Exhibit g.2
[CONNING ASSET MANAGEMENT LOGO]
FORM OF ASSET MANAGEMENT AGREEMENT
This ASSET MANAGEMENT AGREEMENT (the "Agreement"), dated ________, 2005 by
and between Madison Harbor Capital, LLC, a company domiciled in the State of New
York, (the "Company") and Conning Asset Management Company, a Missouri
Corporation ("Conning").
WHEREAS, the Company is the investment adviser to Madison Harbor Balanced
Strategies, Inc. (the "Fund"), a real estate private equity fund of funds
registered with the SEC as a closed-end non-diversified management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, Conning has expertise and experience in providing investment
advice, portfolio management, and investment accounting and reporting services
and the Company wishes to engage Conning to provide such services as specified
in this Agreement;
WHEREAS, the Company and the Fund have entered into an agreement
("Investment Advisory Agreement") whereby the Company provides investment
advisory services to the Fund;
WHEREAS, the Company has the authority under the Investment Advisory
Agreement to retain one or more sub-advisers to assist the Company in providing
investment advisory services to the Fund;
WHEREAS, the Board of Directors of the Fund and the Company desire that the
Company retain Conning to render investment advisory and other services with
respect to that portion of the Fun as the Company shall from time to time
allocate to Conning (the "Managed Portion") in the manner, for the period, and
on the terms hereinafter set forth;
NOW THEREFORE, in consideration of the premises and of the mutual
agreements and covenants contained in this Agreement, the receipt and
sufficiency of which are acknowledged, the Company and Conning hereby agree as
follows:
1. APPOINTMENT. Effective __________, 2005 (the "Effective Date"), the Company
appoints Conning as the Company's sub-adviser to invest and reinvest the
Assets (as defined in Paragraph 2) of the Managed Portion and to perform
portfolio management services in accordance with the Fund's investment
objectives, policies and restrictions as provided in the Fund's Private
Placement Memorandum contained in the Form N-2 (registration statement) of
the Fund on file with the SEC, as currently in effect and as amended or
supplemented from time to time (the "Private Placement Memorandum"), and
such other limitations as imposed in the investment guidelines set forth in
SCHEDULE 1 (the "Investment Guidelines"), subject always to the supervision
and control of the Company and the Fund's Board of Directors, and, as well
as, to perform investment advisory, and investment accounting and reporting
services. Without limiting the generality of the foregoing, the Company
authorizes Conning on behalf of the Fund to purchase, sell, exchange,
convert, surrender for redemption, and otherwise trade securities
(including swaps, options, futures contracts and other financial
instruments) in the Fund's name and, in connection therewith, to sign any
subscription agreements, financial instruments, or other documents and vote
any proxies on behalf of the Fund and to issue instructions to the
Custodians (as defined in Paragraph 3). The Company and Conning agree that
the formal measurement of Conning's investment performance relating to the
provision of its investment advisory and portfolio management services
shall be effective ______________, 2005. The Investment Guidelines may be
modified from time to time in accordance with Paragraph 16 (Amendment) of
this Agreement; provided that, any such modification shall be: (i)
effective no earlier than fifteen (15) days after the Company receives a
written acknowledgement from Conning confirming Conning's receipt of the
modified Investment Guidelines; and (ii) consistent with the Fund's
investment objectives, policies and restrictions as provided in the Private
Placement Memorandum.
2. INVESTMENT ACCOUNT(S). The "Investment Account(s)" shall mean one or more
accounts established by the Fund with the Custodian(s) to hold all Assets
of the Managed Portion, including all changes in such account(s) that
result from purchases, sales, and other transactions effected by Conning in
accordance with this Agreement. "Assets" shall mean all of the Fund's cash,
cash equivalents, securities, investments, and other property, as well as
accretions of any sort, including dividends, interest, , accrued income,
stock splits, and realized capital appreciation. The Fund shall be
responsible for all fees and other costs associated with the establishment
and maintenance of the Account(s).
