1
EXHIBIT 10.1
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement"), dated as of May ___,
1998, is by and between AMRESCO CAPITAL TRUST, a Texas real estate investment
trust (the "Company"), and AMREIT MANAGERS, L.P., a Delaware limited
partnership (the "Manager").
WHEREAS, the Company intends to invest in various types of real estate
related assets and to qualify as a "real estate investment trust" under the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to undertake, on
the Company's behalf, the duties and responsibilities set forth in this
Agreement, subject to the direction and oversight of the Board of Trust
Managers of the Company (the "Board of Trust Managers"), on the terms and
conditions set forth in this Agreement; and
WHEREAS, the Manager desires to undertake, on the Company's behalf,
the duties and responsibilities set forth in this Agreement, subject to the
direction and oversight of the Board of Trust Managers, on the terms and
conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings assigned to them
below:
(a) "AMRESCO Group" means AMRESCO, Inc. together with its
affiliated entities.
(b) "Average Invested Investment Grade Assets" means, for
any quarter, the average of the aggregate book value of the assets of
the Company on a consolidated basis (as reflected on the Company's
balance sheet) and of all of the Company's nonconsolidated taxable
subsidiaries (but excluding the Company's investment in such
subsidiaries), which either (i) have received an Investment Grade
Rating from all Rating Agencies which have rated such asset or (ii)
are unrated but are guaranteed by the U.S. government or any agency or
instrumentality thereof, before reserves for depreciation or bad debts
or other similar noncash reserves, computed by dividing (a) the sum of
such values for each of the three months during such quarter (based on
the book value of such assets as of the last day of each month) by (b)
three.
(c) "Average Invested Non-Investment Grade Assets" means,
for any quarter, the average of the aggregate book value of the assets
of the Company on a consolidated basis (as reflected on the Company's
2
balance sheet) and of all of the Company's nonconsolidated taxable
subsidiaries (but excluding the Company's investment in such
subsidiaries), other than Average Invested Investment Grade Assets,
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by dividing (a) the sum of such values for each of
the three months during such quarter (based on the book value of such
assets as of the last day of each month) by (b) three.
(d) "Chief Investment Officer" means the Chief Investment
Officer of the Company.
(e) "Closing Date" means the date of closing of the
Company's initial public offering of its Common Shares.
(f) "Common Shares" means the Company's common shares of
beneficial interest, $.01 par value per share.
(g) "Confidential Information" means all information of
the Company not generally known in the Company's industry or in the
financial markets which is obtained by the Manager from the Company or
directly as a result of the performance by the Manager of its services
to the Company pursuant to this Agreement.
(h) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(i) "Funds From Operations" or "FFO" means net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships and joint ventures.
(j) "Governing Instruments" means (i) with respect to the
Company, its Declaration of Trust and Bylaws, (ii) with respect to any
Subsidiary which is a corporation, the articles or certificate of
incorporation and bylaws of such corporation, (iii) with respect to
any Subsidiary which is a partnership, the partnership agreement of
such partnership and (iv) with respect to any Subsidiary which is a
limited liability company the articles of organization and the
regulations of such limited liability company, in each case, as the
same may be amended from time to time.
(k) "Guidelines" means the operating policies and general
guidelines for the Company's investments, borrowings and operations,
as approved by the Board of Trust Managers of the Company and in
effect from time to time. The Guidelines, as initially approved by
the Board of Trust Managers of the Company, are attached hereto as
Exhibit "A.".
MANAGEMENT AGREEMENT - PAGE 2
3
(l) "Investment Grade Rating" means a rating equal to or
higher than (i) "BBB-" by Standard & Poor's Rating Services, a
division of the XxXxxx-Xxxx Companies, (ii) "Baa3" by Xxxxx'x
Investors Services, Inc., (iii) "2" by National Association of
Insurance Commissioners, (iv) "BBB-" by Duff and Xxxxxx Credit Rating
Co. or (v) "BBB-" by Fitch IBCA, Inc.
(m) "Master Servicing" means providing administrative and
reporting services to securitized pools of MBS.
(n) "MBS" means mortgage-backed securities (including
commercial or multifamily mortgage backed securities and residential
mortgage backed securities).
(o) "Mezzanine Loan" means a commercial real estate loan
the repayment of which is subordinated to a senior Mortgage Loan and
which is secured either by a second lien mortgage or a pledge of the
ownership interests of the borrower. Such loans can also take the
form of a preferred equity investment in the borrower.
(p) "Mortgage Loans" means, collectively, loans secured
by real property and Mezzanine Loans.
(q) "Nasdaq" means the Nasdaq National Market.
(r) "Nonperforming Mortgage Loans" means Mortgage Loans
for which the payment of principal and/or interest is more than 90
days delinquent.
(s) "NYSE" means the New York Stock Exchange.
(t) "REIT" means a real estate investment trust, as
defined under Section 856 of the Code.
(u) "REIT Provisions of the Code" means Sections 856
through 860 of the Code.
(v) "Securities Act" means the Securities Act of 1933, as
amended.
(w) "Special Servicer" means an entity which services
delinquent and/or defaulted Mortgage Loans, including the oversight
and management of the resolution of such Mortgage Loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
(x) "Special Servicing" means the oversight and
management of the resolution of Mortgage Loans by workout or
modification of loan provisions, foreclosure, deed in lieu of
foreclosure or otherwise, and the control of decisions
MANAGEMENT AGREEMENT - PAGE 3
4
with respect to the preservation of the collateral generally,
including property management and maintenance decisions.
(y) "Special Servicing Rights" means rights to control
the oversight and management of the resolution of Mortgage Loans by
workout or modification of loan provisions, foreclosure, deed in lieu
of foreclosure or otherwise, and to control decisions with respect to
the preservation of the collateral generally, including property
management and maintenance decisions.
(z) "Subperforming Mortgage Loans" means Mortgage Loans
for which default is likely or imminent or for which the borrower is
making payments in accordance with a forbearance plan.
(aa) "Subsidiary" means any corporation, partnership,
limited liability company or other entity formed and controlled by the
Company.
(bb) "Ten-Year U.S. Treasury Rate" means the arithmetic
average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted
to a constant maturity of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the
Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate
cannot be calculated as provided above, then the rate shall be the
arithmetic average of the per annum average yields to maturities,
based upon closing asked prices on each business day during a quarter,
for each actively traded marketable U.S. Treasury fixed interest rate
security with a final maturity date not less than eight nor more than
twelve years from the date of the closing asked prices as chosen and
quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities
selected by the Company.
(cc) "Trust Manager" means a member of the Board of Trust
Managers.
SECTION 2. Duties of the Manager.
(a) Subject to the direction and oversight of the Board
of Trust Managers and in accordance with the Governing Instruments,
the Manager shall be responsible for the day-to-day operations of the
Company and perform (or cause to be performed as permitted herein)
services and activities relating to the assets and operations of the
Company, including, without limitation, the following:
(i) providing a complete program of investing and
reinvesting the capital and assets of the Company in pursuit
of its investment objectives and in accordance with the
Guidelines and policies adopted by the Board of Trust Managers
from time to time;
MANAGEMENT AGREEMENT - PAGE 4
5
(ii) serving as the Company's consultant with
respect to formulation of investment criteria and policies and
preparation of the Guidelines by the Board of Trust Managers;
(iii) assisting the Company in developing criteria
for asset purchase commitments that are specifically tailored
to the Company's investment objectives and making available to
the Company its knowledge and experience with respect to
Mortgage Loans, MBS, real estate and other real estate related
assets;
(iv) representing and making recommendations to
the Company in connection with the origination of Mortgage
Loans, the purchase of and commitment to purchase Mortgage
Loans, MBS, real estate and other real estate related assets,
the financing of Mortgage Loans, MBS, real estate and other
real estate related assets, and the sale and commitment to
sell Mortgage Loans, MBS, real estate and other real estate
related assets (including, without limitation, the
underwriting of Mortgage Loans, the accumulation of Mortgage
Loans for securitization and arrangement for the issuance of
MBS from pools of Mortgage Loans owned by the Company);
(v) furnishing reports and statistical and
economic research to the Company regarding market conditions
in the areas in which the Company proposes to invest as well
as the Company's activities and the services performed for the
Company by the Manager;
(vi) monitoring and providing to the Board of
Trust Managers on an ongoing basis price information and other
data, obtained from certain nationally recognized brokers or
dealers identified by the Board of Trust Managers from time to
time, and providing data and recommendations to the Board of
Trust Managers in connection with the identification of such
brokers or dealers;
(vii) providing the executive and administrative
personnel and office space and office and administrative
services required in rendering services to the Company;
(viii) monitoring the operating performance of the
Company's investments and providing periodic reports with
respect thereto to the Board of Trust Managers, including
comparative information with respect to such operating
performance and budgeted or projected operating results;
(ix) administering the day-to-day operations of
the Company and performing and supervising the performance of
such other administrative functions necessary for the
management of the Company and its assets as may be agreed upon
by the Manager and the Board of Trust Managers,
MANAGEMENT AGREEMENT - PAGE 5
6
including the collection of revenues and the payment of the
Company's debts and obligations;
(x) communicating on behalf of the Company with
the holders of any equity or debt securities of the Company as
required to satisfy the reporting and other requirements of
any governmental bodies or agencies and to maintain effective
relations with such holders;
(xi) counseling the Company in connection with
policy decisions made or to be made by the Board of Trust
Managers, including, without limitation, policy decisions with
respect to investments, leveraging of the Company's assets,
management of the credit risk of the Company's assets,
management of the interest rate risks of the Company's assets,
including decisions with respect to hedging of the assets and
compliance with certain legal requirements;
(xii) advising the Company regarding its status as
a REIT, consulting with legal counsel as appropriate regarding
the application of the REIT Provisions of the Code to the
proposed investments and operations of the Company and
monitoring compliance by the Company with the REIT Provisions
of the Code;
(xiii) advising the Company regarding the status of
its exemption from the Investment Company Act of 1940, as
amended, consulting with legal counsel as appropriate
regarding the nature of its proposed investments and the
impact of such proposed investments on the Company's exemption
from registration under such Act and monitoring the Company's
continuing exemption from registration;
(xiv) evaluating and recommending hedging
strategies to the Board of Trust Managers and, upon approval
by the Board of Trust Managers, engaging in hedging activities
on behalf of the Company, consistent with the Company's status
as a REIT and with the Guidelines;
(xv) upon request by and in accordance with the
directions of the Board of Trust Managers, investing or
reinvesting any money of the Company, and advising the Company
as to its capital structure and capital raising;
(xvi) causing the Company to retain qualified
accountants and/or legal counsel to assist in developing
appropriate accounting procedures, compliance procedures and
testing systems with respect to financial reporting
obligations and compliance with the REIT Provisions of the
Code and to conduct quarterly compliance reviews with respect
thereto;
MANAGEMENT AGREEMENT - PAGE 6
7
(xvii) causing the Company to qualify to do business
in all applicable jurisdictions;
(xviii) assisting the Company in complying with all
federal, state and local regulatory requirements applicable to
the Company in respect of its business activities, including,
without limitation, preparing or causing to be prepared all
financial statements required under applicable regulations and
contractual undertakings and all reports and documents, if
any, required under the Exchange Act;
(xix) taking all necessary actions to enable the
Company to make required federal, state and local tax filings
and reports, including, without limitation, soliciting
shareholders for required information to the extent provided
by the REIT Provisions of the Code;
(xx) handling and resolving all claims, disputes
or controversies (including all litigation, arbitration,
settlement or other proceedings or negotiation) in which the
Company may be involved or to which the Company may be subject
arising out of the Company's day-to-day operations, subject to
such limitation or parameters as may be imposed from time to
time by the Board of Trust Managers;
(xxi) using commercially reasonable efforts to
cause expenses incurred by or on behalf of the Company to be
reasonable or customary and within any budgeted parameters or
Guidelines set by the Board of Trust Managers from time to
time;
(xxii) performing such other services as may be
required from time to time for management or other activities
relating to the assets of the Company in furtherance of the
Manager's obligations hereunder, as the Board of Trust
Managers shall reasonably request or the Manager shall deem
appropriate under the particular circumstances; and
(xxiii) using commercially reasonable efforts to
cause the Company to comply with all applicable laws.
