EXHIBIT 10.25
FORM OF TAX INDEMNIFICATION AGREEMENT
TAX INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of November __,
1997 between XXXXXXX X. XXXXX, an individual ("XX Xxxxx"), NARCO ENTERPRISES,
INC., a _______ corporation, and XXXXX GROUP LIMITED, a ________ corporation,
(collectively, the "Xxxxx Indemnitees"), and PRIME GROUP REALTY, L.P., a
Delaware limited partnership ("UpREIT").
WHEREAS, certain of the Xxxxx Indemnitees (or their predecessors in
interest) had interests in one or more of those certain partnerships set forth
on Exhibit A hereto ("Xxxxx Partnerships"), which owned the "Xxxxx Properties"
(as such term is defined in that certain Contribution Agreement, between the
parties set forth on Schedule 1 attached to such agreement, The Prime Group,
Inc., Prime Group Realty, L.P. and Prime Group Realty Trust, dated October 20,
1997 (the "Contribution Agreement");
WHEREAS, certain each of the Xxxxx Indemnitees is a member of a limited
liability company, (the "Xxxxx LLC"), which has entered into the that certain
Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Partnership
Agreement"), dated the date hereof;
NOW THEREFORE, in consideration of the premises and of the mutual
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Definitions. For purposes of the Agreement, capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to them in the Partnership Agreement or the Contribution Agreement.
Any term defined by reference to an agreement, instrument or other document
shall have the meaning so assigned to it whether or not such document is in
effect. Unless otherwise indicated, references in the Agreement to articles,
Sections, paragraphs, clauses, appendices, schedules and exhibits are to the
same contained in or attached to this Agreement.
For purposes of this Tax Indemnification Agreement, the following
terms shall apply:
(a) The term "After-Tax Basis" shall mean, with respect to any payment
to be received, the amount of such payment supplemented by a further amount so
that, after deduction of the amount of all federal, applicable state and Xxxx
Ridge income taxes that are required to be paid by the recipient thereof
(assuming that the recipient is taxable at the highest marginal federal,
applicable state and Xxxx Ridge income tax rates then applicable to the
recipient and taking into account any tax benefits to be realized by such
recipient from the receipt of the indemnified amount) with respect to the
receipt by it of such amounts, the net amount received is
-1-
equal to the payment required to be made on an After-Tax Basis.
(b) The term "Realistic Possibility of Success" shall mean such
circumstances that tax counsel may properly advise reporting such position on a
tax return in accordance with Section 10.34 of 31 C.F.R. part 10, governing
practice before the Internal Revenue Service.
(c) The term "GP Termination Date" shall mean the period beginning the
date hereof and ending on the date on which the Xxxxx LLC (or its successor) is
no longer a General Partner in the Partnership.
(d) The term "Indemnity Term" shall mean the period beginning on the
GP Termination Date and ending on the tenth anniversary thereof.
(e) The term "Final Determination" shall mean (i) a decision,
judgment, decree or other order by any court of competent jurisdiction, which
decision, judgment, decree or other order has become final after all allowable
appeals by either party to the action have been exhausted or the time for filing
such appeal has expired, or in any case where judicial review shall at the time
be unavailable because the proposed adjustment involves a decrease in net
operating loss carry forward or a business credit carry forward, a decision,
judgment, decree or other order of an administrative official or agency of
competent jurisdiction, which decision, judgment, decree or other order has
become final (i.e., where all administrative appeals have been exhausted by all
parties thereto), (ii) a closing agreement entered into under Section 7121 of
the Code, or any other final settlement agreement entered into in connection
with an administrative or judicial proceeding and with the consent of UpREIT or
as otherwise permitted in Section 6 of the Partnership Agreement, or (iii) the
expiration of the time for instituting a claim for refund, or if such a claim
was filed, the expiration of the time for instituting suit with respect thereto.
