or regional controller of the Retirement Community, that, to the best of
his or her knowledge and belief, and subject to routine year-end audit
adjustments, such Interim Report is true and correct in all material respects.
D. Operator shall, on an annual basis, at the time of the delivery of the
Annual Operating Projection, prepare and deliver to Owner the Management
Analysis Report. In addition, Operator shall, in connection with an impending
Sale of the Retirement Community or commitment by a Holder to make a Secured
Loan, within thirty (30) Days after written request therefor from Owner, prepare
and deliver to Owner an updated Management Analysis Report describing
significant changes since the effective date of the most recent Management
Analysis Report.
E. For purposes of calculating the Operator's fees for any given Fiscal
Year, Operating Profits shall not include adjustments for either refunds or
additional payments of Impositions relating to any prior Fiscal Years. In the
event such refunds or additional payments occur, the Operating Profit with
respect to the prior Fiscal Years in which such Impositions accrued shall be
recalculated to show such refund or additional payment; if the fees with respect
to such prior Fiscal Years are either increased or decreased as a result of such
recalculation of Operating Profit, the party which owes money to the other party
shall promptly pay the amount owed.
SECTION 9.02 RETIREMENT COMMUNITY ACCOUNTS, EXPENDITURES
A. All funds derived from operation of the Retirement Community shall be
deposited by Operator in Retirement Community bank accounts in a bank designated
by Operator and approved by Owner, which approval shall not be unreasonably
withheld. Withdrawals from said
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OPERATING AGREEMENT PAGE 43
accounts shall be made by representatives of Operator whose signatures have been
authorized. Such accounts shall be separate from all other accounts maintained
by Operator, and Operator shall not commingle in such accounts funds derived
from any source other than the operation of the Retirement Community without
prior consent of Owner. Reasonable ▇▇▇▇▇ cash funds shall be maintained at the
Retirement Community.
B. All Operating Expenses shall be paid by Operator and Operator shall
have the right to apply Gross Revenues or Working Capital provided by Owner
pursuant to Section 7.01 for such purpose. Operator shall not be required to
make any payment of amounts that are not Operating Expenses except out of funds
provided by Owner.
SECTION 9.03 ANNUAL OPERATING PROJECTION
A. Forty-five (45) Days prior to the beginning of each Fiscal Year,
Operator shall submit to Owner a projection (the "Annual Operating Projection")
of the estimated financial results of the operation of the Retirement Community
during the next Fiscal Year. Such projection shall project the estimated Gross
Revenues, Operating Expenses, and Operating Profit for the forthcoming Fiscal
Year for the Retirement Community, taking into account the Retirement
Community's market area. In preparing the Annual Operating Projection for each
Fiscal Year, Operator's goal will be the maximization of the long-term Operating
Profit of the Retirement Community, in keeping with the Marriott Standards,
Legal Requirements, and the general standards of the retirement industry for
similar quality-tier properties. If there are material items in any given
Annual Operating Projection which have been budgeted at significantly different
amounts from the amounts actually experienced (or projected) for the same items
in the preceding Fiscal Year, Operator agrees to take reasonable steps to ensure
that, at Owner's request, qualified personnel from Operator's staff are
available to explain these differences to Owner. A meeting (or meetings) for
such purpose shall be held, at Owner's request, within a reasonable period of
time after the submission to Owner of the preliminary draft of the Annual
Operating Projection. Operator shall consult with Owner with respect to the
Annual Operating Projection and shall at all times give good faith consideration
to Owner's suggestion regarding the same, but shall not be required to obtain
Owner's approval thereof, except that Owner shall have the right to approve the
Annual Operating Projection, which approval shall not be unreasonably delayed or
denied, in the event that Owner's Priority was not paid for the prior Fiscal
Year or is not forecasted to be reached in the current Fiscal Year or is not
forecasted to be reached in the Annual Operating Projection for the following
Fiscal Year that has been submitted to Owner.
B. If Owner's approval of the Annual Operating Projection is required
pursuant to Section 9.03A and if Owner fails to approve the Annual Operating
Projection prepared by Operator pursuant to Section 9.03A prior to the first Day
of the Fiscal Year in question, Operator shall commence the operations of the
Retirement Community for said Fiscal Year, and continue such operations until
Owner's approval is obtained, under a provisional Annual Operating Projection
which shall consist of the actual financial results of the immediately preceding
Fiscal Year, with projected Operating Expenses adjusted by the CPI, and with
further reasonable adjustments as necessary to comply with any Legal
Requirements or respond to known cost
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OPERATING AGREEMENT PAGE 44
increases or any extraordinary circumstances that Operator has good reason to
anticipate in the subject Fiscal Year.
C. Operator shall use its best efforts to adhere to the Annual Operating
Projection. It is understood, however, that the Annual Operating Projection is
only a projection by Operator of estimated results and that various
circumstances such as, but not limited to, the costs of labor, material,
services and supplies, casualty, operation of law, or economic and market
conditions may make achievement of the Annual Operating Projection impracticable
or not obtainable. Accordingly, Operator shall be under no obligation to
achieve any of the results shown in the Annual Operating Projection, and
Operator shall be entitled to depart therefrom due to such circumstances,
provided that nothing herein shall be deemed to authorize Operator to take any
action prohibited by this Agreement to reduce Operator's other obligations
hereunder.
D. Operator shall notify Owner of any significant variations from the
Annual Operating Projection promptly after Operator learns of the same, but in
not event later than the date on which Operator is required to give Owner the
Interim Report covering the period in which such variation occurs. Any such
notice shall set forth in reasonable detail the nature, extent and, if known by
Operator, the cause of such variation, and recommendations of appropriate
actions, either to correct the variation or to prevent or minimize its
occurrence or effect. Owner and Operator shall, at Owner's request, meet to
review such variations and discuss appropriate action with respect thereto.
SECTION 9.04 OPERATING LOSSES
Owner shall be solely responsible for any Operating Losses.
ARTICLE 10
PROPRIETARY MARKS; TRADEMARK LICENSE; INTELLECTUAL PROPERTY
SECTION 10.01 PROPRIETARY MARKS
During the term of this Agreement, the Retirement Community shall be known
as a Marriott Retirement Community, with such additional identification as may
be necessary and agreed to by Owner and Operator to provide local
identification. If the name of the Marriott Retirement Community System is
changed, Operator shall have the right to change the name of the Retirement
Community to conform thereto, provided, however, that the word "Marriott" shall
be a part of any such new or revised name. Any incremental costs associated
with implementing such name change shall be borne by Operator and will not be an
Operating Expense. It shall constitute an Event of Default under this Agreement
if Operator shall cease to use, or to have the right to use, the word "Marriott"
in connection with the operation and marketing of the Retirement Community, and
in such event Owner shall be entitled to all rights and remedies as may be set
forth in Article 16, including without limitation the right to terminate this
Agreement. The Proprietary Marks shall in all events remain the exclusive
property of Operator, and nothing contained herein shall confer on Owner the
right to use the Proprietary Marks. Except as
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OPERATING AGREEMENT PAGE 45
provided in Section 10.03, upon Termination, any use of or right to use the
Proprietary Marks by Owner shall cease forthwith and Owner shall promptly remove
from the Retirement Community any signs or similar items which contain the
Proprietary Marks, provided that Operator shall bear the cost of removal if such
Termination was pursuant to Article 16. The right to use such Proprietary Marks
belongs exclusively to Operator, and the use thereof inures to the benefit of
Operator whether or not the same are registered and regardless of the source of
the same.
SECTION 10.02 TRADEMARK LICENSE
In consideration of the rights granted to Operator in this Operating
Agreement, Operator grants to Owner a non-exclusive right and license,
"Trademark License", to use the "Forum" ▇▇▇▇ solely as part of the name of the
Retirement Community as an identifier for the term of this Operating Agreement.
Owner is not permitted to use the "Forum" ▇▇▇▇ in connection with the
identification or operation of any other business or property, or at any other
location, except as may otherwise be provided in other Operating Agreements
between Operator and Owner. Owner acknowledges and agrees that Operator is the
owner of all right, title and interest in and to the "Forum" ▇▇▇▇ and the
goodwill associated with and symbolized by that ▇▇▇▇, the Owner's use of the
"Forum" ▇▇▇▇ pursuant to this Trademark License shall not give Owner any
ownership, apart from this Trademark License, to the "Forum" ▇▇▇▇, and that all
goodwill arising from Owner's use of the "Forum" ▇▇▇▇ shall inure solely to
Operator's benefit.
This Trademark License shall immediately terminate (but subject to the
provisions of Section 4.02E) upon termination or expiration of this Operating
Agreement.
SECTION 10.03 PURCHASE OF INVENTORIES AND FIXED ASSET SUPPLIES
Upon Termination, Operator shall have the option, to be exercised within
thirty (30) Days after Termination, to purchase, at their then book value, any
items of the Retirement Community's Inventories and Fixed Asset Supplies as may
be marked with the Proprietary Marks subject to Section 4.02E. In the event
Operator does not exercise such option, Owner agrees that it will use any such
items not so purchased exclusively in connection with the Retirement Community
until they are consumed.
SECTION 10.04 COMPUTER SOFTWARE AND EQUIPMENT
A. All Software is and shall remain the exclusive property of Operator or
one of its Affiliates (or the licensor of such Software, as the case may be),
and Owner shall have no right to use, or to copy, any Software.