(b) The Manager will perform portfolio management
services on behalf of the Company with respect to the Company's
investments. Such services will include, but not be limited to,
consulting the Company on purchase, sale and other opportunities,
collection of information and submission of reports pertaining to the
Company's assets, interest rates, and general economic conditions,
periodic review and evaluation of the performance of the Company's
portfolio of assets, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with
respect to the purchase, financing and disposition of assets, and
other customary functions related to portfolio management. The
Manager may
MANAGEMENT AGREEMENT - PAGE 7
8
enter into subcontracts with other parties, including AMRESCO, Inc.
and its affiliates, to provide any such services to the Company.
(c) The Manager will monitor and administer the loan
servicing activities provided by servicers of the Company's Mortgage
Loans, other than loans pooled to collateralize MBS or pledged to
secure MBS. Such monitoring and administrative services will include,
but not be limited to, the following activities: serving as the
Company's consultant with respect to the servicing of loans;
collection of information and submission of reports pertaining to the
Mortgage Loan and the moneys remitted to the Manager or the Company by
servicers; periodic review and evaluation of the performance of each
servicer to determine its compliance with the terms and conditions of
the servicing agreement and, if deemed appropriate, recommending to
the Company the termination of such servicing agreement; acting as a
liaison between servicers and the Company and working with servicers
to the extent necessary to improve their servicing performance; review
of and recommendations as to fire losses, easement problems and
condemnation, delinquency and foreclosure procedures with regard to
the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; advising as to and supervising claims
filed under any mortgage insurance policies; and enforcing the
obligation of any servicer to repurchase Mortgage Loans from the
Company.
(d) The Manager will perform monitoring services on
behalf of the Company with respect to loan servicing activities
provided by third parties and with respect to the Company's portfolio
of Special Servicing Rights. Such monitoring services will include,
but not be limited to: negotiating Special Servicing agreements;
acting as liaison between the servicers of the Mortgage Loans and the
Company; review of servicer's delinquency, foreclosures and other
reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to
repurchase Mortgage Loans.
(e) The Manager agrees to use its commercially reasonable
efforts at all times in performing services for the Company hereunder
and in accordance with the Guidelines and policies of the Company in
effect from time to time.
SECTION 3. Obligations of the Manager and the Company.
(a) The Manager shall use commercially reasonable efforts
to determine, in good faith, whether each Mortgage Loan, MBS, real
estate or other real estate asset proposed to be acquired by the
Company conforms to the investment criteria and Guidelines of the
Company approved from time to time by the Board of Trust Managers.
(b) The Manager shall require each seller or transferor
of assets to the Company to make such representations and warranties
regarding such assets as are customarily made in similar transactions
and as may, in the judgment of the
MANAGEMENT AGREEMENT - PAGE 8
9
Manager, be necessary and/or appropriate. With respect to Mortgage
Loans acquired by the Company, and to the extent consistent with
prevailing industry practices, the Manager shall use commercially
reasonable efforts to require the seller or transferor of any Mortgage
Loan to the Company to agree to repurchase any such Mortgage Loan with
respect to which there is fraud or misrepresentation. In addition,
the Manager shall take all such other action as it deems reasonably
necessary or appropriate with regard to the protection of the
Company's investments.
(c) The Manager shall refrain from any action which, in
its sole judgment made in good faith, (i) would adversely affect the
status of the Company as a REIT under the Code, (ii) would violate any
law, rule or regulation of any governmental body or agency having
jurisdiction over the Company which violation could have a material
adverse effect on the Company, its business or assets or results of
operations or (iii) would otherwise not be permitted by the Governing
Instruments, the Guidelines, any operating policies adopted from time
to time by the Company or any agreements of the Company which have
previously been provided to the Manager. If the Manager is ordered to
take any such action by the Board of Trust Managers, the Manager shall
promptly notify the Board of Trust Managers of the Manager's judgment
that such action would adversely affect such status or violate any
such law, rule or regulation or the Governing Instruments, the
Guidelines, the operating policies adopted from time to time by the
Company or any agreements which have previously been provided to the
Manager.
(d) The Manager shall cause Deloitte & Touche LLP, or
another independent accounting firm having the requisite expertise and
reputation, to review the Company's assets and operations on a
quarterly basis to determine whether the Company has complied with the
REIT Provisions of the Code. The Manager shall cause such accounting
firm to deliver to the Board of Trust Managers no later than March 31
of each year an annual report regarding compliance by the Company with
the REIT Provisions of the Code for the preceding fiscal year.
(e) The Manager shall prepare regular reports for the
Board of Trust Managers that will review the Company's acquisitions of
assets, portfolio composition and characteristics, credit quality and
compliance with the Guidelines and the operating performance of such
assets (including comparative information with respect to such
operating performance and budgeted or projected operating results).
(f) In purchasing assets for the Company, the Manager
shall endeavor to obtain on behalf of the Company terms no less
favorable than commercially reasonable terms. In assessing
commercially reasonable terms for any transaction, the Manager shall
consider all factors which it, in good faith, deems relevant,
including the breadth of the market in the asset, the price of the
asset, the reasonableness of any broker commissions both for the
specific transaction
MANAGEMENT AGREEMENT - PAGE 9
10
and on a continuing basis and the market terms determined in
comparable arm's length transactions.
(g) The Company agrees to take all actions reasonably
required to permit the Manager to carry out its duties and obligations
under this Agreement. The Company further agrees to make available to
the Manager all materials reasonably requested by the Manager to
enable the Manager to satisfy its obligations to deliver financial
statements and other information or reports with respect to the
Company.
(h) The Manager agrees, at all times during which it is
serving as Manager to the Company, to (i) maintain a tangible net
worth of at least $250,000 and (ii) maintain "errors and omissions"
insurance coverage (which may be provided by a policy or policies
maintained through, and providing coverage for, other members of the
AMRESCO Group) in an amount which is comparable to that customarily
maintained by other managers or servicers of assets similar to those
held by the Company.
SECTION 4. Additional Activities of Manager.
(a) Except as expressly provided below, this Agreement shall
not prevent or restrict the Manager or any other member of the AMRESCO
Group, or any of their respective officers, directors, partners,
officers, stockholders, employees or Affiliates from engaging in other
businesses or from rendering services of any kind to any other Person,
including investment in, or advisory service to others investing in,
any type of real estate related assets, including assets which meet
the principal investment objectives of the Company; provided, however,
that during the term of this Agreement, neither the Manager, nor any
other member of the AMRESCO Group, nor any of their respective
directors, partners, officers, employees or affiliates (while acting
in such capacity only) will (i) sponsor, (ii) act as manager to or
(iii) make any significant equity investment in, any other REIT with
investment objectives substantially similar to those of the Company,
without the prior approval of a majority of the Independent Trust
Managers.
(b) Directors, partners, officers, stockholders,
employees and Affiliates of the Manager or any other member of the
AMRESCO Group may serve as directors, partners, officers,
stockholders, employees or signatories for the Company or any
Subsidiary of the Company, to the extent permitted by their Governing
Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Trust Managers pursuant to the Company's
Governing Instruments. When executing documents or otherwise acting
in such capacities for the Company, such persons shall use their
respective titles in the Company.
(c) Nothing in this Agreement shall prevent the Manager
or any other member of the AMRESCO Group from selling assets to, or
engaging in any other transaction with, the Company; provided, that
any such transactions must be
MANAGEMENT AGREEMENT - PAGE 10
11
effected in accordance with the Guidelines or shall otherwise be
approved in advance by a majority of the Independent Trust Managers.
SECTION 5. Bank Accounts. At the direction of the Board of
Trust Managers, the Manager may establish and maintain one or more bank
accounts in the name of the Company, and may collect and deposit into any such
account or accounts, and disburse funds from any such account or accounts,
under such terms and conditions as the Board of Trust Managers may approve.
The Manager shall from time to time (or at any time upon the request of a
majority of the Independent Trust Managers) render appropriate accounting of
such collections and payments to the Board of Trust Managers and, upon request,
to the auditors of the Company.
SECTION 6. Records; Confidentiality. The Manager shall maintain
appropriate books of accounts and records relating to the assets of the Company
and the services performed hereunder, and such books of account and records
shall be accessible for inspection by representatives of the Company at any
time during normal business hours. Except in the ordinary course of business
or as required by the Securities Act, the Exchange Act, NYSE, Nasdaq or any
statute, rule, regulation, order or decree of any governmental entity, the
Manager agrees not to disclose any Confidential Information to third parties
who are not Affiliates of the Manager, except with the prior approval of a
majority of Independent Trust Managers.
SECTION 7. Compensation.
(a) For services rendered under this Agreement, the
Company shall pay to the Manager a base management fee calculated and
payable quarterly in an amount equal to (i) 1% per annum of the
Average Invested Non-Investment Grade Assets of the Company and (ii)
0.50% per annum of the Average Invested Investment Grade Assets of the
Company.
(b) In addition to the base management fee, the Manager
shall be entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds From Operations (before the incentive
fee) of the Company for such quarter per Common Share (based on the
weighted average number of shares outstanding during such quarter) (b)
plus gains (or minus losses) from debt restructuring and sales of
property per Common Share (based on the weighted average number of
shares outstanding during such quarter), exceed (2) an amount equal to
(a) the weighted average of the price per Common Share at the initial
offering and the prices per Common Share for any subsequent issuances
of Common Shares by the Company, multiplied by (b) the Ten-Year U.S.
Treasury Rate for the respective quarter plus 3.5% multiplied by (B)
the weighted average number of Common Shares outstanding during such
period.