(f) The term "Indemnity Debt Allocation Method" shall mean the allocation
of the Partnership's excess nonrecourse liabilities in any UpREIT taxable year
for purposes of Regulations Section 1.752-3(a)(3) based upon each Partner's
relative ownership of Units as of the beginning of such UpREIT taxable year;
provided, that nothing in this Agreement shall be interpreted as prohibiting the
UpREIT from actually using a different debt allocation than that based upon the
Indemnity Debt Allocation Method.
(g) The term "Xxxx Ridge" shall mean the municipality of the Village of
Xxxx Ridge, Illinois.
Section 2. Tax Representations. The Xxxxx Indemnitees jointly and
severally represent, warrant and covenant as follows:
(a) immediately prior to the relevant Adjustment Date, the Xxxxx Properties
are subject to aggregate Nonrecourse Liabilities, allocable among the Xxxxx
Properties, as shown on
-2-
Exhibit B attached hereto;
(b) each Nonrecourse Liability, described in Section 2(a) of this
Agreement, was incurred by the Xxxxx Partnership or Xxxxx Indemnitee, which
owned the Xxxxx Properties to which such Nonrecourse Liability is allocated,
either (i) more than two years prior to the date of the Contribution Agreement,
or (ii) not in anticipation of the transfer of such Xxxxx Property to UpREIT
(within the meaning of Regulations Section 1.707-5(a)(6));
(c) each Nonrecourse Liability, described in Section 2(a) of this
Agreement, has encumbered such Xxxxx Properties throughout the period beginning
on the earlier of the date two years prior to the date of the Contribution
Agreement and the date such liability was incurred by the Xxxxx Partnership or
Xxxxx Indemnitee, as applicable, and ending on the Adjustment Date in respect of
such Xxxxx Properties;
(d) each Nonrecourse Liability, described in Section 2(a) of this
Agreement, is nonrecourse for purposes of Regulations Section 1.752-1(a)(2);
(e) immediately prior to the relevant Adjustment Date, each Xxxxx
Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-
2(g)(1) is as shown on Exhibit B attached hereto;
(f) immediately prior to the relevant Adjustment Date, each Xxxxx
Indemnitee is allocated Nonrecourse Liabilities under Code Section 752 and the
Regulations as shown on Exhibit B attached hereto;
(g) intentionally omitted;
(h) intentionally omitted;
(i) the gross fair market value of any Xxxxx Property equals the initial
Gross Asset Value of such Property credited to the Capital Account of the
relevant contributing Xxxxx Partnership or Xxxxx Indemnitee;
(j) each Xxxxx Indemnitee will report any payment received by it under this
Agreement as a payment made within Section 707(a) of the Code.
(k) each Xxxxx Indemnitee has and will have a taxable year that is the
calendar year; and
(l) each Xxxxx Property constitutes nonresidential real property under Code
Section 168;
provided, however, that the breach of any of the foregoing representations,
warranties and
-3-
covenants shall operate only to reduce the UpREIT's indemnity obligation under
this Agreement, and no one shall have any other rights, damages or recoveries in
respect of any such breach.