3. CUSTODY OF ASSETS. The Fund will select and engage at its expense an
independent bank, trust company or other person eligible to serve as a
custodian of an investment company under the 1940 Act (each a "Custodian")
to serve as Custodian of the Fund. The Company shall provide Conning, in
writing, the identity of each Custodian, any change in a Custodian and all
other information regarding the Custodian(s) required for Conning to carry
out its duties under this Agreement. The Company shall notify each
Custodian of the appointment of Conning and of the authority of Conning to
effect investments with respect to the Assets of the Fund. All transactions
authorized by this Agreement shall be made by payment to or delivery by the
Custodian(s). Conning shall not act as Custodian or at any time have actual
possession of any Assets of the Fund. The Company authorizes Conning to
enter into an agreement with each Custodian to use the Depository Trust
Company's Institutional Delivery System for trade confirmation and
settlement.
4. DUTIES OF CONNING AND THE COMPANY.
a) Conning shall manage the Investment Account(s) in accordance with the
Investment Guidelines and consistent with the Fund's investment
objectives, policies and restrictions as provided in the Private
Placement Memorandum, and shall perform and provide such other
investment advisory and investment accounting and reporting services
to the Company as may be reasonably requested by the Company and
agreed to by Conning.
b) Conning shall provide, or cause to be provided, to the Company the
reports set forth on SCHEDULE 2.
c) Conning shall execute and issue to brokers of its choice instructions
or authorizations to purchase, sell, exchange, convert, surrender for
redemption, or otherwise trade in and deal with securities of the
Fund. Conning may place brokerage with broker-dealers that provide
services beneficial to the Fund or to other accounts managed by
Conning and whose commissions include a reasonable charge for such
services. Conning shall confirm or cause to be confirmed in writing to
the Company each security transaction executed for the Fund. Conning
will place all necessary orders with brokers, dealers, or issuers, and
will negotiate brokerage commissions, if applicable. Conning is
directed at all times to seek to execute transactions for the Managed
Portion (i) in accordance with any written policies, practices or
procedures that may be established by the Fund's Board of Directors or
the Company from time to time and (ii) as described in the Fund's
Private Placement Memorandum. In placing any orders for the purchase
or sale of investments for the Fund, with respect to the Managed
Portion, Conning shall use its best efforts to obtain for the Managed
Portion "best execution," considering all of the circumstances, and
shall maintain records adequate to demonstrate compliance with this
requirement.
d) The Company and Fund shall own, have custody of and maintain their
general corporate accounts and records. At reasonable times and upon
reasonable notice, the Company shall provide Conning, and shall cause
each Custodian to provide Conning, with access to all books, records,
accounts, facilities, and personnel necessary or appropriate for the
performance of Conning's obligations under this Agreement.
e) At reasonable times and upon reasonable notice, Conning shall provide
access to all books, records, accounts, facilities, and personnel that
relate specifically to the performance of its obligations to the
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Company and Fund under this Agreement and to the internal and
independent auditors and regulators of the Company and Fund.
f) The Company shall promptly notify Conning, in writing, of any change
in the Investment Guidelines that is necessary for any reason,
including but not limited to a change by the Company or in any
applicable law or regulation.
g) Conning will provide information as reasonably requested by the
Company or the Fund's Board of Directors to assist them or their
delegate in the determination of the fair value of certain portfolio
securities when market quotations are not readily available for the
purpose of calculating the Fund's net asset value in accordance with
procedures and methods established by the Board of Directors.
h) Conning will provide performance and other information as reasonably
requested by the Company or the Fund's Board of Directors to assist
them or their delegate in conducting ongoing due diligence and
performance monitoring.
i) Conning shall maintain all accounts, books, and records with respect
to the Managed Portion as are required of an investment adviser of a
registered investment company pursuant to the 1940 Act and the
Investment Advisers Act of 1940 (the "Advisers Act"), and the rules
thereunder. Conning shall furnish to the Company copies of all such
accounts, books, and records as the Company may reasonably request.