B. Upon Termination, Operator shall have the right to remove from the
Retirement Community, without compensation to Owner, all Software. Furthermore,
upon Termination, Operator shall be entitled to remove from the Retirement
Community any computer equipment which is utilized as part of a centralized
operations control or property management system of Operator or is otherwise
considered proprietary by Operator, or (ii) any other computer equipment
utilized as part of a centralized system that is owned by Operator or a third
party other
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OPERATING AGREEMENT PAGE 46
than Owner. If any of such removed computer equipment is owned by Owner,
Operator shall reimburse Owner for the book value of such equipment and shall
repair any damage caused by the removal of such computer equipment.
C. Upon Termination, Operator shall have the right to remove from the
Retirement Community without compensation to Owner, any computer software
(including upgrades and replacements) owned or licensed by Operator, or any of
its Affiliates.
SECTION 10.05 INTELLECTUAL PROPERTY
All Intellectual Property shall at all times be proprietary to Operator or
its Affiliates, and shall be the exclusive property of Operator or its
Affiliates. During the Term of this Agreement, Operator shall be entitled to
take all reasonable steps to ensure that the Intellectual Property remains
confidential and is not disclosed to anyone other than Operator's employees at
the Retirement Community. Upon Termination, all Intellectual Property shall be
removed from the Retirement Community by Operator, without compensation to
Owner.
SECTION 10.06 BREACH OF COVENANT
Operator and/or its affiliated companies shall be entitled, in case of any
breach of the covenants of Article 10 by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article 10
shall survive Termination.
ARTICLE 11
POSSESSION AND USE OF RETIREMENT COMMUNITY
SECTION 11.01 QUIET ENJOYMENT
Owner covenants that, so long as Owner has not terminated this Agreement by
reason of (i) an Event of Default by Operator under Article 16 of this
Agreement; or (ii) the exercise by Owner of any right of Owner to terminate this
Agreement under any other Section of this Agreement, Operator shall quietly
hold, occupy and enjoy the Retirement Community throughout the Term hereof free
from hindrance or ejection by Owner or other party claiming under, through or by
right of Owner (except as may be otherwise set forth in Section 6.04). Owner
agrees to pay and discharge any payments and charges and, at its expense, to
prosecute all appropriate actions, judicial or otherwise, necessary to assure
such free and quiet occupation. Nothing set forth in the preceding sentence,
however, shall be deemed to create a recourse obligation by Owner to pay any
payment or charge pursuant to a contract which is non-recourse to Owner.
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OPERATING AGREEMENT PAGE 47
SECTION 11.02 USE
A. Operator shall use the Retirement Community solely for the operation of
a Retirement Community pursuant to the Marriott Standards and for all activities
in connection therewith which are customary and usual to such an operation.
B. Operator shall comply with and abide by all Legal Requirements
pertaining to the operation of the Retirement Community, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii), (iii) or (iv) of this Section 11.02B) of such compliance shall be paid
from Gross Revenues as Operating Expenses; (ii) all costs and expenses of
compliance with Environmental Laws shall be paid as set forth in Section 19.09;
(iii) all costs and expenses of compliance with the Legal Requirements which are
described in Section 8.03A shall be paid as set forth in Section 8.03;
(iv) certain costs and expenses are to be borne by Operator and not paid as
Operating Expenses, as and to the extent set forth in Section 2.03B; and
(v) Operator shall have the right, but not the obligation, in its reasonable
discretion, to contest or oppose, by appropriate proceedings, any such Legal
Requirements (provided that the consent of Owner, not to be unreasonably
withheld, shall be obtained prior to instituting any such proceedings which
involve Owner's ownership interest in the Retirement Community in a material
manner); the reasonable expenses of any such contest shall be paid from Gross
Revenues as Operating Expenses.
SECTION 11.03 CENTRAL ADMINISTRATIVE SERVICES
A. Operator will, commencing with the Effective Date and thereafter during
the Term of this Agreement, cause to be furnished to the Retirement Community
certain central administrative services ("Central Administrative Services")
which are furnished generally on a central or regional basis to other Retirement
Communities in the Marriott Retirement Community System and which benefit each
retirement community as a participant in the Marriott Retirement Community
System. Central Administrative Services shall include: marketing and public
relations services; human resources program development; information systems
support and development; centralized computer payroll and accounting services.
In lieu of reimbursement to Operator for any of such Central Administrative
Services, Operator shall be paid, as an Operating Expense, the amount (the
"Central Administrative Services Fee") set forth in Section 11.03B, and none of
the costs incurred by Operator in providing any Central Administrative Service
shall be treated as an Operating Expense. The Central Administrative Services
Fee shall be paid to Operator at the end of each Accounting Period and shall be
based on the Gross Revenues earned during the previous Accounting Period,
subject to final adjustment based upon the results for the entire Fiscal Year.
B. Subject to the last paragraph in the definition of Operating Expenses,
the Central Administrative Services Fee shall be equal to (i) zero percent (0%)
of Gross Revenues for the first thirteen (13) Accounting Periods following the
Effective Date, and (ii) two percent (2%) of Gross Revenues thereafter for the
remainder of the Term.
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OPERATING AGREEMENT PAGE 48
SECTION 11.04 OWNER'S RIGHT TO INSPECT
Owner or its agents shall have access to the Retirement Community at any
and all reasonable times for the purpose of inspection or showing the Retirement
Community to prospective purchasers, investors, tenants, or mortgagees.
SECTION 11.05 INDEMNITY
A. Operator shall indemnify and hold harmless Owner (and any officer,
director, employee, advisor, partner or shareholder of Owner) in respect of,
and, at Owner's request, shall defend any action, cause of action, suit, debt,
cost, expense (including without limitation reasonable attorneys' fees), claim
or demand whatsoever brought or asserted by any third person whomsoever, at law
or in equity, arising by reason of: (i) liabilities stemming from general
corporate matters of Operator or its Affiliates, to the extent the same are not
directly and primarily related to the Retirement Community; (ii) infringement
and other claims relating to the Proprietary Marks; (iii) if Operator fails to
maintain insurance coverage that it is required to maintain pursuant to this
Agreement, the excess of the amount of any liability or loss that would have
been covered over the amount of any applicable deductible; and (iv) the bad
faith or willful misconduct of Operator or its Affiliates, or any of their
employees, servants or agents or other persons for whom they are responsible,
result in a claim for bodily injury, death or property damage occurring on, in
or in conjunction with the business of the Retirement Community, to the extent
that such claim exceeds the insurance proceeds (including Retirement Community
Retentions) which are available to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Operator shall be obligated to
indemnify pursuant to the terms of this Agreement, then, upon demand by Owner,
Operator, at its sole cost and expense, shall resist or defend such claim,
action or proceeding (in Owner's name, if necessary), using such attorneys as
Owner shall approve, which approval shall not be unreasonably withheld. If, in
Owner's reasonable opinion, (i) there exists a conflict of interest which would
make it inadvisable to be represented by counsel for Operator, or (ii) there are
legal defenses available to Operator that are different from or inconsistent
with those available to Owner, or (iii) there are claims at issue which are not
covered by Operator's insurance, Owner shall be entitled to retain its own
attorneys, and Operator shall pay the reasonable fees and disbursements of such
attorneys.
C. Matters with respect to which Operator has specifically agreed to
indemnify Owner under other provisions of this Agreement are to be treated
exclusively under such other provisions and not under this Section 11.05.
D. Payments made by Operator pursuant to this Section 11.05 shall be from
Operator's own funds and shall not constitute Operating Expenses.
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OPERATING AGREEMENT PAGE 49
ARTICLE 12
INSURANCE
SECTION 12.01 INTERIM INSURANCE
[Intentionally omitted]
SECTION 12.02 PROPERTY AND OPERATIONAL INSURANCE
Operator shall, commencing with the Effective Date and thereafter during
the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Retirement Community and contents against
loss or damage by fire, lightning and all other risks covered by the usual
extended coverage endorsement, all in an amount not less than one hundred
percent (100%) of the replacement cost thereof (excluding the cost of
foundations and excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Retirement
Community;
C. Business interruption insurance covering loss of profits and
necessary continuing expenses for interruptions caused by any occurrence covered
by the insurance referred to in Section 12.02 A and B, which shall be of a type
and in such amounts (but such coverage shall in no event be for less than one
(1) year) as are generally established by Operator at similar retirement
communities it owns, leases or manages under the Marriott name in the United
States;
D. General liability insurance against claims for bodily injury, death
or property damage occurring on, in, or in conjunction with the business of the
Retirement Community, and automobile liability insurance on vehicles operated in
conjunction with the Retirement Community, with a combined single limit for each
occurrence of not less than One Hundred Million Dollars ($100,000,000);
representatives of Operator and Owner shall meet, at Owner's request, at
intervals of approximately once every five (5) years, to review the adequacy of
such limit;
E. Employment Practices Liability Insurance, and Workers' compensation
and employer's liability insurance as may be required under applicable laws
covering all of Operator's employees at the Retirement Community;
F. Fidelity bonds, with reasonable limits to be determined by Operator,
covering its employees in job classifications normally bonded in other similar
retirement communities it leases or manages under the Marriott name in the
United States or as otherwise required by law, and comprehensive crime insurance
to the extent Operator and Owner mutually agree it is necessary for the
Retirement Community; and
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OPERATING AGREEMENT PAGE 50
G. Such other insurance in amounts as Operator and Owner, in their
reasonable judgment, mutually deem advisable for protection against claims,
liabilities and losses arising out of or connected with the operation of the
Retirement Community.