Section 3. Indemnified Income Inclusions. If any Xxxxx Indemnitee
shall be required to include in its gross income for federal, applicable state
or Xxxx Ridge income tax purposes (including by way of either an adjustment
proposed by an examining agent during audit or at a closing conference or the
receipt of a "30-day letter" by a Xxxxx Indemnitee or a "60-day letter" by the
Tax Matters Partner of the UpREIT proposing an adjustment to the tax returns of
the Xxxxx Indemnitee or the UpREIT, respectively, and treating the Xxxxx
Indemnitee's distributive share of taxable items of the UpREIT allocated to the
Xxxxx Indemnitee under the Partnership Agreement as "required" for this
purpose), with respect to any of its taxable years which begin prior to the end
of the Indemnity Term, any of the following:
(a) UpREIT items of income and gain attributable to such Xxxxx Indemnitee's
share of the net decrease in Partnership Minimum Gain from Xxxxx Properties (to
the extent not duplicative with subsection (c));
(b) Gain under Code Section 731 from a deemed distribution under Code
Section 752 from the retirement or refinancing of either the Nonrecourse
Liabilities shown on Exhibit B attached hereto, or the debt which refinances or
replaces such Nonrecourse Liabilities; or
(c) gain from the sale, transfer or disposition of Xxxxx Properties;
(d) income under Code Section 704(c) in excess of that allocable to such
Xxxxx Indemnitee under the "traditional method" of Regulations Section 1.704-
3(b),
(such an inclusion being an "Income Inclusion"), UpREIT shall pay to such Xxxxx
Indemnitee an indemnity with respect to the additional federal, applicable state
and Xxxx Ridge income tax liability from such Income Inclusion in the amount
determined in Section 4 hereof.
Section 4. Amount of Indemnification.
-------------------------
(a) In the case of any Income Inclusion that is indemnifiable pursuant to
Section 3 of this Agreement, the relevant Xxxxx Indemnitee (x) shall notify
UpREIT orally and in writing as soon as possible (so as to minimize
indemnifiable costs and expenses incurred under this Agreement prior to such
Income Inclusion), and (y) shall give UpREIT a written certificate setting forth
in reasonable detail (i) the computation of the amount of such Income Inclusion
and (ii) the computation of such amount or amounts that shall equal the sum of
(1) the actual net increase in federal, applicable state and Xxxx Ridge income
tax (including any interest, penalties, fines, or other additions thereto)
("Inclusion Taxes") actually payable by a Xxxxx Indemnitee on an After-Tax
Basis, as a result of such Income Inclusion, determined after taking into
account all deductions, credits, or other federal, applicable state and Xxxx
Ridge income tax benefits then realized and resulting from (a) such Income
Inclusion, (b) the incurrence of the tax liability
-4-
indemnified under this Agreement, or (c) the receipt of any indemnity payment
made under this Agreement (computed in accordance with Sections 3 and 6 of this
Agreement), plus (2) the reasonable costs and expenses incurred by such Xxxxx
Indemnitee in respect of such Income Inclusion.
(b) Each Xxxxx Indemnitee agrees to act in good faith to claim any tax
benefits (including filing claims for refunds and amended tax returns) and take
such other actions as may be reasonable to minimize the net amount of any
indemnity payment due from UpREIT hereunder and to maximize the amount of its
tax savings; provided, however, that such Xxxxx Indemnitee shall not be required
to take any action which, in its good faith judgment, would have any material
adverse business consequences to it. If UpREIT shall disagree with such
computation and so requests in a written notice delivered to such Xxxxx
Indemnitee within thirty (30) days following UpREIT's receipt of the
certificate, such amount shall be reviewed and determined by an independent
public accounting firm of national recognition selected by XX Xxxxx and
reasonably acceptable to UpREIT. The costs of such verification shall be borne
by UpREIT unless such verification shall result in an adjustment in UpREIT's
favor by an amount of more than 5 % of the Inclusion Taxes actually due, in
which case such costs shall be borne by such Xxxxx Indemnitee. Each Xxxxx
Indemnitee agrees to cooperate with such independent accounting firm and to
supply it with all information reasonably necessary to permit it to accomplish
such review and determination. Such information shall be for the confidential
use of such accountants and shall not be disclosed to UpREIT or any other
person. UpREIT and each Xxxxx Indemnitee agree that the sole responsibility of
the independent public accounting firm shall be to verify the amount of a
payment pursuant to this Agreement and that matters of interpretation of this
Agreement are not within the scope of the independent accounting firm's
responsibilities.