Conning agrees that such accounts, books, and records are the property
of the Fund, and will be surrendered to the Fund promptly upon
request, with the understanding that Conning may retain its own copy
of all records.
j) In furnishing services hereunder, Conning shall be subject to, and
shall perform in accordance with, the following: (i) the Fund's
Amended and Restated Certificate of Incorporation, as the same may be
hereafter modified, amended, and/or supplemented from time to time;
(ii) the Fund's By-Laws, as the same may be hereafter modified,
amended, and/or supplemented from time to time; (iii) the Fund's
Private Placement Memorandum; (iv) the 1940 Act and the Advisers Act
and the rules under each and all other federal and state securities
laws or regulations applicable to the Trust and the Fund; (v) the
Trust's compliance procedures and other policies and procedures
adopted from time to time by the Fund's Board of Directors; and (vi)
the written instructions of the Company. The Company agrees to provide
Conning with current copies of the Fund's documents mentioned above
and all changes made to such documents.
5. FEES.
a) The Company shall pay Conning an annual fee, as provided in SCHEDULE
3, on the Assets of the Managed Portion for which Conning is providing
investment advisory, portfolio management and investment accounting
and reporting services. The fees payable to Conning shall be
calculated commencing the Effective Date based on the Net Asset Value
(as defined herein) of the Assets in the Managed Portion for each
calendar quarter, as determined in a manner that complies with
applicable provisions of, and rules under, the 1940 Act. All fees will
be payable quarterly in arrears within thirty (30) days after the date
of Conning's invoice. Any fee payable for less or more than a full
calendar quarter shall be pro-rated. Upon any termination of this
Agreement other than at the end of a calendar quarter, the fee shall
be calculated as of the termination date.
b) The "Net Asset Value" of the Assets in the Managed Portion shall be
determined in the manner set forth in "Net Asset Value" section of the
Private Placement Memorandum contained in the Form N-2 (registration
statement) of the Fund on file with the SEC, as currently in effect
and as amended or supplemented from time to time.
c) The Company is responsible for out-of-pocket expenses directly related
to the provision of services by Conning under this Agreement,
including, without limitation, any custodial expenses, brokerage fees
and commissions, interest on borrowings, if any, taxes, and fees which
are directly related to the
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NAIC asset valuation system ("SVO") including its annual licensing fee
payable by the Company. Any such reimbursable expenses shall be
included in the quarterly or final invoice prepared by Conning and
shall be payable within thirty (30) days after the date of such
invoice.
d) Unless specifically provided for in this Agreement, neither Conning
nor any of its officers, affiliates, or employees shall act as
principal, broker/dealer or receive any compensation from the Company
in connection with the purchase or sale of investments for the
Investment Account(s).
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS.
a) The Company represents, warrants, and covenants to Conning that, as of
the Effective Date and throughout the term of this Agreement:
i) The appointment of Conning as the Fund's sub-adviser has been
duly and properly authorized by the Company in accordance with
its charter, by-laws and other applicable documents ("Corporate
Documents") and the Investment Guidelines are in compliance with
such Corporate Documents and with all legal and regulatory
restrictions applicable to the Company;
ii) this Agreement constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its
terms, except to the extent such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, or similar
laws affecting the rights of creditors generally and by general
equity principles;
iii) the Fund has legal title to the Assets in the Investment
Account(s) and no restrictions exist as to the ownership or
transfer of such Assets unless specifically set forth in this
Agreement; and
iv) the Assets are not subject to regulation under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), nor
do any Assets constitute "plan assets" as defined under ERISA.
b) Conning represents, warrants, and covenants to the Company that:
i) It is, and will remain during the term of this Agreement, a
registered investment adviser under Advisers Act;
ii) this Agreement constitutes a valid and binding obligation of
Conning, enforceable against Conning in accordance with its
terms, except to the extent such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, or similar
laws affecting the rights of creditors generally and by general
equity principles;
iii) it currently has, and agrees that it will maintain, the skilled
personnel, computer hardware and software, and other facilities
necessary to prepare the reports and perform the services
required by this Agreement; and
iv) it has compliance policies and procedures (including a Code of
Ethics) and a chief compliance officer as required by Rule 38a-1
under the 1940 Act ("Rule 38a-1") and Rule 206(4)-7 under the
Advisers Act, and it will provide the Company and Fund with
sufficient materials and information so that (i) the Board of
Directors of the Fund may make a finding by the board that
Conning's policies and procedures are reasonably designed to
prevent violation of the "federal securities laws" (as defined in
Rule 38a-1) by Conning; and (ii) the Fund's Chief Compliance
Officer can fulfill his or her duties with respect to reporting
on the compliance policies and procedures of Conning in
connection with the annual report the Chief Compliance Officer is
required to submit under Rule 38a-1.