(c) The Manager shall compute the compensation payable
under Sections 7(a) and 7(b) within 45 days after the end of each
fiscal quarter. A copy
MANAGEMENT AGREEMENT - PAGE 11
12
of the computations made by the Manager to calculate its compensation
shall thereafter promptly be delivered to the Board of Trust Managers
and payment of the compensation earned under Sections 7(a) and 7(b) of
this Agreement shown therein shall be due and payable within 60 days
after the end of such fiscal quarter.
SECTION 8. Expenses.
(a) Without regard to the compensation received under
this Agreement by the Manager and subject to Sections 8(b) and 8(c),
the Manager shall bear the following expenses:
(i) employment expenses of the personnel employed
by the Manager (including, but not limited to, officers of the
Company employed by the Manager) including, but not limited
to, salaries, wages, payroll taxes and the cost of the
employee benefit plans of such personnel;
(ii) rent, telephone, utilities, office furniture,
equipment, machinery, and other office expenses of the Manager
and/or its Affiliates required for the Company's day-to-day
operations, including costs associated with accounting,
clerical, primary or Master Servicing (including all expenses
customarily paid by primary loan servicers or Master Servicers
in performing primary loan servicing or Master Servicing for
third parties) and back-office services provided by the
Manager or its affiliates;
(iii) computer hardware and software costs
(including costs associated with determining whether its
systems are "Year 2000" compliant and with modifying or
replacing source codes to bring its systems into "Year 2000"
compliance), except for any such expenses that relate solely
to the computer hardware or software used solely for the
business and operations of the Company; and
(iv) all premiums and other expenses required in
connection with "errors and omissions" insurance policies
covering officers and employees of the Manager.
(b) The Company shall pay all of its expenses except
those that are the responsibility of the Manager pursuant to Section
8(a) and without limiting the generality of the foregoing, it is
specifically agreed that the following expenses actually incurred by
or on behalf of the Company shall be paid by the Company and shall not
be paid by the Manager or any other member of the AMRESCO Group:
(i) the cost of money borrowed by the Company,
including interest, commitment fees and other charges;
MANAGEMENT AGREEMENT - PAGE 12
13
(ii) all taxes and license fees applicable to the
Company, including interest and penalties thereon;
(iii) legal, audit, accounting, underwriting,
brokerage, listing, filing, rating agency, registration and
other fees, printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution,
transfer, registration and stock exchange listing of any
securities of the Company (including, without limitation, debt
or equity securities, options or warrants to purchase debt or
equity securities, convertible securities, etc.);
(iv) fees and expenses paid to advisors and
independent contractors, consultants, managers and other
agents (including the Manager or any other member of the
AMRESCO Group) engaged directly by the Company upon its
written request or by the Manager at the Company's written
request for the account of the Company;
(v) due diligence costs and related costs
(including legal fees, accounting and auditing fees,
environmental and engineering reviews) associated with the
acquisition or proposed acquisition or the disposition or
proposed disposition of any of the Company's assets; provided
that with respect to any proposed acquisition of assets, such
asset(s) shall have been preliminarily approved in writing for
investment by the Chief Investment Officer or the Board of
Trust Managers, and further provided that any extraordinary
costs (in excess of $500,000 with respect to any single
transaction or asset) shall be required to be approved in
advance by the Board of Trust Managers;
(vi) other expenses connected with the
acquisition, disposition, financing and ownership of the
Company's assets, including, but not limited to, commitment
fees, brokerage fees, guaranty fees, ad valorem taxes, costs
of foreclosure, maintenance, repair and improvement of
property and premiums for insurance on property owned by the
Company;
(vii) costs related to hedging transactions
(including losses);
(viii) the expenses of organizing, modifying or
dissolving the Company;
(ix) costs related to advertising and marketing of
the Company's assets or services;
(x) expenses connected with payments of dividends
or interest or distributions in any other form made or caused
to be made by the Board of Trust Managers to holders of the
securities of the Company;
MANAGEMENT AGREEMENT - PAGE 13
14
(xi) expenses connected with the structuring,
issuance and administration of MBS by the Company, including,
but not limited to, legal, audit, accounting, underwriting,
listing, filing, rating agency and trustee's fees, insurance
premiums and costs of required credit enhancements;
(xii) all expenses of third parties connected with
communications to holders of equity securities or debt
securities issued by the Company and the other bookkeeping and
clerical work necessary in maintaining relations with holders
of such securities and in complying with the continuous
reporting and other requirements of governmental bodies or
agencies, including any costs of computer services in
connection with this function, the cost of printing and
mailing certificates for such securities and proxy
solicitation materials and reports to holders of the Company's
securities and reports to third parties required under any
indenture to which the Company is a party;
(xiii) custodian's, transfer agent's and registrar's
fees and charges;
(xiv) compensation, fees and expenses paid to the
Independent Trust Managers, the cost of director and officer
liability insurance and premiums for any errors and omissions
insurance coverage maintained for the Company and its
employees (solely in their capacity as employees of the
Company and not in their capacity as employees of the Manager
or any other member of the AMRESCO Group);
(xv) legal, accounting, tax and auditing fees and
expenses paid to third parties relating to the Company's
operations;
(xvi) legal, expert and other fees and expenses
paid to third parties relating to any actions, proceedings,
lawsuits, demands, causes of action and claims, whether actual
or threatened, made by or against the Company, or which the
Company is authorized or obligated to pay under applicable law
or the Governing Instruments or by the Board of Trust
Managers;
(xvii) any judgment rendered against the Company, or
against any Trust Manager, director or officer of the Company
in his capacity as such for which the Company is required to
indemnify such Trust Manager, director, or officer by any
court or governmental agency, or settlement of pending or
threatened litigation; provided that such settlement is
approved or authorized by the Board of Trust Managers or is
entered into by the Manager pursuant to the discretionary
authority granted to the Manager by the Board of Trust
Managers;
(xviii) expenses relating to any office or office
facilities maintained solely for the use or benefit of the
Company exclusive of the office of the Manager;
MANAGEMENT AGREEMENT - PAGE 14
15
(xix) expenses related to the accumulation and
Special Servicing of Mortgage Loans;
(xx) travel and related expenses of directors,
officers and employees of the Manager or other members of the
AMRESCO Group, and of Trust Managers, directors, officers and
employees of the Company who are also directors, officers or
employees of the Manager or other members of the AMRESCO
Group, incurred in connection with attending meetings of the
Board of Trust Managers or holders of securities of the
Company or performing other business activities that relate to
the Company, including, where applicable, a proportionate
share of such expenses as reasonably determined by the Manager
where such expenses were not incurred solely for the benefit
of the Company;
(xxi) costs associated with computer hardware and
software, third party information services and office expenses
that relate solely to the business activities of the Company
(including the costs of bringing any systems into "Year 2000"
compliance, if such systems relate solely to the business
activities of the Company);
(xxii) any extraordinary or non-recurring costs or
charges incurred by the Company; and
(xxiii) other expenses of the Company that are not
expenses of the Manager under Section 8(a).
(c) Any due diligence investigations, underwriting and
other services typically performed by third-party consultants or
service providers (including, without limitation, legal review and
documentation) may be provided to the Company by the Manager or any
other member of the AMRESCO Group if the Manager determines in good
faith that (i) the requisite expertise is available through the
Manager or the other members of the AMRESCO Group and that (ii) either
(a) such services provided by the Manager or other members of the
AMRESCO Group are superior in quality to those available from third
parties or (b) costs savings or other efficiencies will arise from the
use of such services. The Manager will, and will cause each other
member of the AMRESCO Group to, document the time spent by its
employees on such services on behalf of the Company and will be
entitled to reimbursement for the allocable portion of salary and
benefits for such employees.
(d) Notwithstanding the foregoing provisions of this
Section 8, if the Company (or the Manager on behalf of the Company)
incurs due diligence and related costs with respect to a proposed
acquisition of one or more assets and all or any portion of such
assets are not acquired by the Company but are instead acquired by a
member of the AMRESCO Group, then AMRESCO or the appropriate member of
the AMRESCO Group shall, within 30 days of its receipt
MANAGEMENT AGREEMENT - PAGE 15
16
of an itemized statement from the Manager reflecting the costs
incurred by or on behalf of the Company, pay or reimburse the Company
for all such costs (or the appropriate portion thereof allocable to
the portion of the asset(s) acquired).
SECTION 9. Calculations of Expenses. The Manager shall
prepare a statement documenting the expenses of the Company and those incurred
by the Manager on behalf of the Company during each quarter and shall deliver
such statement to the Company within 45 days after the end of each quarter.
Expenses incurred by the Manager on behalf of the Company shall be reimbursed
quarterly to the Manager within 60 days after the end of each quarter. All
expenses incurred by the Manager and submitted to the Company for reimbursement
shall be reviewed by the Independent Trust Managers on a quarterly basis.
SECTION 10. Limits of Manager Responsibility. The Manager
assumes no responsibility under this Agreement other than to render the
services called for hereunder in good faith and shall not be responsible for
any action of the Board of Trust Managers in following or declining to follow
any advice or recommendations of the Manager, including as set forth in Section
3(b). Neither the Manager, nor any other member of the AMRESCO Group will be
liable to the Company, the Independent Trust Managers, the Company's
shareholders or partners, any issuer of MBS or any other party for any acts or
omissions by the Manager, any other member of the AMRESCO Group or any of their
respective partners, directors, officers, stockholders or employees under or in
connection with this Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties. The Company shall reimburse, indemnify and hold harmless the Manager
and the members of the AMRESCO Group and their respective stockholders,
directors, partners, officers and employees (collectively, the "Indemnified
Parties") for, from and against any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, (including
attorneys' fees) in respect of or arising from any acts or omissions of the
Manager, its stockholders, directors, partners, officers and employees made in
good faith in the performance of the Manager's duties under this Agreement and
not constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties. WITHOUT LIMITING ANY OTHER PROVISION OF THIS
AGREEMENT, IT IS THE EXPRESS INTENTION OF THE COMPANY AND THE MANAGER THAT THE
COMPANY'S OBLIGATION TO INDEMNIFY THE INDEMNIFIED PARTIES PURSUANT TO THIS
SECTION 10 INCLUDES INDEMNIFICATION FOR EXPENSES, LOSSES, DAMAGES, LIABILITIES,
DEMANDS AND CHARGES AND CLAIMS OF ANY NATURE WHATSOEVER (INCLUDING ATTORNEYS'
FEES) ARISING DIRECTLY OR INDIRECTLY FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE
OF ANY OF SUCH INDEMNIFIED PARTIES.
SECTION 11. No Joint Venture. The Company and the Manager are
not partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
MANAGEMENT AGREEMENT - PAGE 16
17
SECTION 12. Term; Termination.
(a) This Agreement shall commence on the date set forth
above and shall continue in force until the second anniversary of such
date, and thereafter, it shall be subject to successive one-year
renewal periods upon the review and approval of the Independent Trust
Managers. If the Independent Trust Managers do not resolve to renew
or terminate this Agreement within at least 90 days prior to the end
of the then-current period of this Agreement, this Agreement shall be
automatically extended for a one-year period. The Manager shall have
the right, following the initial term of this Agreement, to terminate
this Agreement at any time upon not less than 180 days prior written
notice. The Company shall have the right, following the initial term
of this Agreement and subject to Section 12(b), to terminate this
Agreement at any time upon not less than 90 days prior written notice.