(c) To the extent that a Xxxxx Indemnitee recognizes an amount in respect
of an Income Inclusion that is indemnifiable pursuant to Section 3 of this
Agreement for any UpREIT taxable year beginning prior to the Indemnity Term,
UpREIT will pay such Xxxxx Indemnitee as its indemnity obligation under this
Agreement 100% of the amount described in Section 4(a).
(d) Any payment due to a Xxxxx Indemnitee pursuant to this Section 4 shall
be paid upon the earlier of the date that (1) the additional federal income tax
in respect of such Income Inclusion is due from the Xxxxx Indemnitee, or (2) the
Xxxxx Indemnitee has filed a return that reflects or would reflect such
additional federal income tax; provided, however, that (A) obligations of such
Xxxxx Indemnitee and UpREIT under this Agreement will first be set off against
each other, and (B) no payment shall be due earlier than completion of the
computation of such indemnity amount as described in Section 4(a).
Section 5. Exclusions.
----------
(a) Notwithstanding the foregoing, UpREIT shall not have any liability for
indemnification under this Agreement (other than for reasonable costs and
expenses incurred by a Xxxxx Indemnitee in accordance with this Agreement) to
the extent the amount otherwise
-5-
indemnifiable is payable by such Xxxxx Indemnitee as a result of one or more of
the following:
(i) Any Xxxxx Indemnitee recognizing gain in respect of the Capital
Contribution of Xxxxx Properties under Code section 707(a)(2), assuming that
each Nonrecourse Liability described in Section 2(a) of this Agreement is a
"qualified liability" within the meaning of Regulations Section 1.707-5(a)(6),
except as a result of either a sale or disposition of such Xxxxx Property, an
indemnity payment under this Agreement, or the general partner nature of the
Xxxxx LLC's interest in the Partnership and the put right described in that
certain [Put Agreement], dated the date hereof, between _____;
(ii) Any payment of cash to a Contributor under Section 3.02(a)(i) of
the Contribution Agreement;
(iii) Any Xxxxx Indemnitee's Interest in the UpREIT not being
respected as a partnership interest to the extent, and as provided in, the
Partnership Agreement;
(iv) The allocations of income, gain, loss, deduction and credit set
forth in the Partnership Agreement not being respected under Sections 704(b) and
704(c) of the Code, except as a result of the exercise of discretion by the
Managing General Partner of the UpREIT in respect of (A) an adjustment to the
"Gross Asset Values" of UpREIT assets, as described in clause (b) of the
definition thereof, or (B) the allocation of Nonrecourse Deductions under the
proviso within [Section 6.3.A.(3)] of the Partnership Agreement;
(v) The UpREIT not being the owner of the Xxxxx Properties for federal
income tax purposes as of the relevant Adjustment Date;
(vi) Immediately after the relevant Adjustment Date, any Xxxxx
Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-
2(g)(1) not being as shown on Exhibit B attached hereto;
(vii) (1) any change in, or amendment to, the Code or any other
federal tax statute, which is effective on or after the relevant Adjustment
Date, (2) any final or temporary regulation, which is enacted or adopted after
the relevant Adjustment Date, or (3) any court decision issued after the
relevant Adjustment Date;
(viii) No Xxxxx Indemnitee is or will be a tax-exempt entity or
person;
(ix) A determination that any Xxxxx Indemnitee did not enter the
transactions contemplated by the Partnership Agreement for profit or with a
sufficient business purpose;
(x) A voluntary or involuntary sale, assignment, transfer or other
disposition by any Xxxxx Indemnitee of any interest in the UpREIT or any part
thereof;
-6-
(xi) The failure of any Xxxxx Indemnitee to claim or to follow the
proper procedure in claiming in a timely manner any UpREIT item allocated to
such Xxxxx Indemnitee by the Partnership;
(xii) The failure of any Xxxxx Indemnitee to take timely action or