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7. TERM AND TERMINATION.
a) This agreement shall commence as of the Efffective Date as set forth
in Paragraph 1, provided, however, that this Agreement shall not
become effective with respect to the Fund unless it has first been
approved in the manner required by the 1940 Act and the rules
thereunder. This Agreement may be renewed thereafter only so long as
such renewal and continuance is specifically approved by those
Directors of the Fund who are not parties hereto or "interested
persons" of the Fund, or any party hereto, cast in person at a meeting
called for the purpose of voting on such approval.
b) This Agreement may be terminated by the Company or the Fund at any
time, without the payment of a penalty, on sixty (60) days' written
notice to the Company and the Fund of its intention to do so. Upon
termination of this Agreement, the obligations of all the parties
hereunder shall cease and terminate as of the date of such
termination, except for (i) any obligation to respond for a breach of
this Agreement committed prior to such termination, (ii) the
obligation of the Company to pay to Conning the fee provided in
Section 5 hereof, prorated to the date of termination, and (iii) any
indemnification obligation provided in Section 12. This Agreement
shall automatically terminate upon the termination of the Investment
Advisory Agreement between the Company and the Fund.
c) In the event of termination of this Agreement, this Agreement, except
for Paragraph 5 (Fees), Paragraph 9 (Confidentiality), Paragraph 11
(Limitation of Liability), Paragraph 12 (Indemnification), and this
Paragraph 7 (Term and Termination), shall immediately become void and
have no further force or effect. Paragraph 9 (Confidentiality) shall
survive for a one year period following termination date.
d) Upon termination of this Agreement and up on specific written request,
Conning shall within twenty (20) Business Days return to the Company
all books and records of the Company, and all other information
relating to the Investment Account(s) then in the possession of
Conning, except for any software or other intellectual property that
is proprietary to, or owned or licensed by, Conning or any of its
affiliates, which shall remain the property of Conning and except for
any record or document that Conning is required to keep under the
recordkeeping requirements of the Advisers Act or the 1940 Act.
8. NON-EXCLUSIVITY; POTENTIAL CONFLICTS OF INTEREST.
a) Conning and its officers and employees may act and continue to act as
investment managers for others. As such, the Company understands that
Conning will not devote its full time to the management of any one
account. Nothing in this Agreement shall in any way be deemed to
restrict Conning's right to perform investment management or other
services for any other person or entity, and the performance of any
such services shall not be deemed to violate or give rise to any duty
or obligation to the Company not specifically undertaken by Conning
under this Agreement.
b) The Company recognizes that there are certain inherent and potential
conflicts of interest that may arise in Conning's management of the
Investment Account(s) and its investment advisory activities on behalf
of other clients with the same or different investment objectives
(some of which are affiliates of Conning), including the allocation of
investment opportunities among accounts and the acquisition and
disposition of a particular investment on behalf of different
accounts.
9. CONFIDENTIALITY. From time to time in the course of the performance of this
Agreement, the Company and Conning will be providing each other with
certain financial, strategic and other information. Except as required by
law and except as otherwise permitted by this Agreement, all such
information of a non-public nature including, but not limited to, this
Agreement that is obtained by one party pursuant to this Agreement shall be
held in confidence by such party and may not be disclosed to any other
person without the prior written consent of the other party; provided, that
Conning may disclose information it receives from or on behalf of the
Company to officers and employees of Conning in the course of providing the
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investment management and accounting services to the Company under this
Agreement and Conning may publicly disclose the fact that the Company is a
client of Conning.
10. RELIANCE ON INFORMATION. Conning shall be entitled to rely, without
independent verification, on the accuracy and completeness of all
information obtained by Conning from the Company and from third parties
reasonably believed by Conning to be reliable.