(b) In addition to such further liability or obligation
of either party to the other provided in Sections 15 and 16, if this
Agreement is terminated by the Company without cause (as "cause" is
defined in Section 14) by delivery of a notice of non-renewal or
termination pursuant to Section 12(a), the Company, in addition to its
obligations under Section 15, shall pay the Manager a termination fee
in an amount equal to the sum of the Manager's base management fee and
incentive compensation earned pursuant to Sections 7(a) and 7(b)
during the four calendar quarters immediately preceding such
termination. Such termination fee shall be paid no later than 30 days
following receipt of the accounting contemplated by Section 15(b).
SECTION 13. Assignments.
(a) Except as set forth in Section 13(b), this Agreement
shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in
writing by the Company with the consent of a majority of the
Independent Trust Managers. Any such assignment approved by the
Independent Trust Managers, in their sole discretion, shall bind the
assignee hereunder in the same manner as the Manager is bound. In
addition, the assignee shall execute and deliver to the Company an
amendment to this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior
written consent of the Manager, except in the case of assignment by
the Company to another REIT or other organization which (i) is a
successor to the Company (by merger, consolidation or otherwise by
operation of law) or (ii) is the purchaser of all or substantially all
of the assets of the Company, in which case such successor
organization shall be bound hereunder and by the terms of such
assignment in the same manner as the Company is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the
Manager may subcontract any or assign all of its responsibilities
under this Agreement to any of
MANAGEMENT AGREEMENT - PAGE 17
18
its qualified Affiliates, and the Company hereby consents to any such
assignment and subcontracting; provided that no such subcontract or
assignment shall relieve the Manager of its duties and obligations
hereunder. The Manager agrees to send copies of any subcontract or
assignment to the Company promptly following its agreement to the
same.
SECTION 14. Termination by the Company for Cause. This Agreement
may be terminated by the Company for "cause" upon 60 days' prior written notice
of termination from the Board of Trust Managers to the Manager, without payment
of any termination fee, if any of the following events shall occur:
(a) if a majority of the Independent Trust Managers shall
determine that the Manager has breached any provision of this
Agreement in any material respect and, within 30 days after receipt of
written notice of such violation, the Manager shall not have cured
such violation, provided that, if such breach is not capable of cure
within such 30-day period, the Manager shall have failed to commence
to cure such breach within such 30-day period and thereafter to
diligently and in good faith prosecute the cure of such breach and
further provided, that if such breach is not capable of cure within
any period of time, a majority of the Independent Trust Managers shall
have also determined that such breach may have a material adverse
effect on the business, operations or financial condition of the
Company; or
(b) there is entered an order for relief or similar
decree or order with respect to the Manager by a court having
competent jurisdiction in an involuntary case under the federal
bankruptcy laws as now or hereafter constituted or under any
applicable federal or state bankruptcy, insolvency or other similar
laws; or the Manager (i) ceases, or admits in writing its inability to
pay its debts as they become due and payable, or makes a general
assignment for the benefit of, or enters into any composition or
arrangement with, creditors; (ii) applies for, or consents (by
admission of material allegations of a petition or otherwise) to the
appointment of a receiver, trustee, assignee, custodian, liquidator or
sequestrator (or other similar official) of the Manager or of any
substantial part of its properties or assets, or authorizes such an
application or consent, or proceedings seeking such appointment are
commenced without such authorization, consent or application against
the Manager and continue undismissed for 30 days; (iii) authorizes or
files a voluntary petition in bankruptcy, or applies for or consents
(by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, reorganization, arrangement,
readjustment of debt, insolvency, dissolution, liquidation or other
similar law of any jurisdiction, or authorizes such application or
consent, or proceedings to such end are instituted against the Manager
without such authorization, application or consent and are approved as
properly instituted and remain undismissed for 30 days or result in
adjudication of bankruptcy or insolvency; or (iv) permits or suffers
all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains
undismissed for 30 days. If any of the events specified in this
MANAGEMENT AGREEMENT - PAGE 18
19
Section 14(b) shall occur, the Manager shall give prompt written
notice thereof to the Board of Trust Managers.
SECTION 15. Action Upon Termination. From and after the
effective date of termination of this Agreement, the Manager shall not be
entitled to compensation for further services hereunder, but shall be paid all
compensation accruing to the date of termination and, if terminated for any
reason other than for "cause" under Section 14, the applicable termination fee.
Upon such termination, the Manager shall forthwith:
(a) after deducting any accrued compensation, any
applicable termination fee and reimbursement for its expenses
permitted hereunder to which it is then entitled, promptly pay over to
the Company all money collected and held for the account of the
Company pursuant to this Agreement;
(b) deliver to the Board of Trust Managers a full
accounting, including a statement showing all payments collected by
it, all expenses incurred by it and a statement of all money held by
it, covering the period following the date of the last accounting
furnished to the Board of Trust Managers with respect to the Company;
and
(c) deliver to the Board of Trust Managers all property,
documents, records and reports of the Company or pertaining to the
Company's assets or operations then in the custody of the Manager.
SECTION 16. Release of Money or Other Property Upon Written
Request. The Manager agrees that any money or other property of the Company
held by the Manager under this Agreement shall be held by the Manager as
custodian for the Company, and the Manager's records shall be appropriately
marked clearly to reflect the ownership of such money or other property by the
Company. Upon the receipt by the Manager of a written request signed by a duly
authorized officer of the Company requesting the Manager to release to the
Company any money or other property then held by the Manager for the account of
the Company under this Agreement, the Manager shall release such money or other
property to the Company within a reasonable period of time, but in no event
later than 60 days following such request. Subject to Section 10, the Manager
shall not be liable to the Company, the Independent Trust Managers, or the
Company's shareholders or partners for any acts performed or omissions to act
by the Company in connection with the money or other property released to the
Company in accordance with this Section 16. The Company shall indemnify the
Manager, its directors, officers, stockholders, partners and employees against
any and all expenses, losses, damages, liabilities, demands, charges and claims
of any nature whatsoever, which arise in connection with the Manager's release
of such money or other property to the Company upon written request of the
Company in accordance with the terms of this Section 16. Indemnification
pursuant to this provision shall be in addition to any right of the Manager to
indemnification under Section 10.
MANAGEMENT AGREEMENT - PAGE 19
20
SECTION 17. Representations and Warranties.
(a) The Company hereby represents and warrants to the
Manager as follows:
(i) The Company is duly organized and validly
existing under the laws of the jurisdiction of its
incorporation, has the power to own its assets and to transact
the business in which it is now engaged and is duly qualified
as a foreign corporation and in good standing under the laws
of each jurisdiction where its ownership or lease of property
or the conduct of its business requires such qualification,
except for failures to be so qualified, authorized or licensed
that could not in the aggregate have a material adverse effect
on the business operations, assets or financial condition of
the Company. The Company does not do business under any
fictitious business name.
(ii) The Company has the power and authority to
execute, deliver and perform this Agreement and all
obligations required hereunder and has taken all necessary
action to authorize this Agreement on the terms and conditions
hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent
of any other person, including, without limitation,
shareholders and creditors of the Company, and no license,
permit, approval or authorization of, exemption by, notice or
report to, or registration, filing or declaration with, any
governmental authority is required by the Company in
connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and
all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be,
executed and delivered by a duly authorized officer of the
Company, and this Agreement constitutes, and each instrument
or document required hereunder when executed and delivered
hereunder will constitute, the legally valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms.
(iii) The execution, delivery and performance of
this Agreement and the documents or instruments required
hereunder will not violate any provision of any existing law
or regulation binding on the Company, or any order, judgment,
award or decree of any court, arbitrator or governmental
authority binding on the Company, or the Governing Instruments
of the Company or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the
Company is a party or by which the Company or any of its
assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or
financial condition of the Company, and will not result in, or
require, the creation or imposition of any lien on any of its
property, assets or revenues
MANAGEMENT AGREEMENT - PAGE 20
21
pursuant to the provisions of any such mortgage, indenture, lease,
contract or other agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the
Company as follows:
(i) The Manager is duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its formation, has the power to own its assets
and to transact the business in which it is now engaged and is
duly qualified to do business and is in good standing under
the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such
qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken
as a whole. The Manager does not do business under any
fictitious business name.
(ii) The Manager has the power and authority to
execute, deliver and perform this Agreement and all
obligations required hereunder and has taken all necessary
action to authorize this Agreement on the terms and conditions
hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent
of any other person including, without limitation, partners
and creditors of the Manager, and no license, permit, approval
or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental
authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or
enforceability of this Agreement and all obligations required
hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by
a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the
Manager enforceable against the Manager in accordance with its
terms.
(iii) The execution, delivery and performance of
this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law
or regulation binding on the Manager, or any order, judgment,
award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the partnership agreement
of the Manager or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the
Manager is a party or by which the Manager or any of its
assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken
as a whole, and will not result in, or require, the creation
or imposition of any lien on any
MANAGEMENT AGREEMENT - PAGE 21
22
of its property, assets or revenues pursuant to the provisions of any
such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
SECTION 18. Notices. Unless expressly provided otherwise
herein, all notices, requests, demands and other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given, made and received when delivered against receipt or upon
actual receipt of registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
(a) If to the Company:
AMRESCO Capital Trust
000 Xxxxx Xxxxx Xxxxxx
Xxxxx 0000
Xxxxxx, Xxxxx 00000
Attention: President and General Counsel
(b) If to the Manager:
AMREIT Managers, L.P.
000 Xxxxx Xxxxx Xxxxxx
Xxxxx 0000
Xxxxxx, Xxxxx 00000
Attention: President and General Counsel
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with
the provisions of this Section 18 for the giving of notice.
SECTION 19. Binding Nature of Agreement; Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
SECTION 20. Entire Agreement. This Agreement contains the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof.
SECTION 21. Amendment. This Agreement may not be modified or
amended other than by an agreement in writing signed by the Manager and the
Company, provided that the amendment of any provision of this Agreement
requiring
MANAGEMENT AGREEMENT - PAGE 22
23
consent or approval of any matter by a majority of the Independent Trust
Managers may not be amended without the approval of a majority of the
Independent Trust Managers.
SECTION 22. CONTROLLING LAW. THIS AGREEMENT AND ALL QUESTIONS
RELATING TO ITS VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT SHALL BE
GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS.
SECTION 23. Indulgences, Not Waivers. Neither the failure nor
any delay on the part of a party to exercise any right, remedy, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, remedy, power or privilege preclude
any other or further exercise of the same or of any other right, remedy, power
or privilege, nor shall any waiver of any right, remedy, power or privilege
with respect to any occurrence be construed as a waiver of such right, remedy,
power or privilege with respect to any other occurrence. No waiver shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.
SECTION 24. Titles Not to Affect Interpretation. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 25. Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
SECTION 26. Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of them may be invalid or unenforceable
in whole or in part.