SECTION 12.03 GENERAL INSURANCE PROVISIONS
A. All insurance described in Section 12.02 may be obtained by Operator
by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Operator's corporate headquarters, all insurance policies maintained by Operator
regarding the Retirement Community.
B. Operator may self insure or otherwise retain such risks or portions
thereof as it does with respect to other similar retirement communities it owns,
leases or manages under the Marriott name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Operator. The policies required under Sections 12.02A, B, C and D
shall include the Owner as an additional insured. Upon notice by the Owner,
Operator shall also have the policies required under Sections 12.02A, B, C and D
include any Qualified Lender as an additional insured. Any property losses
thereunder shall be payable to the respective parties as their interests may
appear. Any Mortgage on the Retirement Community shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.02A and B shall, with respect to any casualty involving less than
twenty-five percent (25%) of the replacement cost of the Retirement Community,
be available for repair and restoration of the Retirement Community. However,
any Qualified Lender shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for repair and/or restoration of the
Retirement Community that are imposed solely for the purpose of assuring that
such proceeds will be properly applied for the purpose of repair and restoration
or that the amount of such proceeds (together with any other funds that Owner
agrees to make available) is sufficient at all times to complete such repair and
restoration.
D. Operator shall deliver to the Owner and to each Qualified Lender
requested by Owner certificates of insurance with respect to all policies so
procured and, in the case of insurance policies about to expire, shall deliver
certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be canceled or
materially changed without at least thirty (30) Days' prior written notice to
the certification holder.
F. The term "Retirement Community Retention" shall mean the amount of any
loss or reserve under Operator's blanket insurance or self-insurance programs
which is allocated to the Retirement Community, not to exceed the higher of (a)
the maximum per occurrence limit established for similar retirement communities
participating in such programs, or (b) the
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OPERATING AGREEMENT PAGE 51
insurance policy deductible on any loss which may fall within high hazard
classifications as mandated by the insurer (e.g., earthquake, flood, windstorm
on coastal properties, etc.). If the Retirement Community is not a participant
under Operator's blanket insurance or self-insurance programs, "Retirement
Community Retention" shall mean the amount of any loss or reserve allocated to
the Retirement Community, not to exceed the insurance policy deductible.
SECTION 12.04 COST AND EXPENSE
Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any
Retirement Community Retention, shall be paid from Gross Revenues as Operating
Expenses. To the extent that such costs or expenses include reimbursement by
Operator of its own costs or expenses, or those of one of its Affiliates, such
costs or expenses shall be generally competitive (as calculated over the Term of
this Agreement) with costs and expenses of non-affiliated entities providing
similar services. Such premiums and costs shall be allocated on an equitable
basis to the retirement communities participating under Operator's blanket
insurance or self-insurance programs. Any reserves, losses, costs or expenses
which are uninsured (unless required to be insured under Section 12.02) shall be
treated as a cost of insurance and shall be Operating Expenses. Upon
Termination, an escrow fund in an amount reasonably acceptable to Operator shall
be established from Gross Revenues (or, if Gross Revenues are not sufficient,
with funds provided by Owner) to cover the amount of any Retirement Community
Retention and all other costs which will eventually have to be paid by either
Owner or Operator with respect to pending or contingent claims, including those
which arise after Termination for causes arising during the Term of this
Agreement. Upon the final disposition of all such pending or contingent claims,
any unexpended funds remaining in such escrow shall be paid to Owner, and
Operating Profit for the final Fiscal Year shall be recalculated as a result of
any claims paid and Operator and Owner shall each pay the other such amounts as
may be required as a result of such adjustment.
SECTION 12.05 OWNER'S OPTION TO OBTAIN CERTAIN INSURANCE
Owner may, at its option, by written notice to Operator which shall be
delivered no later than ninety (90) Days prior to the natural expiration of the
insurance policies which Operator has obtained pursuant to Section 12.02 A, B
and C, procure and maintain the insurance specified in Section 12.02A, B and C
(in which case Operator shall allow such policies obtained by it under
Section 12.02A, B, and C to expire), subject to the following terms and
conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Operator named as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.02A and B shall be available for repair and restoration of the
Retirement Community, to the extent required pursuant to Section 12.03C.
However, any Holder of such Secured Loan shall be entitled to impose reasonable
conditions on the disbursement of insurance proceeds for the repair and/or
restoration of the Retirement Community, including a
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OPERATING AGREEMENT PAGE 52
demonstration by Owner and/or Operator that the amount of such proceeds
(together with other funds Owner agrees to make available) is sufficient for
such purpose.
B. Owner shall deliver to Operator certificates of insurance with respect
to all policies so procured and, in the case of insurance policies about to
expire, shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) Days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as Operating
Expenses, provided that if the cost of such insurance procured by Owner exceeds
the cost of Operator's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be an
Operating Expense.
E. Should Owner exercise its option to procure the insurance described
in this Section 12.05, Owner hereby waives its rights of recovery from Operator
or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Retirement
Community, and any resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Operator is under no obligation to
thereafter include the Retirement Community in its blanket insurance program
(with respect to the coverage described in Section 12.02A, B and C) for the
balance of the Term of this Agreement. However, upon a Sale of the Retirement
Community, a successor Owner shall have the right, notwithstanding the fact that
the previous Owner may have obtained insurance in accordance with this
Section 12.05, to have the Retirement Community included in Operator's blanket
insurance program (provided that the Retirement Community, as of that point in
time, satisfies the applicable criteria for admission to such program, as
established by the program's insurance carriers) by making a written request to
Operator for such inclusion not later than thirty (30) Days after the date on
which such party becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Operator.
ARTICLE 13
TAXES
SECTION 13.01 REAL ESTATE AND PERSONAL PROPERTY TAXES
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under GAAP) shall be paid by Operator from Gross Revenues, as an
Operating Expense, before any fine,
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OPERATING AGREEMENT PAGE 53
penalty, or interest is added thereto or lien placed upon the Retirement
Community or the Agreement, unless payment thereof is stayed. Owner shall within
five (5) business Days after the receipt of any invoice, ▇▇▇▇, assessment,
notice or other correspondence relating to any Imposition, furnish Operator with
a copy thereof. Operator shall, within the earlier of thirty (30) Days of
payment or five (5) business Days following written demand by Owner, furnish
Owner with copies of official tax bills and assessments which Operator has
received, and evidence of payment or contest thereof. Either Owner or Operator
(in which case each party agrees to sign the required applications and otherwise
cooperate with the other party in expediting the matter) may initiate
proceedings to contest any Imposition, and all reasonable costs of any
negotiations or proceedings with respect to any such contest shall be paid from
Gross Revenues and shall be an Operating Expense in determining Operating
Profit; provided, however, that neither party shall have the right to expend in
excess of Five Thousand Dollars ($5,000) (to be adjusted by the CPI) with
respect to any such negotiations or proceedings without the consent of the other
party.
B. The word "Impositions", as used in this Agreement, shall not include
any franchise, corporate, estate, inheritance, succession, capital levy or
transfer tax imposed on Owner, or any income tax imposed on any income of Owner
(including distributions to Owner pursuant to Section 9.01 hereof), all of which
shall be paid solely by Owner, not from Gross Revenues nor from the FF&E
Reserve.
C. Owner shall have the right to require Operator to establish an escrow
account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Operator) from which Impositions will be paid.
Payments into such escrow account will be Operating Expenses. Any interest
which accrues on amounts deposited in such escrow account shall not constitute
Gross Revenue and be added to the balance in such escrow account and used to pay
Impositions.
ARTICLE 14
RETIREMENT COMMUNITY EMPLOYEES
SECTION 14.01 EMPLOYEES
A. All personnel employed at the Retirement Community shall be the
employees of Operator. Subject to the provisions of this Agreement, Operator
shall have absolute discretion to hire, promote, supervise, direct, train and
discharge all employees at the Retirement Community, to fix their compensation
and, generally, establish and maintain all policies relating to employment;
provided, however, that (i) all of the foregoing shall be in accordance with the
Marriott Standards, and (ii) Operator shall not enter into any written
employment agreements with any person which purport to bind the Owner and/or
purport to be effective regardless of a Termination, without obtaining Owner's
prior consent which may be withheld in Owner's sole discretion. Operator and
Owner shall each comply with all Legal Requirements regarding labor relations;
if either Operator or Owner shall be required, pursuant to any such Legal
Requirement, to recognize a labor union or to enter into collective bargaining
with a labor union, the party so required shall promptly notify the other party
pursuant to Section 19.08. Operator and Owner
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shall comply with all requirements under any collective bargaining agreements
binding upon each of them during the Term. All costs and expenses of such
compliance shall be Operating Expenses.