11. LIMITATION OF LIABILITY.
a) Conning shall be liable to and indemnify the Company and the Fund to
the extent any loss, liability, or damage results from the gross
negligence or bad faith of Conning, or the reckless disregard by
Conning of its obligations and duties under this Agreement.
b) Absent any fault on its part, as described in sub-paragraph (a),
Conning shall not be liable for any loss, liability, or damage
incurred by the Company or the Fund as a result of any investment
decision, recommendation, or other action taken or omitted in what
Conning, in good faith, believes to be the proper performance of its
duties under this Agreement. Conning does not guarantee the future
performance of the Investment Accounts or any specific level of
performance, the success of any investment decision or strategy that
Conning may use, or the success of Conning's overall management of the
Assets. The Company understands that investment decisions made for the
Investment Accounts by Conning are subject to various market,
currency, economic, political and business risks, and that those
investment decisions will not always be profitable. Conning will
manage only the securities, cash, and other investments held in the
Investment Accounts.
c) Additionally, Conning shall not be liable for any liability, loss, or
damage resulting from: (i) the willful misconduct, negligence, or bad
faith of any independent representative, consultant, independent
contractor, broker, agent, or other person who is selected, engaged or
retained by Conning on behalf of the Company in connection with the
performance of non-investment advisory services under this Agreement,
unless such person was selected, engaged, or retained by Conning in a
grossly negligent manner or such person is an employee of, or
otherwise affiliated with, Conning; (ii) any act or failure to act by
any Custodian; (iii) any investment made by Conning consistent with
the Investment Guidelines in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard by Conning when making
the investment; or (iv) the reliance by Conning on information as
provided in Paragraph 10 (Reliance on Information).
The federal and state securities laws impose liabilities under certain
circumstances on persons who act in good faith, and therefore nothing in this
Agreement will waive or limit any rights that the Company may have under those
laws.
12. INDEMNIFICATION. In the event the Company seeks indemnification for a claim
alleged by a person who is not a party to this Agreement (a "Third Party
Claim"), the Company shall, as a condition to receiving any indemnification
pursuant to Paragraph 11(a), give prompt written notice of such Third Party
Claim to Conning. Conning shall have the right to elect to investigate,
negotiate, settle, and defend such third party claim and, if such election
is made, the Company shall have the right, at its own expense, to
participate in the defense of such Third Party Claim through counsel of its
own choosing. Conning shall not be required to indemnify the Company with
respect to any settlement of a Third Party Claim that Conning has not
approved in writing in advance, provided that such approval is not
unreasonably withheld.
13. INDEPENDENT CONTRACTOR. The relation of Conning to the Company is, and
shall remain during the term of this Agreement, that of an Independent
Contractor. Conning and the Company are not partners or joint venturers
with each other under this Agreement, and nothing in this Agreement shall
be construed so as to make them partners or joint venturers, or to impose
any liability as such on either of them.
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14. NOTICES. All notices and other communications required or permitted to be
given pursuant to this Agreement shall be in writing and shall be
considered as properly given or made if (i) sent by overnight delivery by a
nationally recognized air courier service, or (ii) mailed by registered or
certified mail, return receipt requested, and if addressed to the
respective address listed below:
A. If to the Company, to: Madison Harbor Capital, LLC
The Chrysler Building, 49th Floor
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. Maine
Managing Partner
B. If to Conning, to: Conning Asset Management Company
City Place II, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Vice President and General Counsel
All notices will be deemed effective upon receipt. Any party may change its
address for the receipt of notices by providing notice, in the manner
provided in this Paragraph 15, to each other party.
15. AMENDMENT. No amendment will be effective unless: (i) first reviewed by
Conning's legal department and in writing and signed by each of the parties
and no waiver of compliance with any provision or condition, and (ii)
approved in the manner required by the 1940 Act and the rules thereunder or
in accordance with exemptive or other relief granted by the SEC or its
staff. No consent provided for in this Agreement shall be effective unless
in a writing duly executed by the party sought to be charged with such
waiver or consent.
16. ASSIGNMENT. This Agreement shall automatically terminate in the event of
its assignment.
17. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with the laws of the State of New York, without reference to the choice of
law rules thereof. In the event of any conflicts between a provision of
this Agreement and the 1940 Act or Advisers Act, or any rules thereunder,
the 1940 Act of Advisers Act provision or rule shall prevail and govern.