SECTION 27. Attorneys' Fees. Should any action or other
proceeding be necessary to enforce any of the provisions of this Agreement or
the various transactions contemplated hereby, the prevailing party will be
entitled to recover its actual reasonable attorneys' fees and expenses from the
non-prevailing party.
SECTION 28. Gender. Words used herein regardless of the number
and gender specifically used, shall be deemed and construed to include any
other number, singular or plural, and any other gender, masculine, feminine or
neuter, as the context requires.
MANAGEMENT AGREEMENT - PAGE 23
24
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
"COMPANY"
AMRESCO CAPITAL TRUST
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
"MANAGER"
AMREIT MANAGERS, L.P.
By: AMREIT MANAGERS G.P., INC.
its general partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
MANAGEMENT AGREEMENT - PAGE 24
25
EXHIBIT "A"
TO MANAGEMENT AGREEMENT
AMRESCO CAPITAL TRUST
OPERATING POLICIES
PRELIMINARY STATEMENT
I. INVESTMENT POLICIES
II. CAPITAL AND LEVERAGE POLICIES
III. CREDIT RISK MANAGEMENT POLICIES
IV. FINANCIAL RISK MANAGEMENT POLICIES
V. POLICIES REGARDING TRANSACTIONS WITH THE AMRESCO GROUP
VI. REIT COMPLIANCE POLICIES
VII. POLICY REGARDING INVESTMENT COMPANY ACT
SCHEDULE I - DEFINITIONS
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 1
26
PRELIMINARY STATEMENT
The following operating policies of AMRESCO Capital Trust (the
"Company") are intended to be guidelines for the business and operations of the
Company. Such policies are intended to be reviewed from time to time and may
be changed from time to time by the Board of Trust Managers, in their sole
discretion without shareholder approval. As used in these policies, the term
"Company" means either AMRESCO Capital Trust, a Texas real estate investment
trust ("AMCT") or AMCT collectively with its affiliates, as the context
requires, the term "AMRESCO Group" means AMRESCO, INC. and its affiliated
entities (other than the Manager) and the term "Manager" means AMREIT Managers,
L.P., an affiliate of AMRESCO. Other capitalized terms used in these policies
have the meanings set forth on Schedule I attached.
SECTION SECTION 1. INVESTMENT POLICIES
A. General
1. Principal Business Objective. The Company's
principal business objective is to maximize shareholder value by producing cash
flow for distribution to its shareholders through investment in mid- to
high-yield real estate related assets which earn an attractive spread over the
Company's cost of funds. The investment policies set forth below are intended
to enable the Company to achieve its principal business objective.
2. Role of the Manager. The Manager is authorized in
accordance with the terms of the Management Agreement to make all day-to-day
investment decisions of the Company based on the policies and guidelines set
forth below. The Manager should use all commercially reasonable efforts to
determine, in good faith, whether each investment proposed to be made by the
Company conforms to the policies and guidelines set forth below. All proposed
investments shall be reviewed and approved by the Investment Committee prior to
investment.
3. Review by the Board. The Board will review the
investments of the Company on a quarterly basis to determine general compliance
with the policies and guidelines set forth below.
B. Investment Objectives
1. General. The Company will invest in those real
estate related assets which it believes are likely to generate attractive
risk-adjusted returns on capital invested, after considering all material
relevant factors. Initially the Company intends to invest in a diversified
portfolio of commercial and multifamily Mortgage Loans (including, among
others, Participating Loans, Mezzanine Loans, Construction Loans and Bridge
Loans), MBS, and commercial real estate (including, but not limited to, Net
Leased Real Estate, real estate acquired at foreclosure or by deed-in-lieu of
foreclosure or other
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 2
27
underperforming or Distressed Real Estate). Investments in real estate may
also take the form of equity investments in partnerships and joint ventures,
but not in corporations in which more than 10% of the voting shares would be
owned by the Company or which would represent more than 5% of the value of the
Company's total consolidated assets (unless such corporation is a Qualified
REIT Subsidiary), and shall otherwise be structured in compliance with the REIT
Provisions of the Code.
2. Types of Investments. The Company shall invest
principally in the following types of investments:
(a) Mortgage Loans. The Company may invest in
various types of commercial and multifamily Mortgage Loans, including
without limitation Permanent Mortgage Loans, Participating Loans,
Construction Loans, Mezzanine Loans, Bridge Loans or any combination
thereof. The Company may not invest directly nor originate
residential Mortgage Loans secured by single family (one-to-four unit)
residential property.
(i) Limits on Investments. The
Manager's loan underwriters will be afforded flexibility and
latitude with respect to the size of any single Mortgage Loan,
but shall generally target loans ranging from $10 million to
$40 million. However, without the prior approval of the
Board, the Company's investment in any one Mortgage Loan may
not exceed the greater of (A) $75 million in principal amount
outstanding or (B) 10.0% of the Company's total consolidated
assets.
(ii) Coinvestment. The Company may
invest in any Mortgage Loan alone or may coinvest with others.
If the Company coinvests in any Mortgage Loan with any member
of the AMRESCO Group, such investment must be made in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(iii) Concentration Limits. The Manager
shall seek to achieve diversification in the Company's assets
to avoid undue geographic, borrower, issuer, product type,
industry and certain other types of concentrations. The
Company may, in the future, in consultation with the Manager
and the Investment Committee, establish specified limitations
or parameters as to the foregoing concentrations. The Manager
shall seek to invest, on the Company's behalf, primarily in
Mortgage Loans secured by property located in the United
States and in foreign countries in which the AMRESCO Group has
previously conducted business.
(iv) Sources of Loans. Mortgage Loans in
which the Company invests may be either originated or
purchased by the Company. Purchased loans may be purchased
individually, through loan participations or syndications or
in pools and may include Distressed Mortgage Loans. Loans
purchased from any member of the AMRESCO Group must be
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 3
28
purchased in accordance with the Company's policies regarding
transactions with members of the AMRESCO Group.
(v) Pricing. In determining the rate at
which an originated Mortgage Loan will bear interest, or the
price at which a purchased Mortgage Loan will be acquired, the
Manager should consider the following factors, in addition to
the Company's targeted rate of return on such investment:
market conditions, market interest rates, the availability of
mortgage credit and other economic factors, the term of the
Mortgage Loan, the liquidity of the Mortgage Loan, the
limitations on the obligations of the borrower and/or seller
with respect to the Mortgage Loan, the rate and timing of
payments to be made with respect to the Mortgage Loan, the
mortgaged property underlying the Mortgage Loan, the existence
and quality of any credit enhancement related to such Mortgage
Loan, the risk of adverse fluctuations in the market values of
that mortgaged property as a result of economic events or
governmental regulations, the historical performance and other
attributes of the property manager responsible for managing
the mortgaged property, relevant laws limiting actions that
may be taken with respect to Mortgage Loans and limitations on
recourse against the borrower following realization on the
collateral through various means, risks of timing with respect
to Mortgage Loan prepayments, risks associated with geographic
concentration of mortgaged property, environmental risks,
pending and threatened litigation, junior liens and other
issues relating to title, a prior history of real estate
mortgage and other contractual defaults by affiliated parties
on similar and dissimilar obligations, and other factors
deemed relevant by the Manager.
(vi) Due Diligence. In considering
whether to originate or acquire any Mortgage Loan, the Manager
should perform certain due diligence tasks on behalf of the
Company that reasonably may be expected to provide relevant
and material information as to the value of such Mortgage Loan
and whether the Company should originate or acquire that
Mortgage Loan, including all such information described above
as necessary to be considered in connection with the pricing
of a Mortgage Loan or as may be required by any warehouse
lender.
(vii) Credit Risk Management. Each
Mortgage Loan investment must be in accordance with the
Company's credit risk management policies and underwriting
criteria, including its policies or criteria, to the extent
applicable, regarding loan-to-value ratios or loan-to-cost
ratios, borrower and tenant credit quality, credit
enhancement, collateral requirements, etc.
(viii) Compliance With Other Policies.
Each Mortgage Loan investment shall comply with Company
policies, including, without limitation, its policies
regarding compliance with the REIT Provisions of the Code and
exclusions from regulation under the Investment Company Act.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 4
29
(b) MBS. The Company may invest in all types of
MBS, including, without limitation, all types of investment grade and
non-investment grade CMBS and RMBS (except that the Company does not
currently intend to invest in RMBS secured by lower credit quality
Mortgage Loans known as "B," "C" and "D" Mortgage Loans).
(i) Limits on Investments. Without the
prior approval of the Board, the percentage of the Company's
total consolidated assets which may be invested in MBS at any
time may not exceed 40%. The Company may, in the future, in
consultation with the Manager and Investment Committee,
establish specified limitations or parameters on the
percentage of the Company's total consolidated assets invested
in MBS that may be related to any one issuer.
(ii) Coinvestment. The Company may
invest in any MBS alone or may coinvest with others. If the
Company coinvests in any MBS with any member of the AMRESCO
Group, such investment must be made in accordance with the
Company's policies regarding transactions with members of the
AMRESCO Group.
(iii) Sources of MBS. MBS may be
purchased by the Company from any source. MBS purchased from
any member of the AMRESCO Group must be purchased in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(iv) Pricing. In determining the price
at which to acquire any MBS, the Manager should consider, in
addition to the Company's targeted rate of return on such
investment, the following factors: (A) the quality of the
underlying collateral pool, (B) the prepayment and default
history of the underlying Mortgage Loans, (C) cash flow
analyses under various prepayment and interest rate scenarios
(including sensitivity analyses), (D) an analysis of various
default scenarios and (E) prices paid for similar MBS by bona
fide third parties or broker price opinions. Because there
are so many characteristics to consider, each MBS should be
analyzed individually, taking into consideration both
objective data as well as subjective analysis.
(v) Due Diligence. The Company shall, in
consultation with the Manager, determine the scope of review
to be performed before the Company acquires MBS, which will be
designed to provide sufficient information regarding the MBS
to enable the Company to make a decision regarding the
acquisition and pricing of the MBS. The due diligence should
include an analysis of the information described above as
necessary to be considered in connection with the pricing of
MBS. With respect to CMBS, the Manager will use sampling and
other appropriate analytical techniques to determine which
Mortgage Loans will undergo a full-scope review or a more
streamlined review process. Considerations that should
influence the
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 5
30
choice for scope of review should generally include size of the loan,
debt service coverage ratio, loan-to-value ratio, maturity of the
loan, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a site inspection,
tenant-by-tenant rent roll analysis, review of historical income and
expenses for each property securing the Mortgage Loan, a review of
major leases for each property (if available); recent appraisals (if
available), engineering and environmental reports (if available), and
the price paid for similar CMBS by unrelated third parties in arm's
length purchases and sales (if available) or a review of broker price
opinions (if the price paid by a bona fide third party for similar
CMBS is not available and such price opinions are available). For
those Mortgage Loans that are selected for the more streamlined review
process, the Manager's evaluation may include a review of the property
operating statements, summary loan level data, third party report and
a review of prices paid for similar CMBS by bonafide third parties or
broker price opinions, each as available. If the Manager's review of
such information does not reveal any unusual or unexpected
characteristics or factors, no further due diligence need be
performed.