B. No person shall be given gratuitous accommodations or services without
prior joint approval of Owner and Operator except in accordance with usual
practices of the Operator with respect to its employees visiting the Retirement
Community in the normal course of business.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Operator is in excess of the Settlement
Threshold Amount shall be jointly approved by Operator and Owner. In addition,
Operator shall give Owner a written notice (pursuant to Section 19.08) of any
settlement of any Employee Claim where the settlement amount is below the
Settlement Threshold Amount, but is in excess of Fifty Thousand Dollars
($50,000.00) (said dollar amount to be adjusted by the CPI). Any dispute
between Owner and Operator as to whether Operator's settlement recommendation is
reasonable, where such proposed settlement is in excess of the Settlement
Threshold Amount, shall be resolved by arbitration under Section 19.11 hereof;
provided that Operator shall have the right to settle any Employee Claim (prior
to the arbitration on the reasonableness of the settlement, as described in this
sentence) based on Operator's recommendation, which shall be Operator's
reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as
an Operating Expense) up to the amount of Owner's settlement recommendation,
which shall be Owner's reasonable estimate, in good faith, and (ii) Operator's
own funds to the extent Operator's recommendation exceeds the amount described
in subparagraph (i) above. Following the settlement of such Employee Claim, the
parties will arbitrate under Section 19.11 the issue of whether Operator's
settlement recommendation was reasonable under the circumstances. If the
arbitrators decide that Operator's recommendation was reasonable, Operator shall
be entitled to reimburse itself from Gross Revenues (as an Operating Expense) in
the amount of the funds advanced under subparagraph (ii) above, together with
accrued interest thereon at the Prime Rate. If the arbitrators decide that
Operator's settlement recommendation was not reasonable, then Operator shall not
be entitled to any reimbursement of the amounts advanced by it under
subparagraph (ii) above, nor to accrued interest thereon.
D. Operator shall pay from its own funds, and not from Gross Revenues, any
Employee Claim which is not covered by insurance as set forth in this Agreement,
where the basis of such Employee Claim is conduct by Operator which (i) is a
substantial violation of the standards of responsible labor relations as
generally practiced by prudent owners or operators of similar retirement
community operations in the quality tier of retirement communities (but if the
quality tier then does not include twenty (20) or more communities, then the
comparison shall be against all similar retirement community operations) in the
state in which the Retirement Community is situated, and (ii) is not the
isolated act of individual employees, but rather is a direct result of corporate
policies of Operator which either encourage or fail to discourage such conduct.
In addition, Operator shall indemnify, defend and hold harmless Owner from and
against any fines or judgments arising out of such conduct, and all Litigation
expenses (including reasonable attorneys' fees and expenses) incurred in
connection therewith. Any dispute between
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OPERATING AGREEMENT PAGE 55
Owner and Operator as to whether or not certain conduct by Operator is not in
accordance with the aforesaid standards shall be resolved by arbitration under
Section 19.11 hereof. It is the intention of the parties that the arbitration
proceedings described in the preceding sentence shall be conducted independently
of any arbitration proceedings with respect to such Employee Claim pursuant to
the applicable union contract and/or pursuant to Section 14.01C of this
Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Operator and Owner are involved as actual or potential defendants,
Operator shall have exclusive and complete responsibility (subject to the rights
of Owner to approve certain settlements, as set forth in Section 14.01C) for the
resolution of such Employee Claims. In the event that any Employee Claim is
made against Owner, but not against Operator, Owner shall give notice to
Operator of the Employee Claim in a timely manner so as to avoid any prejudice
to the defense of the Employee Claim, provided that Operator shall in all events
be so notified within twenty (20) Days after the date such Employee Claim is
made against Owner. Operator will thereafter assume exclusive and complete
responsibility for the resolution of such Employee Claim.
F. It is the understanding of the parties that payments made in the normal
course of business to any union pension fund, on behalf of the unionized
employees (if any) at the Retirement Community, shall be paid from Gross
Revenues as Operating Expenses.
G. At Termination, other than by reason of a Default of Operator
hereunder, an escrow fund shall be established from Gross Revenues (or, if Gross
Revenues or are not sufficient, with funds provided by Owner) to reimburse
Operator for all costs and expenses reasonably anticipated to be incurred by
Operator such as reasonable transfer costs, or severance pay, unemployment
compensation and other employee liability costs arising out of either the
transfer or termination of employment of Operator's employees at the Retirement
Community, as the case may be. Upon the final payment of such costs, any
unexpended funds remaining in such escrow (i) shall be paid to Owner if Owner or
the FF&E Reserve had provided such funds or (ii) if such funds had been paid
from Gross Revenues, shall be distributed between Owner and Operator in the same
manner as such funds would have been distributed if such funds had been included
in Operating Profit for the Fiscal Year in which such Termination occurs, and
Operating Profit for the final Fiscal Year shall be recalculated as a result of
payment of such costs, and Operator and Owner shall each pay to the other such
amounts as may be required as a result of such adjustment.
H. Operator (and not Owner) shall have the exclusive power to hire,
dismiss or transfer the general manager of the Retirement Community, provided,
however, that Operator shall keep Owner reasonably informed and shall give Owner
the opportunity to participate in the process with respect to any such hiring,
dismissal or transfer, as follows:
1. Owner shall be given a reasonable prior notice, circumstances
permitting, of any proposed hiring, dismissal or transfer of the general
manager.
2. Prior to any dismissal or transfer of the general manager, Owner
shall be notified and Owner shall be advised of the reason for such proposed
dismissal or transfer of the
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OPERATING AGREEMENT PAGE 56
general manager and of the qualifications of any proposed replacement manager.
Owner shall be given a reasonable opportunity to interview the proposed
replacement general manager. Operator shall consider in good faith the opinions
and requests of Owner with respect to such matters and, if Operator elects not
to implement any such request, Operator shall explain its decision to Owner in
reasonable detail.
ARTICLE 15
DAMAGE, CONDEMNATION AND FORCE MAJEURE
SECTION 15.01 DAMAGE AND REPAIR
If, during the Term hereof, the Retirement Community is damaged or
destroyed by fire, casualty or other cause, Owner shall, at its cost and expense
and with all reasonable diligence, repair or replace the damaged or destroyed
portion of the Retirement Community substantially to the same condition as
existed previously. Proceeds from the insurance described in Section 12.01
shall be applied to such repairs or replacements. However, Owner shall not be
obligated to so repair or replace the damaged or destroyed portion of the
Retirement Community if one or more of the following is true: (i) the
Retirement Community is so badly damaged or destroyed that it cannot reasonably
be repaired or replaced within one (1) year of either the date of the casualty
or such later date as is covered by business interruption insurance described
under Article 12; (ii) the loss, if uninsured, is greater than One Hundred
Thousand Dollars ($100,000.00); or (iii) the cost of the repair and restoration
work exceeds Five Million Dollars ($5,000,000) and the remainder of the Term is
less than ten (10) years. If Owner elects not to repair or replace the damaged
portion of the Retirement Community for one or more of the foregoing reasons, it
shall so notify Operator by written notice within sixty (60) Days after the date
of the casualty. If Owner does not so notify Operator, Owner shall promptly
commence and complete the repairing, rebuilding or replacement so that the
Retirement Community shall be substantially the same as it was prior to such
damage or destruction. If Owner is not obligated to so repair or replace the
damaged or destroyed portion of the Retirement Community as aforesaid and elects
not to so repair or replace, either party may terminate this Agreement upon
sixty (60) Days notice.
SECTION 15.02 CONDEMNATION
A. In the event all or substantially all of the Retirement Community shall
be taken in any eminent domain, condemnation, compulsory acquisition, or similar
proceeding by any competent authority for any public or quasi-public use or
purpose, or in the event a portion of the Retirement Community shall be so
taken, but the result is that it is unreasonable to continue to operate the
Retirement Community, this Agreement shall terminate effective as of the date of
such taking or similar proceeding.
B. In the event a portion of the Retirement Community shall be taken by
the events described in Section 15.02A, or the entire Retirement Community is
affected but on a temporary basis, and the result is not to make it unreasonable
to continue to operate the Retirement
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Community, this Agreement shall not terminate. However, so much of any award for
any such partial taking or condemnation as shall be necessary to render the
Retirement Community equivalent to its condition prior to such event shall be
used for such purpose; the balance of such award, if any, shall be fairly and
equitably apportioned between Owner and Operator in accordance with their
respective interests.
C. In the event of any proceeding described in Section 15.02 A or B and
Owner and Operator cannot agree on a fair and equitable apportionment of any
such award, the dispute shall be decided in accordance with Section 19.11. For
this purpose, any award or compensation received by any Holder shall be deemed
to be an award or compensation received by Owner.
SECTION 15.03 FORCE MAJEURE
A. The expiration, withdrawal or revocation of any License which is
material to the operation of the Retirement Community in accordance with the
Marriott Standards, where such expiration, withdrawal or revocation: (i) is not
due to the Default of either Operator or Owner; and (ii) is not otherwise within
the reasonable control of either Operator or Owner, shall not be an Event of
Default under Article 16 of this Agreement. Operator and Owner shall each, in
good faith, use all commercially reasonable efforts (including the diligent
pursuit of all available appeals), during the period of one hundred twenty (120)
Days after the date of such withdrawal or revocation, to have such License
reinstated. If, notwithstanding such efforts, such License is not reinstated
prior to the expiration of the aforesaid period of one hundred twenty (120)
Days, either Owner or Operator shall have the right, at its option, to terminate
this Agreement upon no less than sixty (60) Days' notice to the other party;
provided, however, that the terminating party must deliver such notice of
Termination to the other party by no later than ninety (90) Days after the
expiration of such one hundred twenty (120) Day period; and provided further,
that no such Termination shall be effective if, prior to the effective date of
such Termination, such License is reinstated or such expiration, withdrawal or
revocation of such License is stayed.