18. SEVERABILITY. In the event that any provision or condition in this
Agreement shall be invalid, illegal, or unenforceable under applicable law
of mandatory application, the validity, legality, and enforceability of
that provision or condition in other instances and of the remaining
provisions and conditions shall not in any way be affected thereby.
19. HEADINGS. Section headings are for convenience of reference only and shall
not affect the construction of this Agreement.
20. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which when executed shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
21. FORCE MAJEURE. Each party shall not be considered to be in default in the
performance of its obligations under this Agreement, to the extent that the
performance of any such obligations is prevented or delayed by any cause
which is beyond the reasonable control of such party. Each party shall have
adopted a business continuity or disaster recovery plan, the primary
purpose of which is to establish procedures to
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deal with an event that causes, or has the potential to cause, significant
disruption to the party's normal operations and enable the party to
continue to perform critical operations and to return to a normal state of
affairs as quickly as possible.
22. ACKNOWLEDGMENT OF DISCLOSURE. The Company acknowledges receipt of Conning's
Form ADV, Part II at least 48 hours prior to signing this Agreement.
23. PROXY VOTING. Conning shall have no responsibilities with regard to voting
proxies for the Fund's securities, except that it shall forward to the
Company all materials it receives relating to corporate actions of issuers
of securities in the Fund's investment portfolio.
24. PRIOR AGREEMENTS. THIS AGREEMENT CONSTITUTES THE ENTIRE UNDERSTANDING AND
AGREEMENT, AND SUPERSEDES ANY AND ALL OTHER PROPOSALS, UNDERSTANDINGS, AND
AGREEMENTS BETWEEN THE COMPANY AND CONNING WITH RESPECT TO THE SUBJECT
MATTER HEREOF.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement by their duly authorized officers effective as of the date first above
written.
MADISON HARBOR CAPITAL, LLC
BY
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NAME ▇▇▇▇▇▇▇ ▇. Maine
TITLE Managing Partner
CONNING ASSET MANAGEMENT COMPANY
BY
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NAME ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
TITLE President and Chief Executive Officer
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SCHEDULE 1
Attached To and Forming a Part of the
Asset Management Agreement
Dated This ___ Day of _________, 2005
Between
Madison Harbor Capital, LLC
and
Conning Asset Management Company
This Schedule forms an integral part of this Agreement and may be modified from
time to time in accordance with Paragraph 1 herein.
INVESTMENT GUIDELINES
INCOME TESTS:
- The 75% INCOME TEST states that 75% of income has to come from "real
estate". Real estate income means:
1. Rents from real property
2. Interest on obligations secured by mortgages on real property
a. Excluding mineral, oil or gas royalty interests
b. REMIC of FASIT assets work so long as 95% or more of those
assets are "real estate"
3. Dividends from REIT common or preferred shares
4. Income from interests in a pool of mortgages evidenced by the
ownership of pass-through certificates
- Further, for a one-year period from the time that a REIT receives
capital from an equity or debt financing (with a maturity of 5 years or
more), the income generated from the investment in stock (of any nature,
i.e., does not have to be invested in a REIT) or debt securities (of any
nature, i.e., does not have to be collateralized by real estate) will be
considered qualifying income under the 75% income test and such assets
will be included in determining whether the 75% asset test has been
satisfied.
- The 95% INCOME TEST, states that of the gross income during the year,
95% must be derived from the same items of income that qualify for the
75% test or from dividends or income from any source. Thus, the 95% test
requires income to be derived from sources which, while passive, have
less of a connection with real estate activities than those sources
mandated for the 75% test. Income which qualifies for the 95% but not
the 75% income test, such as dividends and interest from an obligation
which is not secured by a mortgage on real property (i.e., Not So Bad
Income) can be up to 25% of its annual gross income.
- Therefore, any REIT may receive up to 5% of its annual gross income
from sources which do not qualify for both the 75% and 95% income tests,
i.e., the "5% Bad Income Basket". In a typical REIT this may be
comprised of service income of some sort.