(vi) Compliance With Other Policies.
Each MBS investment must be in accordance with all Company policies,
including, without limitation, its policies regarding compliance with
the REIT Provisions of the Code and exclusion from regulation under
the Investment Company Act and the Investment Advisors Act.
(c) Real Estate. The Company intends to invest
in various types of commercial real estate, including, but not limited to,
Net Leased Real Estate, REO Properties and other Distressed Real Estate.
(i) Coinvestment; Manner of Investment.
The Company may invest in any real estate project alone or may
coinvest with others. Investments may be made directly by the
Company or through partnerships or other entities formed with
other parties, including members of the AMRESCO Group. If the
Company coinvests in any real estate project with any member
of the AMRESCO Group, such investment must be made in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(ii) Concentration Limits. The Manager
shall seek to avoid undue geographic and product type
concentrations with respect to the Company's commercial real
estate, when considered together with the Company's other
invested assets. The Manager will seek to invest, on the
Company's behalf, primarily in commercial real estate located
in the United States and in other foreign countries in which
the AMRESCO Group has previously conducted business.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 6
31
(iii) Sources. Real estate may be
purchased by the Company from any source. Real estate
purchased from any member of the AMRESCO Group must be
purchased in accordance with the Company's policies regarding
transactions with members of the AMRESCO Group.
(iv) Pricing. The Company's policy is to
determine the fair market value of real estate utilizing those
procedures that the Company and the Manager deem relevant for
the specific real estate being evaluated, which procedures
need not be the same for each property being evaluated.
Information that may be examined in determining the fair
market value of a property includes the following: (A) the
Company's projected rate of return on such investment; (B)
current and historical operating statements; (C) existing or
new appraisals; (D) sales comparables; (E) industry statistics
and reports regarding operating expenses; (F) existing leases
and market rates for comparable leases; (G) deferred
maintenance observed during site inspections or described in
structural and engineering reports; and (H) correspondence and
other documents and memoranda found in the files of the seller
of that real estate or other relevant parties. The Manager is
expected to develop projections of net operating income and
cash flows taking into account lease rollovers, tenant
improvement costs and leasing commissions. The Manager should
compare its estimates of revenue and expenses to historical
operating statements and estimates provided in appraisals and
general industry and regional statistics. Market
capitalization rates and discount rates should then be applied
to the cash flow projections to estimate values. These values
should then be compared to available appraisals and market
sale comparables to determine recommended bid prices for each
property. The amount offered by the Company generally should
take into account projected holding periods, capital costs and
projected profit expectations.
(v) Due Diligence. The Manager should
conduct an investigation and evaluation of all real estate
proposed to be purchased. The Manager should include within
its due diligence review and analysis of the real estate
contemplated to be acquired a review of market studies for
each geographic market in which the real estate proposed to be
purchased is concentrated, including area economic data,
employment trends, absorption rates and market rental rates.
Such due diligence analyses generally also should include (A)
site inspections of properties, (B) a review of all property
files and documentation that are made available to the Company
or the Manager, (C) a Phase I environmental assessment for
each property, and (D) all other information necessary to
determine a fair price for such property. The Manager's
review should include, to the extent possible, examinations of
available legal documents, litigation files, correspondence,
title reports, operating statements, appraisals, engineering
reports and environmental reports, among other due diligence
items.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 7
32
(vi) Credit Risk Management. Each real
estate investment must be in accordance with the Company's
credit risk management policies, including its policies
regarding tenant credit quality.
(vii) Compliance With Other Policies.
Each real estate investment must be in accordance with all
Company policies including without limitation its policies
regarding compliance with the REIT Provisions of the Code and
exclusion from regulation under the Investment Company Act.
(d) Other Investments. The Company may also
pursue a variety of complementary commercial real estate and
finance-related businesses and investments in furtherance of its
business objective. Such activities may include, but are not limited
to, foreign real estate-related asset investments, equity interests or
other investments in other REITs, registered investment companies,
partnerships and other investment funds and real estate operating
companies to the extent permitted by the REIT Provisions of the Code.
Any such investments may be made by the Company in accordance with the
operating policies of the Company upon approval of the Investment
Committee.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 8
33
SECTION SECTION 2. CAPITAL AND LEVERAGE POLICIES
A. General. The Company intends to increase its invested assets
through the use of leverage in order to create yields commensurate with its
investment objectives. The Company intends to utilize leverage in a manner
that is prudent and consistent with maintaining an acceptable level of risk.
B. Limitations on Indebtedness. The Company's Leverage Ratio
(i.e., ratio of (i) indebtedness with respect to which the Company is the
obligor to (ii) the Company's total outstanding equity) shall not exceed (at
the time any debt is incurred) 3:1, without the prior approval of the Board of
Trust Managers.
C. Sources of Financing. The Company may utilize a variety of
debt vehicles, including warehouse lending arrangements, reverse repurchase
agreements, securitizations of mortgage loans or other secured or unsecured
financing sources, as deemed appropriate by the Manager, considering the
availability of financing sources and existing rates and market conditions at
any given time.
D. Securitizations. The Company may obtain secured financing
through the securitization of all or any portion of its Mortgage Loans.
Securitizations may be accomplished through the issuance of structured debt,
with the Company retaining an equity interest in the collateral or through a
"sale" of the underlying Mortgage Loans, if the Manager reasonably determines
there are structural or other advantages to such form of securitization. Any
securitizations conducted by the Company under which a "sale" of an interest in
Mortgage Loans occurs shall be conducted, to the extent permitted by the REIT
Provisions of the Code, through one or more taxable subsidiaries of the
Company, unless otherwise approved by the Board of Trust Managers or the
Company's investment or tax compliance officer. In addition, any such
securitizations shall be structured, to the extent practicable, to minimize the
attribution of any Excess Inclusion income to the Company's shareholders.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 9
34
SECTION SECTION 3. CREDIT RISK MANAGEMENT POLICIES
A. General. The Company is expected to be exposed to
various levels of credit and special hazard risks depending on the nature of
its investments. The Company's policy is to manage such risk by originating or
otherwise acquiring only those assets which satisfy the Company's underwriting
criteria and credit quality standards and, through the activities of the
Manager, by closely monitoring the quality and performance of its invested
assets.
B. Investment Committee. The Manager will establish one or more
Investment Committees (an "Investment Committee") which will meet regularly to
consider whether the Company should invest in specific Targeted Investments.
Subject to the following conditions, the voting members of an Investment
Committee may vary depending on the type of Targeted Investment under
consideration. At least two-thirds of the members of the Investment Committee
present and voting, must vote in favor of a particular Targeted Investment
before the Targeted Investment may be purchased, acquired or originated by the
Company. A quorum must be present for any meeting of the Investment Committee.
A quorum shall consist of a minimum of four of the members of the Investment
Committee and must include at least two of the following officers of the
Company: the President, the Chief Investment Officer and the Chief Operating
Officer. The Board of Trust Managers will monitor the Invested Portfolio and
the credit risk associated therewith.
C. Portfolio Review Program. The Manager shall implement a
Portfolio Review Program to provide for periodic review of the Invested
Portfolio so that potential credit problems can be recognized and addressed at
the earliest opportunity.
D. Underwriting Criteria and Credit Quality. The Company shall,
from time to time, in consultation with the Manager and the Investment
Committee, establish underwriting criteria and credit quality standards for the
various types of assets in which the Company intends to invest. Such
underwriting criteria shall include, without limitation, the following:
1. Loan to Value Ratios. The Company will typically not
loan in excess of 90% of the "stabilized" value of the property or in
excess of 100% of the cost of a property (which may include budgeted
construction period interest in the case of a Construction Loan).
2. Return Requirements. In underwriting a Mortgage
Loan, the Manager will model the economic return to the Company and
the borrower to determine whether the loan is economically feasible.
The Manager is not required to establish minimum debt service coverage
ratios, but shall underwrite to a "market" debt service coverage ratio
in evaluating the viability of refinancing of a loan. With respect to
MBS, the Manager shall utilize bond models (including those of
AMRESCO, Charter Research and dealers), as appropriate, to project
potentials for delinquency, prepayment and extension and to project
losses and returns prior to pricing of transactions.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 10
35
3. Concentrations of Credit. The Manager shall seek to
diversify and balance the Company's portfolio to minimize risk and
potential losses. To the extent applicable, the Manager shall monitor
the Company's Mortgage Loan concentrations from the perspectives of
(i) the size of any single loan, (ii) the total size of the
transaction if the Company is in a subordinate loan position, (iii)
the aggregate amount of loans to one borrower, (iv) geographic
concentrations, (v) property type concentrations. The Company may, in
the future (in consultation with the Investment Committee and the
Manager), establish specified limitations or parameters as to the
foregoing concentrations. With respect to the Company's MBS
portfolio, the Manager shall employ the following risk control
guidelines: (i) investments should be made in a manner intended to
minimize overweighing of economic concentration as measured by the
quotient of the weighted average loan distribution (compared to the
U.S. as a whole) of the largest states divided by the size of the
state's economy relative to the entire U.S. economy, (ii) no single
property type shall represent more than 50% of the Company's entire
MBS portfolio, (iii) distribution of loan sizes intended to result in
favorable loss distributions (large loans must be individually
analyzed and determined to be secure enough to protect the Company's
position) and (iv) the establishment of a maximum percentage of the
Company's MBS portfolio that may be represented by a single issuer.
4. Insurance Requirements. The Manager shall require
that the borrower or owner, as applicable, maintain, at all times
during the term of the loan or the investment, liability, hazard, rent
loss, flood, earthquake and/or other insurance coverage as may be
applicable, in such amounts and in accordance with the requirements
established from time to time by the Manager.
5. Borrower or Tenant Credit Quality. The Manager shall
review and analyze the credit history, net worth, liquidity, etc. of
each borrower/guarantor or significant tenant, as applicable.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 11
36
SECTION SECTION 4. FINANCIAL RISK MANAGEMENT POLICY
A. General. The objective of the Company's Financial Risk
Management Policy is to ensure that business exposures to risk are identified,
measured, and are managed in the most effective and efficient methods within
established guidelines. It is the Company's policy to hedge as much of the
interest rate risk as the Manager determines is in the best interest of the
Company, given the cost of and risks involved with such xxxxxx and the
Company's desire not to jeopardize its status as a REIT.
B. Financial Risk Management Committee. The Trust Managers will
establish the Financial Risk Management Committee to assist it in establishing
financial risk management, hedging and derivatives policies and to oversee and
monitor the Company's management of risk and use of derivatives. The Committee
will be composed initially of the Chairman of the Board of Company, Chief
Executive Officer ("CEO"), Chief Operating Officer ("COO"), Chief Investment
Officer ("CIO"), Chief Financial Officer ("CFO"), Treasurer and Chief
Accounting Officer. At least 50% of the members of the Financial Risk
Committee are required to constitute a quorum at any meeting of such Committee
and at least two-thirds of those present and voting at any meeting is required
for approval of any action. The Committee can also designate other persons to
act as nonvoting members who serve in an advisory capacity. To assist the
Committee in operating decisions and implementation of policy and procedures,
it may establish a Financial Risk Steering Committee to handle operational
issues.