B. If an order, judgment or directive by a court or administrative body is
issued, in connection with any Litigation involving Owner, which restricts or
prevents Operator, in a material adverse manner, from operating the Retirement
Community in accordance with the Marriott Standards, and which, in Operator's
reasonable opinion, will have a significant adverse effect upon operations of
the Retirement Community, Operator shall be entitled, at its option, to
terminate this Agreement upon sixty (60) Days' written notice; provided,
however, that Operator shall (if it so elects) deliver such notice of
Termination to Owner by no later than ninety (90) Days after Operator receives
written notice of the issuance of such order, judgment or directive (or, if such
order, judgment or directive is appealed, within ninety (90) Days after Operator
receives written notice of the final disposition of such appeal).
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ARTICLE 16
DEFAULTS
SECTION 16.01 DEFINITION OF "DEFAULT"
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The commencement by either party of any proceeding under any
bankruptcy, reorganization, readjustment of debt, dissolution or liquidation law
or statute or an assignment for the benefit of creditors or application for the
appointment of a trustee or receiver for a substantial part of its assets or if
a petition is filed against it for any such purpose which petition is not timely
controverted.
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) Days from the date of entry thereof, any order
approving any involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing to be
unstayed and in effect for any period of ninety (90) Days;
D. Any "Default" which is specifically designated as such under any
provision of this Agreement;
E. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement; and
F. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
SECTION 16.02 DEFINITION OF "EVENT OF DEFAULT"
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01A, B, and C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, be deemed an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by either party hereto under
Section 16.01E, such Default shall be deemed an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
Business Days after written notice from the non-defaulting party demanding such
cure.
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C. Upon the occurrence of any Default by either party hereto under Section
16.01D and F, such Default shall be deemed an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
Days after written notice from the non-defaulting party demanding such cure, or
if the Default is such that it cannot reasonably be cured within said thirty
(30) Day period, if the defaulting party fails to commence the cure of such
Default within said thirty (30) Day period or fails to diligently pursue such
efforts to completion.
D. Upon the occurrence of any Default by Operator with respect to its
obligations under Section 2.03A1 resulting in the suspension or revocation of a
material License, such Default shall be deemed an "Event of Default" under this
Agreement if Operator fails to obtain reinstatement of such License, either
(i) within sixty (60) Days after the date of the relevant suspension(s) or
revocation, or (ii) if Operator had received from the appropriate regulatory
authorities at least thirty (30) Days prior written notice of the impending
suspension or revocation, then within thirty (30) Days after the relevant
suspension or revocation.
SECTION 16.03 REMEDIES UPON AN EVENT OF DEFAULT
A. Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to pursue any one or more of the following courses of
action: (i) in the event of a material breach by the defaulting party of its
obligations under this Agreement, to terminate this Agreement by written notice
to the defaulting party, which Termination shall be effective as of the
effective date which is set forth in said notice, provided that said effective
date shall be at least thirty (30) Days after the date of said notice; provided
that, if the defaulting party is the employer of all or a substantial portion of
the employees at the Retirement Community, the foregoing period of thirty (30)
Days shall be extended to seventy five (75) Days (or such longer period of time
as may be necessary under applicable federal, state or local laws pertaining to
termination of employment); (ii) to institute forthwith any and all proceedings
permitted by law or at equity, including, without limitation, actions for
specific performance and/or damages; and (iii) to avail itself of any one or
more of the other remedies described in this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01E, the amount owed to the non-defaulting party shall accrue
interest, at the Prime Rate, from and after the date on which such payment was
originally due to the non-defaulting party.
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages) by reason of applicable provisions of law or
equity.
SECTION 16.04 OPERATOR'S RIGHT TO SPECIFIC PERFORMANCE FOR OWNER'S WRONGFUL
TERMINATION
Owner hereby acknowledges that (i) Operator has an interest in this
Agreement beyond the fees that Operator will earn pursuant to the provisions of
this Agreement, (ii) the termination
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of this Agreement by Owner when Owner is not entitled to terminate this
Agreement pursuant to the provisions of this Agreement will be injurious to
Operator's business conducted beyond Owner's Retirement Community, and will
damage Operator's Proprietary Marks, (iii) Operator's Proprietary Marks are
unique, Operator's exclusive rights of possession under Section 2.02B are
unique, the Retirement Community is unique and Operator is entitled to an
exclusive license to operate Operator's business at the Retirement Community and
to promote Operator's Proprietary Marks at the Retirement Community, which
license is irrevocable except pursuant to the express provisions of this
Agreement, (iv) it would be impossible to calculate the damages that Operator
would sustain if Owner terminated this Agreement when Owner is not entitled to
terminate this Agreement pursuant to the provisions of this Agreement, and
(v) the remedy of specific performance of Owner's obligations under this
Agreement is fair, equitable and practicable. Accordingly, Owner agrees that
(i) Owner shall not exercise any legal power that it may have to breach this
Agreement by terminating, or purporting to terminate, this Agreement, except
where this Agreement (including without limitation Sections 4.03, 4.04 and
Article 16) expressly permits such termination, and Owner hereby surrenders and
releases any such legal power, and (ii) Owner consents to the issuance by a
court of competent jurisdiction of injunctive relief prohibiting Owner from
terminating, or purporting to terminate, this Agreement or from evicting
Operator from the Retirement Community, except where this Agreement (including
without limitation Sections 4.03, 4.04 and Article 16) expressly permits such
termination, and Owner consents to the grant by a court of competent
jurisdiction of specific performance of the obligations of Owner under this
Agreement. Nothing set forth in this Section 16.04 modifies any right of Owner
to terminate this Agreement as expressly set forth in this Agreement (including
without limitation Sections 4.03, 4.04 and Article 16).
SECTION 16.05 OWNER'S ESTATE
Notwithstanding any other provisions of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Operator
shall look only to Owner's estate and interest in the Retirement Community
(which shall, for this purpose, include but not be limited to, (i) amounts
deposited in the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Operator's
right to look to Owner's estate and interests in the Retirement Community for
satisfaction of such a money judgment against Owner shall survive Termination
and shall not be affected by any one or more Sales of the Retirement Community.
Nothing contained in this Section 16.05 shall be deemed to affect or diminish
Operator's remedies under this Article 16 other than money damages against Owner
(including, without limitation, Termination of this Agreement).
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ARTICLE 17
ASSIGNMENT
SECTION 17.01 ASSIGNMENT
A. Operator shall not assign or transfer its interest in this Agreement
without the prior written consent of Owner, such consent to be granted or
withheld in Owner's sole discretion; provided, however, that Operator shall have
the right, without such consent, (but following written notice to Owner), to
(1) assign its interest in this Agreement to any of its Affiliates, and any such
Affiliate shall be deemed to be the Operator for the purposes of this Agreement,
and (2) sublease shops or grant licenses or concessions at the Retirement
Community so long as the terms of any such subleases, licenses or concessions do
not exceed the Term of this Agreement and are otherwise consistent with the
requirements of this Agreement. In the event of such an assignment by Operator
of its interest in this Agreement to an Affiliate, the Operator which is named
in the Preamble to this Agreement: (i) shall automatically be deemed to
guarantee the performance of such Affiliate under this Agreement; (ii) shall, at
the request of Owner, execute a guaranty, in form and substance reasonably
satisfactory to both parties, of the performance of such Affiliate under this
Agreement (provided that the failure of Owner to obtain an executed guaranty
pursuant to this clause (ii) shall not affect the validity or enforceability of
the guaranty which is automatically created pursuant to clause (i); and provided
further, that, when Owner does so receive an executed guaranty pursuant to this
clause (ii), such executed guaranty shall be deemed to have superseded the
guaranty described in clause (i) above); and (iii) shall make available to such
Affiliate, in connection with the performance by such Affiliate under this
Agreement, Operator's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement
other than (i) in connection with a Sale of the Retirement Community which
complies with the provisions of Article 18 hereof, or (ii) as set forth in
Section 17.01C.
C. Nothing contained herein shall prevent (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Article 6; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article 18 hereof shall, if applicable, be complied with, and
(y) if such transfer is by Operator, such transfer is being done as a part of a
merger or consolidation or a sale, disposition or other conveyance of all or
substantially all of the assets of Operator.
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement shall not relieve Owner from its obligations
under this Agreement which accrued prior to the date of such assignment, but
shall relieve Owner of such obligations accruing
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after such date, if the assignment complies with Section 17.01 and if Operator
has received an assumption agreement executed by the assignee (in form and
substance reasonably satisfactory to Operator) pursuant to which such assignee
assumes all obligations liabilities of Owner accruing under this Agreement from
and after the date of assignment. An assignment (either voluntarily or by
operation of law) by Operator of its interest in this Agreement shall not
relieve Operator from its obligations under this Agreement, unless Owner so
agrees in writing, such agreement to be granted or withheld in Owner's sole
discretion.