follow the proper procedures in reporting his distributive share from the UpREIT
or contesting a claim made by the Internal Revenue Service in accordance with
the Partnership Agreement;
(xiii) The gross negligence or the willful misconduct of any Xxxxx
Indemnitee or any affiliate thereof;
(xiv) Any breach by any Xxxxx Indemnitee of any of its
representations, warranties or covenants in Sections [7.1.A. or 8.2 of the
Partnership Agreement (prior to the GP Termination Date), Sections 10.5,
11.3.A., 11.6.A., D or E.,] of the Partnership Agreement, Sections 2 or 6 of
this Agreement, or the Contribution Agreement;
(xv) Any guarantee by any Xxxxx Indemnitee or a person related to any
Xxxxx Indemnitee of any Nonrecourse Liability encumbering a Xxxxx Property or
Xxxxx Interest or any other debt of the UpREIT or its affiliates;
(xvi) Any Xxxxx Indemnitee recognizing taxable income under Code
Section 704(c), except to the extent such income results from either a sale or
other disposition of a Xxxxx Property or income under Code Section 704(c) in
excess of that allocable to such Xxxxx Indemnitee under the "traditional method"
of Regulations Section 1.704-3(b);
(xvii) Any recapture under Code Section 1245 or 1250 of depreciation
attributable to Xxxxx Properties that was allocated to any Xxxxx Indemnitee
after the relevant Adjustment Date.;
(xviii) the sale, transfer or other disposition of any Xxxxx Property
after the fifth anniversary of the GP Termination Date; provided, however, that
the UpREIT uses its best efforts to cause such sale, transfer or other
disposition to be on a tax-deferred or tax-exempt basis; or
(xix) the sale, transfer or other disposition of all or any portion
of the land described in Exhibit D hereto (the "Land"); provided, however, that
the UpREIT uses its best efforts to cause such sale, transfer or other
disposition of the Land that occurs within the period ending on or prior to the
fifth anniversary of the GP Termination Date, to be on a tax-deferred or tax-
exempt basis.
(b) Further, notwithstanding anything to the contrary within this
Agreement, after taking into account any amounts thereof excluded under Section
5(a), the cumulative Income Inclusions for all Xxxxx Indemnitees in respect of
Section 3(a), 3(b) and 3(c) that will be
-7-
indemnifiable by the UpREIT shall not exceed the following:
(i) For any Income Inclusion under Section 3(b),the aggregate negative
Capital Accounts of all Xxxxx Indemnitees as set forth on Exhibit B;
(ii) For any Income Inclusion under Section 3(a), the aggregate
Minimum Gain of all Xxxxx Indemnitees as set forth on Exhibit B; and
(iii) For any Income Inclusion under Section 3(c), the excess of the
aggregate Gross Asset Value of the Xxxxx Properties contributed to the UpREIT on
the relevant Adjustment Dates, over the aggregate initial adjusted tax bases of
such Xxxxx Properties on such relevant Adjustment Dates.
(c) Finally, notwithstanding anything to the contrary within this
Agreement, after taking into account any amounts thereof excluded under Sections
5(a) and 5(b), UpREIT shall not be liable for indemnification under this
Agreement in respect of an Income Inclusion under Section 3(a) or (b), to the
extent of that such Income Inclusion arises from a Final Determination that the
amount of debt of UpREIT allocable to such Xxxxx Indemnitee for purposes of
Section 752 of the Code and Regulations Section 1.752-3(a)(3) is less than the
amount of debt such Xxxxx Indemnitee would be allocated if the UpREIT allocated
the Xxxxx Indemnitees collectively an aggregate amount of debt, using the
Indemnity Debt Allocation Method for purposes of Section 752 of the Code and
Regulations Section 1.752-3(a)(3), of at least $43 million; provided, however,
that UpREIT actually allocates to the Xxxxx Indemnitee, collectively, on the
UpREIT's federal, applicable state and Xxxx Ridge income tax returns, at least
such aggregate amount of debt.
Section 6. Contests.