C. General Objectives for the Use of Derivatives. Derivative
transactions or hedging activities are not to be undertaken for speculative
purposes, but only to lessen risks associated with earnings, credit, interest
rate, foreign currency, and other similar risks. Use of derivatives is not
automatic, nor is it necessarily the only response to managing business risk.
Derivative transactions should only be undertaken after the risks that have
been identified are determined to exceed defined levels established by this
Policy and are considered to be unavoidable because they are necessary or
support normal business activities.
The use of derivatives involves risks such as credit, liquidity,
basis, settlement, legal and systemic. Derivatives should be used only to the
extent that the Manager determines that the expected benefit of such use (after
considering the cost of the derivative transactions) is considered to outweigh
these risks. The Manager should avoid any incremental increase in the
Company's overall market exposure from the use of derivatives.
D. Specific Objectives for Use of Derivatives. Derivatives may
be used to protect foreign activities, including foreign revenue sources,
specific assets and liabilities denominated in foreign currencies, to hedge
firm commitments and forecasted transactions that expose the Company to risk,
and to protect against exchange rate movements between different currencies
that impact revenue and profit expressed in U.S. Dollars. Derivatives may also
be used to protect the value of the Company's investments in Mortgage Loans and
MBS and to hedge purchase commitments and forecasted
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 12
37
transactions that expose the Company to risk and to protect against interest
rate movements that negatively impact the value and/or intended execution of a
transaction.
E. Prohibitions on Use of Derivatives.
1. General. Derivatives shall not be used for trading,
speculation, or any other purpose in which the objective is to
generate profits. Derivative transactions are considered speculative
if they are perceived (at the time such transaction is entered into)
to increase risk, if their use has no relation to objectives specified
by the Company's policy, or if their use is not intended and expected
to manage business risks that have been identified.
2. Leverage. Derivative transactions are considered to
be highly leveraged if they expose the Company to loss in excess of
gains expected to be generated by positions and transactions they
modify. Unless approved by the Board of Trust Managers, the Manager
shall not utilize highly leveraged derivatives as they generally do
not reduce risk.
3. Valuation. Unless otherwise approved by the Board of
Trust Managers, the Manager shall avoid using any derivative for which
a market quotation cannot be obtained or which cannot be valued
reliably internally by the financial staff using valuation
methodologies that have been approved for use by the Financial Risk
Management Committee.
4. GAAP Accounting. Use of derivatives that do not
qualify for hedge accounting or deferral accounting under generally
accepted accounting principles shall not be utilized unless approval
is obtained from the Financial Risk Management Committee.
5. Accounting Motivated Transactions. Derivative
transactions that are primarily motivated by accounting implications
and do not reduce economic or business risk exposure shall not be
utilized. Derivative transactions are considered to be accounting
motivated transactions if they result in the current recognition of
revenue or current reduction of cost as a result of incurring a
liability to be recognized in the future or taking a risk to be
determined and settled in the future.
Use of derivatives solely to manage earnings is prohibited.
Derivative transactions are unauthorized if the intention of the
transaction is to recognize a profit by closing out, modifying,
terminating or offsetting the derivative instrument, even if the
transaction would otherwise meet the requirements for use under this
policy.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 13
38
F. Operating Limitations on Use of Derivatives.
1. Forecasted Transactions. Forecasted transactions
that are not expected to occur within one year generally are not
considered to be probable of occurring under this policy. The Manager
shall not use derivatives to hedge such forecasted transactions unless
specific written approval is obtained from the Financial Risk
Management Committee.
2. Derivative Products and Strategies. Use of the
following products and strategies requires specific approval for each
transaction by the Financial Risk Management Committee:
o Written options
o Combination options involving the use of written options
o Written options embedded in swaps and other derivatives
o Selective hedging and partial hedging of exposures outside of
preapproved parameters that have been identified
o Frequent buying and selling or terminating derivatives used in
risk management activities not
specifically related to changing positions of the matched items
3. Types of Contracts Authorized for Use. The Company
may use the following derivative instruments specifically approved by
the Financial Risk Management Committee:
Cash Market Derivatives
o Treasury or Eurodollar securities
o Futures contracts Treasury or Eurodollar securities
o Purchased options on Treasury and Eurodollar features
o MBS forward securities
Mortgage Backed Securities ("MBS") - FNMA, GNMA, FHLMC, and Other Debt
Securities
o Futures contracts on MBS and other debt securities
o Purchase options on MBS and other debt securities
o MBS forward cash securities
Interest Rate Derivatives
o Interest rate swaps
o Interest rate caps, floors and collars
o Options on swaps
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 14
39
Foreign Currency Derivatives
o Currency forwards and futures
o Purchased currency options
o Combination foreign currency options - where the notional amount and maturity date exactly match the
underlying transaction being hedged and the cost of the purchased options is equal to or greater than
the proceeds received on the option sold
o Foreign currency derivatives - authorized for use by business units exposed to foreign currency risk to
the extent identified by the risk identification and measurement process
Use of any derivative not specifically identified above requires the written
approval of the Financial Risk Management Committee.
G. Counterparty Risk. The Company will only enter into
derivative transactions with counterparties that have a current senior debt
rating by either Standard & Poor's Rating Services, a division of XxXxxx-Xxxx
Companies, or Xxxxx'x Investors Service, Inc. of A or better or the equivalent
rating by other recognized rating agencies approved by the Financial Risk
Management Committee.
The Company will generally continue in a derivative transaction if the
counterparty's credit rating is downgraded to BBB. Appropriate steps should be
taken by the Manager to minimize risks if the counterparty's credit rating is
downgraded below BBB. Such steps may include obtaining collateral or some
other acceptable form of credit enhancement, or terminating the transactions,
if practicable. The Manager shall notify the Financial Risk Management
Committee of all credit downgrades. The Committee must approve the actions
proposed to be taken with respect to a transaction where the counterparty's
credit rating is downgraded below BBB.
The Company will not enter into a new derivative transaction with a
counterparty if the new transaction will result in credit exposure exceeding
limits specified by the Financial Risk Management Committee. Such limits are
currently set as follows:
(Senior Debt Rating)
o For counterparties rated AAA Unlimited
o For counterparties rated AA Unlimited
o For counterparties rated A 10% of the Company's Equity
For purposes of this paragraph, "credit exposure" means the greater of the
current net market value of all derivative transactions with the counterparty,
or 5% of the total notional value of the derivatives with that counterparty.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 15
40
H. Authorized Brokers. The Manager is authorized, on behalf of
the Company, to enter into derivative transactions with primary dealers and
other financial institutions as follows:
o Any "primary" government security dealer as approved from time to time by the Federal Reserve Bank of New York.
o Any commercial bank which is FDIC insured and maintains a commercial paper rating in the top two credit
categories from a rating service of national prominence.
o Any SEC-registered broker dealer that meets the voluntary capital requirements of the Federal Reserve Bank of
New York.
o Any federal agency or federally sponsored agency.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 16
41
SECTION SECTION 5. POLICIES REGARDING TRANSACTIONS WITH THE AMRESCO GROUP
A. General. As a result of the Company's relationship with the
AMRESCO Group (including, particularly, as a result of the Right of First
Refusal and the Correspondent Agreement), the Company expects to benefit from
the market reputation, expertise and relationships developed by the AMRESCO
Group and the potential investment opportunities (including coinvestment
opportunities) expected to be identified through the AMRESCO Group. It is the
intention of the Company that the agreements and transactions, including the
sale of or coinvestment in any asset, between the Company and the AMRESCO Group
be fair to the Company and be on terms at least as favorable as those the
Company could have obtained from unaffiliated third parties. Accordingly, the
following procedures should be implemented to assist the Company in
ascertaining that any transactions and agreements with the AMRESCO Group meet
such standard.
B. Acquisitions from Members of the AMRESCO Group.
1. The Company may acquire assets which meet its
investment criteria and objectives (other than CMBS or RMBS issued in
securitizations sponsored by members of the AMRESCO Group) from
members of the AMRESCO Group, without prior approval from the
Independent Trust Managers provided that:
(a) the Chief Investment Officer reasonably
determines in good faith that the price of the asset is no
greater and the terms of the sale are no less favorable than
that which would be available from third parties for similar
investments;
(b) the purchase price of any individual asset or
pool of assets proposed to be purchased at any one time does
not exceed the greater of $75 million or 10.0% of the
Company's total consolidated assets, determined before the
proposed acquisition; and
(c) when possible, the price that the Company
will pay for any asset acquired from the AMRESCO Group shall
be determined by reference to the prices most recently paid to
the AMRESCO Group for similar investments, adjusted for
differences in the terms of such transactions and for changes
in market conditions between the dates of the relevant
transactions. If no previous sales of comparable investments
have occurred, the Manager shall attempt to determine a market
price for the asset by obtaining a broker's price opinion or
an appraisal, if it can do so at a reasonable cost.
2. Assets which do not meet the criteria set forth above
may be purchased from any member of the AMRESCO Group only with the
prior approval
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 17
42
of a majority of the Independent Trust Managers (or a majority of the
Independent Trust Managers of any authorized Committee of the Board).
3. The Company may purchase CMBS or RMBS issued in
securitizations sponsored by members of the AMRESCO Group only in a
competitive bidding situation and upon prior approval of a majority of
the Independent Trust Managers.
C. Coinvestments with Members of The AMRESCO Group.
1. The Company may coinvest in any asset with any member
of the AMRESCO Group, without prior approval from the Independent
Trust Managers, provided that the terms of the Company's investment is
substantially similar to the terms of the investment of the AMRESCO
Group, except for such differences as may be attributable solely to
the size of the investment.
2. Any potential coinvestments by the Company with any
member of the AMRESCO Group which exceed $15 million (in the
aggregate, during any calendar year) and which contemplate investment
terms for the Company which are different than those proposed for any
member of the AMRESCO Group will require the prior approval of a
majority of the Independent Trust Managers (or a majority of the
Independent Trust Managers of any authorized Committee of the Board).
D. Expense Reimbursement and Allocation Matters.
1. Due diligence and underwriting expenses incurred by
the Manager or any member of the AMRESCO Group may be charged to and
reimbursed by the Company only after an asset has been preliminarily
approved for investment by the Chief Investment Officer or other
authorized officer of the Company.
2. The Manager may incur due diligence, underwriting and
other costs and expenses on behalf of the Company, provided that, in
the event costs and expenses with respect to any one transaction are
expected to exceed $500,000, the incurrence of such costs and expenses
must be approved, in advance, by the Board of Trust Managers (or a
majority of the Independent Trust Managers of any authorized Committee
of the Board).