F. Subject to the provisions of this Article 17, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
ARTICLE 18
SALE OF THE RETIREMENT COMMUNITY
SECTION 18.01 SALE OF THE RETIREMENT COMMUNITY
A. Owner shall not enter into any Sale of the Retirement Community to any
individual or entity which: (i) does not, in Operator's reasonable judgment,
have sufficient financial resources and liquidity to fulfill Owner's obligations
under this Agreement; (ii) is known in the community as being of bad moral
character, or is in control of or controlled by any one or more persons who have
been convicted of a felony involving turpitude in any state or federal court, or
whose reputation would otherwise result in the cancellation of, or failure to
issue or renew, any License; (iii) is a competitor or significant potential
competitor of Operator (defined below); or (iv) does not accept the full
assignment of the Owner's Liabilities under this Agreement accruing from and
after the date of sale and recognize the continuing presence at, and operation
of, the Retirement Community by Operator pursuant to this Agreement. An
individual or entity shall not be deemed to be in the business of operating
retirement communities in competition with Operator solely by virtue of: (x) the
ownership of such retirement communities, either directly or indirectly through
subsidiaries, affiliates and partnerships; or (y) holding a mortgage or
mortgages secured by one or more retirement communities. Furthermore, the
phrase "a competitor or significant potential competitor of Operator" means any
individual or entity (either directly or through an Affiliate) which
(i) operates or manages (as distinguished from owning) a nursing home, assisted
living facility, home health care agency, retirement community or health care
facility, which, in the aggregate contain more than (a) 1,000 units or beds if
such sale occurs between the Effective Date and the first day of 2003, or
(b) 1,500 units or beds if such sale occurs during 2003 through 2007, or
(c) 2,000 units or beds if such sale occurs on or after January 1, 2008; and
(ii) has a net worth in excess of seventy million dollars ($70,000,000.00).
B. If at the time of a Sale of the Retirement Community, Operator has
certified to Owner that Owner has failed to pay a specific sum that is due and
payable by Owner hereunder, then net proceeds of the Sale, in an amount, as
available, equal to the sum owed shall be placed in escrow pending either
payment or resolution of the dispute. The insufficiency of the net
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proceeds to pay the full amount due and payable shall not affect Owner's right
to consummate such sale of the Retirement Community.
C. Notwithstanding the foregoing, if Owner or an Affiliate of Owner is a
corporation or other entity whose shares are listed on a public stock exchange,
and if a Sale of the Retirement Community occurs as a result of purchases of
such shares, through such public stock exchange, in sufficient quantities to
cause a transfer of the "controlling interest" in Owner (as described in the
definition of "Sale of the Retirement Community"), and if such Sale of the
Retirement Community is not in compliance with the provisions of this
Section 18.01A, Operator shall have the right, at its option, to terminate this
Agreement by written notice to Owner, but such non-compliance with Section
18.01A shall not be an Event of Default nor shall it subject Owner to claims for
damages by Operator pursuant to Article 16.
D. If Owner desires to enter into a Sale of the Retirement Community with
a third party, Owner shall give written notice thereof to Operator, stating the
name of the prospective purchaser. Such notice shall include appropriate
information relating to such prospective purchaser demonstrating compliance with
the provisions of Section 18.01A; if Operator reasonably requests additional
information, Owner shall promptly furnish such information to Operator. Within
thirty (30) Days after the date of receipt of Owner's written notice and such
other information, Operator shall elect, by written notice to Owner, one of the
following alternatives:
1. To consent to such Sale of the Retirement Community and to the
assignment of this Agreement to such purchaser, provided that concurrently with
the finalization thereof the purchaser shall, by appropriate instrument
reasonably satisfactory to Operator, assume all of Owner's obligations hereunder
accruing from and after the date of sale. An executed copy of such assumption
agreement shall be delivered to Operator.
2. If such Sale of the Retirement Community would not comply with the
provisions of Section 18.01A hereof, to terminate this Agreement by written
notice from Operator to Owner. Such notice will set an effective date for such
Termination not earlier than thirty (30) Days, nor more than one hundred twenty
(120) Days, following the date of the giving of such notice. Operator shall
have the right to change such effective date of Termination to coincide with the
date of the finalization of the proposed Sale of Retirement Community. At
Operator's election, said notice of Termination shall not be effective if such
Sale of the Retirement Community is not finalized. If such Termination by
Operator results from a Default by Owner under Section 18.01A, such Termination
shall not relieve Owner of liability to Operator for such Default.
E. If Operator shall fail to elect any of the above alternatives set forth
in Section 18.01D within said thirty (30) Day period, the same shall be
conclusively deemed to constitute an election and consent under Section 18.01D1,
and the provisions thereof shall prevail as if Operator had consented in writing
thereto. Any proposed Sale of the Retirement Community of which notice has been
given by Owner to Operator under Section 18.01D must be consummated within one
hundred eighty (180) Days following the giving of such notice, or such longer
period
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OPERATING AGREEMENT PAGE 64
as may be necessary so long as Owner is diligently working in good faith to
effectuate the Sale. Failing such consummation, such notice, and any response
thereto given by Operator, shall be null and void and all of the provisions of
Sections 18.01C and D must again be complied with before Owner shall have the
right to consummate a Sale of the Retirement Community upon the terms contained
in said notice, or otherwise.
F. In connection with the possibility of a Sale of the Retirement
Community achieved by means of a transfer of the controlling interest in Owner,
Owner, from time to time, upon written request of Operator, shall (unless Owner
is a publicly-traded entity registered under the Securities Act of 1934) furnish
Operator with a list of the names and addresses of the owners of the capital
stock (but only those owners which hold an ownership interest of thirty percent
(30%) or more), or the partnership interests (both the General Partner and any
limited partner holding an interest of thirty percent (30%) or more), or other
proprietary ownership interests in Owner. In connection with obtaining and
maintaining any material License, Owner shall provide such information regarding
its owners as may be required. Operator shall treat such information as
confidential pursuant to Section 19.04.
G. It is understood that no Sale of the Retirement Community (which is
otherwise in compliance with the provisions of this Article 18) shall reduce or
otherwise affect : (i) the current level of Working Capital; (ii) the current
amount deposited in the FF&E Reserve; or (iii) any of the operational bank
accounts maintained by Operator pursuant to this Agreement. If, in connection
with any Sale of the Retirement Community, the selling Owner intends to
withdraw, for its own use, any of the cash deposits described in the preceding
sentence, the selling Owner must obtain the contractual obligation of the buying
Owner to replenish those deposits (in the identical amounts) immediately upon
such withdrawal and the selling Owner shall not be entitled to withdraw any of
such deposits unless and until the buying Owner has replenished such deposits in
the amount withdrawn by the selling Owner. The obligations described in this
Section 18.01G shall survive such Sale of the Retirement Community and shall
survive Termination.
H. Operator shall have the right to terminate this Agreement, on thirty
(30) Days written notice, if title to or possession of the Retirement Community
is transferred either by Owner in breach of the provisions of Section 18.01A, or
by judicial or administrative process (including, without limitation, a
Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by
a court-appointed receiver) to an individual or entity which would not qualify
as a permitted transferee under clause (i), (ii) or (iii) of Section 18.01A,
regardless of whether or not such transfer is the voluntary action of the
transferring Owner, or whether (under applicable law) the Owner is in fact the
transferor; provided, however, that Operator shall not have the right to so
terminate this Agreement based on the assertion that a Holder fails to so
qualify as a permitted transferee under said clauses (i), (ii) or (iii) of
Section 18.01A.
I. In the event of any sale or transfer to an Affiliate of Owner, such
sale or transfer shall be subject to this Agreement and such Affiliate shall
assume all of the obligations of Owner under this Agreement.
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OPERATING AGREEMENT PAGE 65
SECTION 18.02 ASSUMPTION AGREEMENT OF SUCCESSOR OWNER
In the event of any Sale of the Retirement Community, the purchaser shall,
prior to finalization of such Sale of the Retirement Community, execute and
deliver to Operator a written instrument reasonably satisfactory to Operator
pursuant to which such purchaser assumes all of Owner's obligations hereunder
accruing from and after the date of sale. By accepting a deed conveying the
Retirement Community to any grantee thereunder, the grantee under such deed
shall be deemed to have assumed all obligations of Owner under this Agreement
accruing from and after the date of sale, whether or not such grantee executes
and delivers to Operator a written assumption agreement.
ARTICLE 19
MISCELLANEOUS
SECTION 19.01 RIGHT TO MAKE AGREEMENT
A. Each party warrants, with respect to itself, that to the best of its
knowledge, (i) neither the execution of this Agreement nor the finalization of
the transactions contemplated hereby shall violate any provision of law or
judgment, writ, injunction, order or decree of any court or governmental
authority having jurisdiction over it; (ii) result in or constitute a breach or
default under any indenture, contract, other commitment or restriction to which
it is a party or by which it is bound; or (iii) require any consent, vote or
approval which has not been taken, or at the time of the transaction involved
shall not have been given or taken. Each party covenants that it has and will
continue to have throughout the Term of this Agreement and any extensions
thereof, the full right to enter into this Agreement and perform its obligations
hereunder.
B. Each party agrees that it will, at its own expense, on or before the
Effective Date, provide: (i) certified copies of the applicable resolutions of
its board of directors (if it is a corporation), or written authorization by all
stockholders, or members (if it is a limited liability company) or written
authorization by all general partners (if it is a partnership) or other
appropriate documentation establishing its authority to execute this Agreement;
and (ii) such opinions of counsel (which may be provided by house counsel of
Operator or Marriott International, Inc. or Host Marriott Corporation) as the
other party shall reasonably request regarding the matters described in this
Section 19.01.