--------
(a) Nothing in this Agreement shall be construed to prevent UpREIT
from contesting, through its Tax Matters Partner in accordance with the
Partnership Agreement as part of the unified audit of the UpREIT, any claim in
respect of any "partnership" item of the UpREIT that, if successful, would
result in an Income Inclusion (a "Partnership Level Issue").
(b) If UpREIT contests a Partnership Level Issue that, if successful,
would result in an Income Inclusion, UpREIT's liability for indemnification
under Section 4 hereof (other than reasonable costs and expenses described in
Section 6(f) of the Agreement) shall, at UpREIT's election, be deferred until
thirty (30) days after a Final Determination of such Xxxxx Indemnitee's federal
income tax liability in respect of an Income Inclusion.
(c) If any audit or proceeding involving an indemnifiable adjustment
is being conducted in a proceeding involving such Xxxxx Indemnitee, which cannot
be transferred to the UpREIT as a partnership item (a "Xxxxx Level Issue"), such
Xxxxx Indemnitee hereby agrees (i) promptly to notify UpREIT in writing of such
adjustment (and the failure of such Xxxxx Indemnitee to so notify UpREIT shall
preclude any indemnity hereunder to the extent UpREIT's
-8-
right to effect its contest rights hereunder has been precluded by such
failure), and (ii) upon UpREIT's delivery to of a written opinion of nationally
recognized tax counsel reasonably acceptable to such Xxxxx Indemnitee ("Tax
Counsel") to the effect that there is a Realistic Possibility of Success upon
contest of such Xxxxx Level Issue, such Xxxxx Indemnitee will contest that
adjustment by filing a protest and administrative appeal and prosecuting the
same in good faith; provided, however, that such Xxxxx Indemnitee will not be
obligated to pursue an administrative appeal if such Xxxxx Indemnitee instead
pursues relief in Tax Court or a court having refund jurisdiction.
(d) If, within 30 days following the failure of such administrative
proceedings with respect to a Xxxxx Level Issue, UpREIT delivers to a Xxxxx
Indemnitee a written opinion of Tax Counsel to the effect that there is a
Realistic Possibility of Success if the proposed adjustment is presented to a
court for resolution, then such Xxxxx Indemnitee will contest the proposed
adjustment in good faith in the Tax Court or by paying the tax (and any
applicable interest and penalties) and suing for refund in the Court of Federal
Claims or appropriate Federal District Court. If, within 30 days following a
final adverse decision of such court with respect to such Xxxxx Level Issue,
UpREIT delivers to such Xxxxx Indemnitee a written opinion of Tax Counsel to the
effect that it is more likely than not that such decision would be reversed on
appeal, then such Xxxxx Indemnitee will appeal such decision to the appropriate
Federal Court of Appeals. With respect to any of the above-described
proceedings, such Xxxxx Indemnitee will keep UpREIT and its counsel informed as
to the progress of such proceedings, give UpREIT and its counsel the opportunity
to review and comment in advance on all written submissions and filings relevant
to indemnifiable issues (after making appropriate redactions to preserve the
confidentiality of the such Xxxxx Indemnitee return as to other issues), and
consider in good faith any suggestions made by UpREIT or its counsel.
(e) Such Xxxxx Indemnitee shall present any settlement offer
provided to such Xxxxx Indemnitee pursuant to a Xxxxx Level Issue to UpREIT. If
UpREIT recommends acceptance of a settlement offer of a Xxxxx Level Issue or if
the Tax Matters Partner recommends acceptance of a settlement offer in respect
of a Partnership Level Issue, but such Xxxxx Indemnitee declines to accept such
offer in writing within 30 days (if such Xxxxx Indemnitee does not respond
within 30 days, such lack of response shall be treated as acceptance of UpREIT's
or the Tax Matters Partner's recommendation, respectively), (1) the obligation
of UpREIT to make indemnity payments as the result of any such contest or
proceedings shall not thereafter exceed the obligation that it would have had if
such contest had been settled or proceeding terminated on the basis recommended
by UpREIT or the Tax Matters Partner, as applicable, and (2) in the case of a
Xxxxx Level Issue, UpREIT shall have no further liability for costs or other
expenses in respect of such contest.