3. In the event that any member of the AMRESCO Group
purchases or otherwise invests in all or any portion of an asset with
respect to which due diligence, underwriting or other costs of which
have been charged to or reimbursed by the Company, the Company shall
recover from the AMRESCO Group all or the applicable portion of such
costs and expenses allocable to the investment by the AMRESCO Group.
4. To the extent any member of the AMRESCO Group (other
than the Manager) provides services to the Company pursuant to the
Management Agreement or otherwise for which it is entitled to receive
payment or
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 18
43
compensation, such payment or compensation shall be reasonable and no
greater than amounts which are charged by third parties in arms-length
transactions.
E. Quarterly Review of Related Party Transactions. The
Independent Trust Managers shall review, on a quarterly basis, all (i)
acquisitions of assets by the Company from members of the AMRESCO Group made
during the preceding calendar quarter (including the prices of and the terms of
such acquisitions) which were not specifically approved for acquisition by the
Independent Trust Managers, (ii) all coinvestments made with any member of the
AMRESCO Group during the preceding calendar quarter, (iii) the reasonableness
of the expenses paid to any member of the AMRESCO Group and (iv) the terms of
all other transactions between the Company and any member of the AMRESCO Group.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 19
44
SECTION SECTION 6. REIT COMPLIANCE POLICIES
A. General. It is the Company's intention to qualify as a REIT
under the Code beginning with its taxable year ending on December 31, 1998.
Accordingly, the Company shall conduct its business in accordance with the
following procedures so as to meet the (i) organizational requirements, (ii)
income tests, (iii) asset tests and (iv) annual distribution requirements
applicable to REITs.
B. Organizational Requirements. The Company shall enforce the
"Excess Share" provisions of its Declaration of Trust prohibiting ownership of
more than 9.8% of the Common Shares by any person, subject to the exceptions
provided therein. In addition, on or before January 30th of each year, the
Company shall send a letter demanding information regarding the amount of
shares each such shareholder constructively owns (the "shareholder demand
letters") (i) in the event the Company has 2,000 or more shareholders of record
on any dividend record date, from each record holder of 5% or more of its
shares, (ii) in the event the Company has less than 2,000 and more than 200
shareholders of record on any dividend record date, from each record holder of
1% or more of its shares and (iii) in the event the Company has 200 or less
shareholders of record on any dividend record date, from each shareholder of
record of one-half of 1% or more of its shares.
C. Income Tests. At least 75% of the Company's gross income
(excluding income from prohibited transactions) for each taxable year shall be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and interest)
or from certain types of temporary investments. In addition, at least 95% of
the Company's gross income (excluding income from prohibited transactions) for
each taxable year must be derived from such real property investments and from
dividends, interest and gain from the sale or disposition of securities.
1. Acquisition of Assets. Prior to purchasing,
originating or otherwise acquiring any asset (including, without
limitation, any acquisition by foreclosure or deed-in-lieu of
foreclosure), such asset will be reviewed and analyzed by the
Company's investment compliance officer (and, to the extent the
investment compliance officer or other executive officer of the
Company determines necessary, by qualified REIT tax counsel) to ensure
that the acquisition and ownership will not cause the Company to fail
to qualify as a REIT for federal income tax purposes. To the extent
that any proposed acquisition includes an equity investment in real
estate or a Mortgage Loan or a pool of Mortgage Loans secured by real
estate, the Company shall require the owner of the real estate or the
borrower, as applicable, to complete a "checklist," make
representations, and/or otherwise supply requisite information
regarding the nature of the income from and the operation of the
property to enable the Company's investment compliance officer (or
REIT tax counsel, as applicable) to determine whether such proposed
investment satisfies the income tests applicable to REITs.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 20
45
2. Other Income. Prior to entering into any transaction
which may result in the receipt by the Company of income (whether
through the sale or lease of assets, the provision of services, the
entering into of a hedging transaction or otherwise), such transaction
will be reviewed and analyzed by the Company's investment compliance
officer (and, to the extent the investment or tax compliance officer
or other executive officer of the Company determines necessary, by
qualified REIT tax counsel) to ensure that the receipt of income from
such transaction will not cause the Company to fail to qualify as a
REIT for federal income tax purposes. If the investment compliance
officer or qualified REIT tax counsel determines it to be appropriate,
the Company may transfer certain nonqualifying activities to a taxable
corporation from which it may receive dividends, to the extent
permitted by the Code.
D. Asset Tests. At least 75% of the value of the Company's total
assets shall be represented by cash or cash items (including certain
receivables), government securities, "real estate assets" (including loans
secured by real estate interests) or, in certain cases, temporary investments
as defined in or permitted by the Code. In addition to the foregoing
requirement, the value of any one issuer's securities owned by the Company
shall not exceed 5% of the value of the Company's total consolidated assets,
and the Company shall not own more than 10% of any one issuer's outstanding
voting securities (except for its interests in any qualified REIT subsidiary).
Prior to any acquisition or disposition of the Company's assets, the investment
compliance officer (or qualified REIT counsel, as applicable) shall review such
proposed acquisition or disposition to determine that such acquisition or
disposition will not cause the Company to fail to qualify as a REIT for federal
income tax purposes as a result of the foregoing asset tests.
E. Annual Distribution Requirements. The Company shall make
quarterly distributions to its shareholders equal, on an annual basis, to at
least 95% of the Company's REIT taxable income (computed without regard to the
dividends paid deduction and any net capital gains).
F. Review by Independent Accounting Firm. The Company shall
cause its independent accounting firm to review, in connection with its
quarterly review of the financial statements of the Company, the Company's
compliance with the REIT Provisions of the Code. The Company shall cause its
independent accounting firm to review, in connection with its annual audit of
the financial statements of the Company, the Company's compliance with the REIT
Provisions of the Code and, in connection therewith, to prepare and deliver, on
an annual basis, a report of its findings with respect thereto to the Board.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 21
46
SECTION SECTION 7. POLICY REGARDING INVESTMENT COMPANY ACT
A. General. The Company intends to be primarily engaged in the
business of purchasing or otherwise acquiring "mortgages and other liens on and
interests in real estate" and therefore to be excluded from regulation under
the Investment Company Act.
B. Percentage of Assets Constituting Interests in Real Estate.
The Company shall maintain at least 55% of its assets directly in Mortgage
Loans, MBS which represent all of the beneficial interest in the underlying
pool of Mortgage Loans, direct equity investments in real estate and other
qualifying liens on and interests in real estate.
C. Collateral Rights. With respect to any proposed investment in
any MBS which does not represent all of the beneficial interest in the
underlying pool of Mortgage Loans, the Manager shall seek (where appropriate
and feasible) to obtain the right to foreclose on the underlying property, to
control the oversight and management of the resolution of the underlying
Mortgage Loans by workout or modification of loan provisions, foreclosure, deed
in lieu of foreclosure or otherwise and to control decisions with respect to
the preservation of the collateral generally (collectively, the "Collateral
Rights").
D. Maximum Percentage of Partial MBS Interests. Without the
prior approval of the Board of Trust Managers (or any authorized Committee of
the Board), the Company's aggregate investments in MBS shall not exceed, at the
time of such investment, 40% of the Company's total consolidated assets.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 22
47
SCHEDULE I
DEFINITIONS
Capitalized terms used above have the meanings set forth below, unless
the context indicates otherwise.
"Board" means the Board of Trust Managers of AMCT.
"Bridge Loan" means a Mortgage Loan used for temporary financing.
"CMBS" means commercial or multifamily MBS.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means AMCT's common shares of beneficial interest, par
value $.01 per share.
"Construction Loan" means a Mortgage Loan the proceeds of which are to
be used to finance the costs of construction or rehabilitation of real
property.
"Correspondent Agreement" means the nonexclusive Correspondent
Agreement between Xxxxxxxx Xxxxxxxx Xxxxxx and the Company.
"Distressed Mortgage Loans" means Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Estate" means REO Properties and other
underperforming or otherwise distressed real estate.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Committee" means the committee(s) maintained by the
Manager (which committee(s) will include the President and the Chief Investment
Officer of the Company) which must approve the purchase, acquisition or
origination by the Company of any Targeted Investment.
"Management Agreement" means the agreement by and between the Company
and the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
"MBS" means mortgage-backed securities (including CMBS and RMBS).
"Mezzanine Loan" means a commercial real estate loan the repayment of
which is subordinated to a senior Mortgage Loan and which is secured either by
a second lien
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 23
48
mortgage or a pledge of the ownership interests of the borrower. Such loans
can also take the form of a direct equity investment in a partnership or joint
venture.
"Mortgage Collateral" means mortgage pass-through securities or pools
of whole loans securing or backing a series of CMBS.
"Mortgage Loans" means, collectively, loans secured by real property
and Mezzanine Loans.
"Net Leased Real Estate" means real estate that is net leased on a
long-term basis (ten years or more) to tenants who are typically responsible
for paying a majority of the costs of owning, operating, and maintaining the
leased property during the term of the lease, in addition to the payment of a
monthly rent to the landlord for the use and occupancy of the premises.
"Nonperforming Mortgage Loans" means Mortgage Loans for which the
payment of principal and/or interest is more than 90 days delinquent.
"Participating Loan" means a Mortgage Loan that entitles the lender to
the receipt of interest based on a percentage of the mortgaged property's
revenues or cash flow, and/or any gain on sale of the property which
Participating Loan may be a Mezzanine Loan, Construction Loan, Bridge Loan or
other Mortgage Loan.
"Permanent Mortgage Loans" means long-term senior Mortgage Loans.
"Qualified REIT Subsidiary" means a corporation whose stock is
entirely owned by the Company at all times during such corporation's existence.
"REIT" means a real estate investment trust, as defined under Section
856 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code.
"REO Property" means real estate acquired at foreclosure (or by deed
in lieu of foreclosure).
"Residual Interests" means REMIC Residual Interests and non-REMIC
Residual Interests collectively.
"Right of First Refusal" means the right to be granted by AMRESCO to
the Company with respect to Targeted Mortgage Loans and MBS, pursuant to which
AMRESCO will agree not to permit any member of the AMRESCO Group to invest in
(i) the first $100 million of Targeted Mortgage Loans which are identified by
or to any member of the AMRESCO Group during any calendar quarter, or (ii) any
MBS, other than MBS issued in securitizations sponsored in whole or in part by
any member of the AMRESCO Group, unless the Investment Committee shall have
first determined, in each
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 24
49
case, that the Company should not invest in such asset or assets, or should
invest in only a portion of such asset or assets.
"RMBS" means a series of one-to four-family residential MBS.
"Subordinated Interests" means classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes.
"Subperforming Mortgage Loans" means Mortgage Loans for which default
is likely or imminent or for which the borrower is making payments in
accordance with a forbearance plan.
"Targeted Investments" means the various types of real estate related
assets targeted to be invested in by the Company.
"Targeted Mortgage Loans" means any Mortgage Loan which (i) meets the
investment criteria and objectives of the Company and (ii) has been
preliminarily reviewed and approved for further consideration by any member of
the AMRESCO Group.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 25