C. Each party (the "Indemnifying Party") hereby agrees to indemnify,
defend and hold harmless the other party from all expenses (including attorneys'
fees), losses, claims, and damages stemming from any action by any third party
alleging: (i) such a breach or default by the Indemnifying Party under any
indenture, contract, commitment or restriction; (ii) the failure of the
Indemnifying Party to obtain such consent, vote or approval; or (iii) that the
Indemnifying Party does not have the full right and authority to enter into this
Agreement and perform its obligations hereunder.
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OPERATING AGREEMENT PAGE 66
SECTION 19.02 CONSENTS
Wherever in this Agreement the consent or approval of Owner or Operator is
required, unless otherwise expressly provided, such consent or approval shall
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
Unless otherwise expressly provided, if either Owner or Operator fails to
respond within thirty (30) Days to a request by the other party for a consent or
approval, such consent or approval shall be deemed to have been given.
SECTION 19.03 RELATIONSHIP BETWEEN THE PARTIES
The relationship between Owner and Operator pursuant to this Agreement
shall be that of Owner with an independent contractor, provided, however, that
with respect to those specific and limited circumstances in which (i) Operator
is holding funds for the account of Owner, and (ii) Operator is required to act
as agent for Owner with respect to agreements with residents pursuant to
Licenses and/or Legal Requirements, the relationship between Owner and Operator
shall be that of principal and agent. Neither this Agreement nor any agreement
nor any agreements, instruments, documents or transactions contemplated hereby
shall in any respect be interpreted, deemed or construed as making Operator a
partner or joint venturer with Owner or as creating any similar relationship or
entity, and each party agrees that it will not make any contrary assertion,
contention, claim or counterclaim in any action, suit or other legal proceedings
involving the other.
SECTION 19.04 CONFIDENTIALITY
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential, each party will make every effort to ensure that the
information is not disclosed to any outside person or entities (including the
press) without the written consent of the other party, provided, that such
consent will not be required with respect to (i) legally required filing and
other disclosures mandated by Legal Requirements, (ii) in the case of Owner,
disclosure to any Holder, prospective Holder, investor, purchaser of the
Retirement Community or prospective purchaser of the Retirement Community, and
(iii) in the case of either party, disclosure to any rating agencies, lenders,
stock analysts, banks, accountants, and other like professionals.
SECTION 19.05 APPLICABLE LAW
This Agreement shall be construed under and shall be governed by the laws
of the State of Maryland.
SECTION 19.06 COVENANTS RUNNING WITH THE LAND; RECORDATION
The terms and provisions of this Agreement shall run with the land
described in Exhibit A, and with Owner's interest therein, and shall be binding
upon all successors to, and assignees or transferees of, such interest, provided
that no such successor, assignee or transferee shall have any liability for
obligations of Owner for the period preceding or following such successor's,
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OPERATING AGREEMENT PAGE 67
assignee's or transferee's ownership of the Retirement Community. Upon request
of either party, the parties shall execute an appropriate memorandum of this
Agreement in recordable form and the requesting party, at its sole cost and
expense, may cause the same to be recorded in the jurisdiction where the
Retirement Community is located. Immediately upon request of Owner following
any termination of this Agreement, Operator shall execute, acknowledge and
record such release or termination statement as may be required to release such
memorandum. In the event that Operator shall fail to so immediately execute,
acknowledge and record such release or termination statement, Operator hereby
appoints Owner as its attorney-in-fact to execute, acknowledge and record the
same, and all costs incurred by Owner in connection therewith (including
reasonable attorneys' fees) shall be reimbursed by Operator. Such power-of-
attorney shall be deemed coupled with an interest and irrevocable.
SECTION 19.07 HEADINGS
Headings of Articles and Sections are inserted only for convenience and in
no way limit the scope of the particular Articles or Sections to which they
refer.
SECTION 19.08 NOTICES
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing and delivered either by hand, a nationally
recognized overnight courier or sent by certified or registered mail, postage
prepaid, return receipt requested:
To Owner:
--------
Host Marriott Corporation
Asset Management Department
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: SLS Asset Manager
Department 908
Copy to:
-------
Host Marriott Corporation
Law Department - 923
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: General Counsel
To Operator:
------------
Marriott Senior Living Services, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: Chief Financial Officer
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OPERATING AGREEMENT PAGE 68
Copy to:
--------
Marriott International, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: General Counsel
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly given, as described
above, shall be deemed to have been received as of the date of delivery to the
addressee in the case of hand delivery, or, in all other cases, on the date when
the return receipt or courier service confirmation indicates delivery was made
to the addressee or acceptance of delivery was refused by the addressee.
SECTION 19.09 ENVIRONMENTAL MATTERS
A. Operator shall indemnify, defend and hold Owner and its Affiliates (and
their respective directors, officers, shareholders, employees and agents)
harmless from and against all loss, cost, liability and damage (including,
without limitation, engineers' and attorneys' fees and expenses, and the cost of
Litigation) arising from the placing, discharge, leakage, use and storage of
Hazardous Materials in violation of applicable Environmental Laws, on or in the
Retirement Community by Operator's employees, representatives or agents during
the Term of this Agreement. Operator shall only bring on the Land such
Hazardous Materials as are needed in the normal course of business of the
Retirement Community.
B. In the event of the discovery of Hazardous Materials on or in the
Retirement Community during the Term of this Agreement, Owner shall (except to
the extent such removal is Operator's responsibility pursuant to Section 19.09A)
promptly remove (if required by applicable Environmental Law) such Hazardous
Materials, together with all contaminated soil and containers, and shall
otherwise remedy the problem in accordance with all Environmental Laws. Owner
shall (except to the extent that the removal of such Hazardous Materials is
Operator's responsibility pursuant to Section 19.09A) indemnify, defend and hold
Operator and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, cost,
liability and damage (including, without limitation, engineers' and attorneys'
fees and expenses, and the cost of Litigation) arising from the presence of
Hazardous Materials on or in the Retirement Community.
C. All costs and expenses of the removal of Hazardous Materials from the
Retirement Community pursuant to Section 19.09B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Operator pursuant to the
indemnity set forth in the last sentence of Section 19.09B, shall be paid by
Owner from its own funds, not as an Operating Expense or from the FF&E Reserve,
shall be treated as an expenditure by Owner pursuant to Section 8.03, and shall
be counted in determining Owner's Additional Investment.
D. The term "Hazardous Materials" means and include any substance or
material containing one or more of any of the following: "hazardous material",
"hazardous waste", "hazardous substance", "regulated substance", "petroleum",
"pollutant", "contaminant", or "asbestos" as such terms are defined in any
applicable Environmental Law in such
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OPERATING AGREEMENT PAGE 69
concentration(s) or amount(s) as may impose clean-up, removal, monitoring or
other responsibility under any applicable Environmental Law, or which may
present a significant risk of harm to residents, invitees or employees of the
Retirement Community.
SECTION 19.10 ESTOPPEL CERTIFICATES
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) Days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (i) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (ii) stating whether or not to the best knowledge of the
certifying party: (x) there is a continuing Default by the non-certifying party
in the performance or observance of any covenant, agreement or condition
contained in this Agreement; or (y) there shall have occurred any event which,
with the giving of notice or passage of time or both, would become such a
Default, and, if so, specifying each such Default or occurrence of which the
certifying party may have knowledge; and (iii) stating such other information as
the non-certifying party may reasonably request. Such statement shall be
binding upon the certifying party and may be relied upon by the non-certifying
party and/or such third party specified by the non-certifying party as
aforesaid. The obligations set forth in this Section 19.10 shall survive
Termination (that is, each party shall, on request, within the time period
described above, execute and deliver to the non-certifying party and to any such
third party a statement certifying that this Agreement has been terminated).
SECTION 19.11 ARBITRATION
A. In the event of a dispute between Owner and Operator with respect to
any issue of fact specifically mentioned herein as a matter to be decided by
arbitration, such dispute shall be determined by arbitration as provided in this
Section 19.11.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Operator shall each appoint and pay all fees of a fit and
impartial person as arbitrator with at least ten (10) years' recent
professional experience in the general subject matter of the dispute. Notice of
such appointment shall be sent in writing by each party to the other, and the
arbitrators so appointed, in the event of their failure to agree within thirty
(30) Days after the appointment of the second arbitrator upon the matter so
submitted, shall appoint a third arbitrator. If either Owner or Operator shall
fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) Days
after written notice from the other party to make such appointment, then the
arbitrator appointed by the party having made such appointment shall appoint a
second arbitrator and the two so appointed shall, in the event of their failure
to agree upon any decision within thirty (30) Days thereafter, appoint a third
arbitrator. If such arbitrators fail to agree upon a third arbitrator within
forty five (45) Days after the appointment of the
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OPERATING AGREEMENT PAGE 70
second arbitrator, then such third arbitrator shall be appointed by the American
Arbitration Association from its qualified panel of arbitrators, and shall be a
person having at least ten (10) years' recent professional experience as to the
subject matter in question. The fees of the third arbitrator and the expenses
incident to the proceedings shall be borne equally between Owner and Operator,
unless the arbitrators decide otherwise. The fees of respective counsel engaged
by the parties, and the fees of expert witnesses and other witnesses called for
the parties, shall be paid by the respective party engaging such counsel or
calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
Days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Operator. A judgment of a court of competent jurisdiction may be entered
upon the award of the arbitrators in accordance with the rules and statutes
applicable thereto then obtaining.