(f) Notwithstanding the foregoing, such Xxxxx Indemnitee will have no
obligation to contest any action with respect to a Xxxxx Level Issue (i) unless
such items could give rise to a federal income tax liability (disregarding other
items in the assessment and considering effects in future years) in excess of
$__________ , (ii) without UpREIT paying
-9-
when due, reasonable third-party costs and out-of-pocket expenses including
reasonable legal, witness and accounting fees and other expenses and, in the
case of proceedings before the Court of Federal Claims or Federal District
Court, the amount of tax (and any applicable interest and penalties) for which
refund is claimed, and (iii) to the extent such Xxxxx Indemnitee waives in
writing UpREIT's obligation to indemnify such Xxxxx Indemnitee for such items,
in which case all third-party costs and out-of-pocket expenses described in
clause (ii) thereafter incurred and all taxes would be paid by such Xxxxx
Indemnitee.
(g) such Xxxxx Indemnitee shall not settle any such Xxxxx Level Issue
without UpREIT's consent; provided that such Xxxxx Indemnitee shall not be
required to contest any proposed adjustment and may settle any such proposed
adjustment if such Xxxxx Indemnitee shall waive its right to indemnity under
this Agreement with respect to such adjustment and any Income Inclusion that
results from such adjustment and, in the case of proceedings before the Court of
Federal Claims or Federal District Court, shall pay to UpREIT the amount of tax
(and any applicable interest and penalties) previously paid or advanced by
UpREIT with respect to such adjustment or the contest of such adjustment under
Section 6(f), plus interest at ___% computed from the time such amounts were
paid or advanced by UpREIT.
(h) Within thirty (30) days after a Final Determination of the
liability of such Xxxxx Indemnitee in respect of a Xxxxx Level Issue, UpREIT and
each Indemnitee agree to pay each other, as applicable, the net amount of (i)
the payment owed by the UpREIT to such Xxxxx Indemnitee of any indemnification
hereunder, not theretofore paid resulting from the outcome of such contest, and
(ii) in the case of proceedings before the Court of Federal Claims or Federal
District Court, the repayment owed by such Xxxxx Indemnitee to UpREIT of the
amount of tax (and any applicable interest and penalties) previously paid or
advanced by UpREIT with respect to such adjustment or the contest of such
adjustment under Section 6(f), together with any interest received by or
credited to such Xxxxx Indemnitee that is attributable to such advance.
Section 7. Tax Savings.
-----------
(a) In the event that UpREIT makes an indemnity payment pursuant to
Section 4, if such Xxxxx Indemnitee shall realize with respect to any year, any
federal, applicable state or Xxxx Ridge income tax savings that would not have
been realized but for receipt of such payment, the related Income Inclusion or
the event giving rise thereto, (and which tax savings were not taken into
account in calculating UpREIT's indemnity payment to such Xxxxx Indemnitee),
such Xxxxx Indemnitee shall pay to UpREIT, on an After-Tax Basis, an amount
equal to the actual net reduction in federal, applicable state and Xxxx Ridge
income tax actually realized by such Xxxxx Indemnitee. Each Xxxxx Indemnitee
agrees to act in good faith to claim any tax benefits or savings (including
filing claims for refunds and amended tax returns) and take such other actions
as may be reasonable to minimize the net amount of any indemnity payment due
from UpREIT hereunder and to maximize the amount of its tax savings; provided,
however, that such Xxxxx Indemnitee shall not be required to take any action
which, in its good faith judgment, would have any material adverse business
consequences to it.