ASSET TESTS:
- There is a 75% ASSET TEST. On the last day of each quarter of the
REIT's taxable year, at least 75% of the value of the total assets (GAAP
basis) of the REIT must consist of "real estate assets", cash and cash
items (including receivables), and government securities. Real estate
assets mean:
1. Real property, including interests in real property and interests
in mortgages on real property
a. Including foreign real estate and mortgages (if legal
equivalent of a US mortgage)
2. Shares in other REITs and REMICs
3. Property (not otherwise a real estate asset) attributable to the
temporary investment of new capital (the grace period mentioned
above)
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- Cash or cash items include:
1. Cash on hand and time or demand deposits with or withdrawable
accounts in financial institutions and certificates of deposit,
issued in large denominations with maturities of one year or less.
a. The IRS takes the position that bankers acceptances or
repurchase agreements are cash and therefore these are not
includable in determining the 75% assets test.
- Government Securities include:
1. Treasury obligations
2. Securities issued by FHA, FNMA, Federal Home Loan Bank, Federal
Land Bank, Federal Intermediate Credit Bank, Banks for
Cooperatives and Public Housing Administration.
3. Guarantee agreements issued by the Commodity Credit Corporation,
Small Business Administration and certain participation
certificates issued by the General Services Administration and
obligations of the US Postal Service.
There is also a 25% ASSETS TEST. At the close of each quarter of the REIT's
taxable year, not more than 25% of the value of its total assets can be
represented by securities (other than government securities, stock of a
qualified REIT subsidiary, and securities that otherwise qualify as real estate
assets; e.g., shares in other REITs and regular interest in a REMIC
(collectively "75% Securities"). In addition, not more than 20% of the value of
a REIT's total assets can be represented by securities of one or more taxable
REIT subsidiaries. Further, except with respect to 75% securities and a taxable
REIT subsidiary, no more than 5% of the REIT's assets can be represented by the
securities of a single issuer.
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SCHEDULE 2
Attached To and Forming a Part of the
Asset Management Agreement
Dated This ___ day of ________, 2005
Between
Madison Harbor Capital, LLC
and
Conning Asset Management Company
SERVICE DELIVERABLES AND REPORTS
Conning shall provide, or cause to be provided to, the Company the following
service deliverables and reports at the times specified or at such other
reasonable times as shall be mutually agreed upon by Conning and the Company:
A. Portfolio Review and Analysis
1. Current asset allocation review
2. Specific asset review
3. Effective maturity review
4. Quality analysis
5. Coupon and cash flow analysis
6. Duration, convexity and yield analysis
B. Capital Market and Investment Outlook
1. Economic analysis
2. Sector analysis
3. Industry analysis
4. Security credit analysis
C. Relative Value Analysis
1. Market conditions review
2. Yield and spread analysis
3. Spread adjustments and risk comparison
4. Evaluation of current opportunities
5. Portfolio construction and optimization
D. Asset Classes
1. Publicly traded, investment grade fixed income.
a. Treasury/agency bonds
b. U.S. corporate bonds
c. MBS/CMBS/ABS
d. Foreign government/provincial/corporate bonds
e. Sinking fund preferred stock
2. Equity Securities
a. Indexed equities
b. Preferred stock
3. Others - negotiable
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E. Performance Reporting
1. Conformity with AIMR standards
2. Benchmark comparisons
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SCHEDULE 3
Attached To and Forming a Part of the
Asset Management Agreement
Dated This ___ Day of __________, 2005
Between
Madison Harbor Capital, LLC
and
Conning Asset Management Company
FEE SCHEDULE
ASSETS UNDER MANAGEMENT BASIS POINTS
----------------------- ------------
First $20 million 15.0 bps
Thereafter 10.0 bps
PLEASE NOTE:
- The above Fee Schedule is subject to an initial minimum annual fee
of $25,000.
- The above-mentioned minimum annual fee will be waived during the
subscription period which is expected to be complete approximately June 30,
2005. During the subscription period a straight basis point calculation of
fees will be in place.
- In the event that $100 million or more is actually raised during the
Subscription Period, the annual fee will be based on 15 basis points on the
first $100 million of assets managed plus 10 basis points on assets greater
than $100 million. In addition, the initial minimum annual fee following
the Subscription Period will be $100,000, payable quarterly in arrears.
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