SECTION 19.12 AFFILIATES
Except as otherwise specifically set forth in this Agreement, Operator
shall be entitled to contract with one or more of its Affiliates to provide
goods and/or services to the Retirement Community only if the prices and/or fees
paid to any such Affiliate are competitive with the prices and/or fees then
currently being paid to reputable and qualified parties which are not Affiliates
of Operator. In determining, pursuant to the foregoing sentence, whether such
prices and/or fees are competitive, the goods and/or services which are being
purchased shall be grouped in reasonable categories, rather than being compared
item by item.
SECTION 19.13 EQUITY AND DEBT OFFERINGS
No reference to Operator or to any of its Affiliates will be made in any
prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors or lenders in the Retirement Community, unless
Operator has previously received a copy of all such references. However,
regardless of whether Operator does or does not so receive a copy of all such
references, neither Operator nor any of its Affiliates will be deemed a sponsor
of the offering described in any such Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Operator agrees in advance, the Prospectus will not include: (i) any
Proprietary Marks (provided that the Prospectus may identify the name of the
Retirement Community even if such name is a Proprietary ▇▇▇▇); or (ii) except as
required by applicable securities laws, the text of this Agreement. Owner shall
be entitled, however, to include in such Prospectus an accurate summary of this
Agreement. If there are no Legal Requirements pursuant to which such
information must be publicly disclosed, appropriate measures shall be taken to
ensure that entities or individuals receiving such Prospectus shall acknowledge
the confidentiality of such information. Owner shall indemnify, defend and hold
Operator and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, costs,
liability and damage (including attorneys' fees and expenses, and the cost of
Litigation) arising out of any Prospectus or the offering described therein.
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OPERATING AGREEMENT PAGE 71
SECTION 19.14 RESTRICTION ON OPERATOR
A. Subject to the other provisions of this Section 19.14, Operator and its
Affiliates shall not be prohibited or restricted from developing, owning,
operating, leasing, managing, financing, or franchising other retirement
communities or businesses.
B. During the first seven (7) Agreement Years neither Operator nor any of
its Affiliates shall (directly or indirectly) construct, own, operate, manage,
lease, finance, or franchise (or participate in any of the foregoing activities)
a Similar Property in either Area A or Area B, except that;
1. Operator or any Affiliate may so own, operate, manage, lease, or
franchise a Similar Property in Area B (but not Area A) if such Similar Property
was in operation on the Effective Date and the average total occupancy at the
Retirement Community has been at least ninety-three percent (93%) for the six
(6) months immediately preceding any notice (identifying the subject site) from
Operator to Owner that it intends to proceed with an activity permitted by this
subparagraph 1, which notice shall be given at least thirty (30) Days prior to
the date on which Operator intends to proceed (the "B1 Notice"), provided,
however, that, if Operator does not execute a binding contract to purchase,
operate, manage, lease or franchise such a Similar Property within twelve (12)
months after giving a B1 Notice, then a new such B1 Notice will be required
before Operator can proceed with any further activities pursuant to this
subparagraph 1, and
2. At any time following one (1) year after the last to occur of
(i) the first Agreement Year, or (ii) completion of all Expansion Units
undertaken at the Retirement Community, Operator or any Affiliate may construct,
own, operate, manage, lease, or franchise a Similar Property within Area B (but
not Area A) if the average total occupancy at the Retirement Community has been
at least ninety-three percent (93%) during the six (6) months immediately
preceding any notice (identifying the subject site) from Operator to Owner that
it intends to proceed with an activity permitted by this subparagraph 2, which
notice shall be given at least thirty (30) Days prior to the date on which
Operator intends to proceed (the "B2 Notice"), provided, however, that, if,
after giving a B2 Notice, Operator should either fail to proceed or, having
initiated action to proceed, should cease such actions -- in either case for a
period of ninety (90) Days or more, then a new B2 Notice will be required before
Operator can either continue the original action or proceed with any new actions
pursuant to this subparagraph 2. Notwithstanding the foregoing, if Operator
elects not to undertake the completion of substantially all of the Expansion
Units by either providing written notice to Owner of its election or by
operation of the expiration of the Option set forth in the Expansion Agreement
and Owner elects to undertake the Expansion Units within nine (9) months of such
notice or expiration, Operator or an Affiliate shall not construct, own,
operate, manage, lease or franchise a Similar Property within Area B until the
occurrence of: (i) the second anniversary of the earlier to occur of (x) the
Option set forth in the Expansion Agreement has expired and, (y) delivery of
notice to Owner that Operator elects not to undertake the completion of the
Expansion Units; and (ii) the occupancy test set forth in the immediate
preceding sentence has been met.
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OPERATING AGREEMENT PAGE 72
For purposes of this Section 19.14B, the words and phrases
..."proceed", "proceed with actions", "actions", and "activities", refer, in the
broadest r easonable sense, to all customary and usual actions, plans,
investigations, preparations, negotiations, studies, and the like in connection
with the planning for, designing of, financing (both debt and equity) of, site
acquisition for, construction of, land use approvals for, all permitting and
approval processes for, and all other related activities with respect to the
development of (by the way of purchase, lease, franchise, operation or
management) such a Similar Property.
C. The restrictions set forth in Section 19.14B shall not apply to any
construction, ownership, operation, management, leasing or franchising by
Operator or its Affiliates of a Similar Property, if Operator's involvement with
such Similar Property resulted from a chain acquisition, that is, the
acquisition (whether by stock or asset purchase of either real property
interests or contract rights) by Operator or an Affiliate of five (5) or more
communities or facilities in a single transaction. However, if (i) any such
acquisition results in more than twelve (12) Similar Properties located in
either this or other Areas A as designated in this Agreement and similar
operating agreements between Operator and Host Marriott Corporation or one or
more of its Affiliates, in the aggregate, or (ii) more than one such Similar
Property is located in any one such Area A; then Operator (or its Affiliate as
needs be), at Owner's request, will, within two (2) years of the date of such
chain acquisition, divest itself of the ownership, operation, development,
leasing, franchising, and/or management of all such Similar Properties (with
Operator choosing which particular Similar Properties are to be disposed of) in
excess of the twelve (12) facility limitation specified in clause (i)
immediately above, and/or the one facility limitation specified in clause (ii)
immediately above.
D. For the purposes of this Section 19.14, Area A shall include all of the
real property located within a two and one-half (2.5) mile radius of the
Retirement Community; and Area B shall include all of the real property located
beyond a two and one-half (2.5) mile radius, but within a five (5) mile radius
of the Retirement Community. In each case the radius shall be measured from the
main entrance of the Retirement Community. A Similar Property shall be deemed
to be within either Area A or B if more than twenty (20) percent of the square
feet of land area of the real estate parcel on which it is located lies within
either Area A or B. If a Similar Property falls within both Areas, it shall be
considered to be within Area A.
E. The parties agree that the period of restriction and the geographical
area of restriction imposed upon MSLS in this Section 19.14 are fair and
reasonable and are reasonably required for the protection of Owner. If the
provisions of this Section 19.14 relating to the area of restriction or the
period of restriction shall be deemed to exceed the maximum areas or period
which a court having jurisdiction over the matter would deem enforceable, such
area or period shall, for purposes of this Agreement, be deemed to be the
maximum area or period which such court would deem valid and enforceable.
F. The parties agree that irreparable damage would occur in the event any
of the provisions of this Section 19.14 were not to be performed in accordance
with the terms hereof, and that their remedy at law for any breach of the other
party's obligations hereunder would be
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OPERATING AGREEMENT PAGE 73
inadequate. The parties agree and consent that, in addition to any other rights
or remedies that may be available at law or in equity, temporary and permanent
injunctive relief may be granted in any proceeding which may be brought to
enforce this Section 19.14 without the necessity of proof of actual damage.
SECTION 19.15 ENTIRE AGREEMENT
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior understandings and writings and may be
changed only by a writing signed by both parties hereto.
SECTION 19.16 WAIVER
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
SECTION 19.17 PARTIAL INVALIDITY
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Operator or Owner, or constitute a substantial deviation from the
general intent and purpose of said parties as reflected in this Agreement.
SECTION 19.18 CONSTRUCTION
No provisions of this Agreement shall be construed in favor of, or against,
any particular party by reason of any presumption with respect to the drafting
of this Agreement; both parties, being represented by counsel, having fully
participated in the negotiation of this instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date.
ATTEST: OWNER:
_______________________________________
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its:___________________________________
ATTEST: OPERATOR:
MARRIOTT SENIOR LIVING SERVICES, INC.
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its: Vice President
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OPERATING AGREEMENT PAGE 75
JOINDER OF PARTY
For the purpose of inducing Owner to enter into this Agreement, Marriott
International, Inc. for itself and its Affiliates, hereby agrees to be directly
bound, as a party, to the provisions of Section 19.14 of the above Agreement,
but not to any of the other terms and conditions of the Agreement.
IN WITNESS WHEREOF, Marriott International, Inc. has executed this JOINDER
OF PARTY as of the Effective Date.
ATTEST: MARRIOTT INTERNATIONAL, INC.
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its: Vice President
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OPERATING AGREEMENT PAGE 76
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
EXHIBIT B
EXISTING TITLE ENCUMBRANCES
EXHIBIT C
PRO FORMA FEES
EXHIBIT D
OWNER'S INITIAL COST AND
SECURED LOAN BALANCE