-10-
(b) Any payment due to UpREIT pursuant to this Section 7 shall be paid
within one business day after such Xxxxx Indemnitee has (1) received (or is
deemed to have received) a refund or (2) has filed a return that reflects or
would reflect such tax saving; provided, however, that (A) obligations of such
Xxxxx Indemnitee and UpREIT under this Agreement will first be set off against
each other, and (B) any loss of such tax savings by such Xxxxx Indemnitee
subsequent to the year of realization by such Xxxxx Indemnitee shall be treated
as an Income Inclusion that is indemnifiable pursuant to the provisions of this
Agreement.
Section 8. State and Xxxx Ridge Tax. For purposes of this Agreement,
each Indemnitee will be treated as having an Income Inclusion, realizing any
deductions, credits or other income tax benefits, having the same tax savings
and having the same tax attributes and status for applicable state income and
Xxxx Ridge tax purposes at the same time, in the same amount and in the same
manner, as such Xxxxx Indemnitee does for federal income tax purposes.
Section 9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois.
Section 10. Notices. All notices, demands, declarations, consents,
directions, approvals, instructions, requests and other communications required
or permitted by the terms hereof shall be given in the manner described in
Section 14.1 of the Partnership Agreement.
Section 11. Successors and Assigns. The terms of this Tax
Indemnification Agreement may not be assigned by any Indemnitee (including,
without limitation, by descent or will), without the written consent of UpREIT.
Section 12. Miscellaneous. This Agreement may be executed in any
number of counterparts, each executed counterpart constituting an original but
all together only one Agreement. Any provision of this Agreement which is
prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. Neither this Agreement
nor any of the terms hereof may be terminated, amended, supplemented, waived or
modified orally, but only by an instrument in writing signed by the party
against which the enforcement of the termination, amendment, supplement, waiver
or modification is sought.
Section 13. Anticipated Indemnitee Debt Allocation Methodology.
UpREIT acknowledges and agrees with each Indemnitee that the aggregate
nonrecourse indebtedness of UpREIT that is apportioned to the Indemnities
collectively under this Agreement and the Partnership Agreement pursuant to Code
Section 752 and Regulations Sections 1.702-3(a)(2) shall be apportioned among
the various Indemnitees using a method substantially similar to that
-11-
within the debt allocation model set forth on Exhibit C hereto.
Section 14. Term. The term of this Agreement shall be from the date
hereof until such time as the applicable statute of limitations under the Code
bars any claim by the Internal Revenue Service against a Indemnitee for
Inclusion Taxes otherwise indemnifiable under this Agreement.
Section 15. Exhibits. The parties to this Agreement acknowledge and
agree that future Capital Contributions may be made to the UpREIT pursuant to
Section 3.02(b) of the Contribution Agreement, and agree to reasonably cooperate
to update the Exhibits and other factual information referenced or contained in
this Agreement to take such Capital Contributions into account.
Section 16. Assumption of Recourse Liabilities. Prior to the GP
Termination Date, upon 30 days written notice to the Managing General Partner,
the Xxxxx LLC may agree to indemnify the Managing General Partner for the debt
obligations of the UpREIT that are recourse to the general partners of the
UpREIT under relevant state law, but only to the extent necessary for the Xxxxx
LLC to be allocated a greater share of recourse liabilities of the UpREIT for
purposes of Regulations Section 1.752-2 to avoid an Income Inclusion; and,
provided, however, that such indemnification shall not be allowed to the extent
it would cause adverse tax consequences to the Managing General Partner, another
partner in the UpREIT or the REIT.
-12-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective Officers thereunto duly authorized as of
the day and year first above written.
PRIME GROUP REALTY TRUST
By:_____________________________________
Name:
Title:
NARCO ENTERPRISES, INC., A ____ CORPORATION
By:_____________________________________
Title:__________________________________
XXXXX GROUP LIMITED, A ____ CORPORATION
By:_____________________________________
Title:__________________________________
XXXXXX X. XXXXX
________________________________________
-13-
