Lease Agreement With Microsoft Corporation

STANDARD FORM LEASE - -------------------------------------------------------------------------------


PARTIES: This Lease, executed in duplicate at Cupertino, California, on July 25, 1998, by and between Mission West Properties, L.P., a Delaware Limited Partnership, and Microsoft Corporation, a Washington Corporation, hereinafter called respectively Lessor and Lessee, without regard to number or gender.


USE: That Lessor hereby leases to Lessee, and Lessee leases from Lessor, for the purpose of conducting therein office, research and development, light manufacturing, and warehouse activities, and any other legal activity; and for no other purpose without obtaining the prior written consent of Lessor, the Premises described below.


PREMISES: The subject premises are located on certain real property consisting of approximately 32 acres as shown on Exhibit A.1 situated in the City of Mountain View, County of Santa Clara, State of California ("Property"). Such Property as improved with five buildings, parking lots with parking for 1,748 cars, landscaped areas, common areas, and other related improvements, shall be collectively referred to herein as the "Premises." The five buildings comprising a portion of the Premises will consist of approximately 515,700 square feet of space, defined by the City of Mt. View as the maximum allowable development on the subject real property and are commonly referred to as buildings 1,2, 3, 4, and 5 (such five buildings shall be defined as the "Buildings"), as shown on Exhibit A.2. The address for the Premises will be between 1065 and 1105 L'Avenida, Mountain View, California. Lessee's pro-rata share of the Premises is 100%.


The actual rentable square feet of the Premises shall be verified by Lessor and Lessee and shall consist of all space on each floor plane of each Building measured from the vertical plane of the outside edge of all eaves. This means that the floor area of each floor that is used for elevator shafts, stairwells, fire corridors, columns, ducts, and the like shall be included in the rentable square feet of the Premises. Subject to Section 2, Lessee agrees to deliver Buildings that total at least 515,700 square feet, as measured by Lessor. Lessee shall pay rent based upon 515,700 square feet, even in the event Lessor's measurement method results in more square feet than the City of Mt. View's measurement method.


TERM: The term for buildings numbered 2, 3, 4, and 5 shall be for eighty-four (84) months and sixteen (16) days unless extended pursuant to Section 34 of this Lease (the "Lease Term"), commencing on the 15th day of March, 1999 and ending on the 31st day of March, 2006 as adjusted per Section 1.1 below. The term for building number 1 shall be for eighty-two (82) months and sixteen (16) days unless extended pursuant to Section 34 of this Lease (the "Lease Term"), commencing on the 15th day of May, 1999 and ending on the 31st day of March, 2006 as adjusted per Section 1 below.


RENT: Subject to the determination of the final square footage of building number 1, base rent shall be payable in monthly installments as follows:


Base Estimated
Rent CAC* Total
---------- ----------- ----------
March 15, 1999 to March 31, 1999 $ 672,495 $ 78,526 $ 751,021
April 1, 1999 to April 30, 1999 $1,226,315 $143,195 $1,369,510
May 1, 1999 to May 14, 1999 $ 553,820 $ 64,669 $ 618,489
May 15, 1999 to May 31, 1999 $ 834,270 $ 96,321 $ 930,591
June 1, 1999 to March 31, 2000 $1,521,315 $175,645 $1,696,960


Monthly base rent shall increase by 4% on April 1st of each year, commencing on April 1, 2000, during the Lease Term over the prior year's base rent. * CAC CHARGES TO BE ADJUSTED PER COMMON AREA CHARGES SECTION BELOW.


Base rent and CAC as scheduled above shall be payable in advance on or before the first day of each calendar month during the Lease Term. The term "Rent," as used herein, shall be deemed to be and to mean the base monthly rent and all other sums required to be paid by Lessee pursuant to the terms of this Lease. Rent shall be paid in lawful money of the United States of America, without offset or deduction, except as provided in Sections 19 and 21, and shall be paid to Lessor at such place or places as may be designated from time to time by Lessor. Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Upon execution of this Lease, Lessee shall deposit with Lessor the first month's rent.


SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of One Million Dollars ($1,000,000) (the "Security Deposit"). The Security Deposit shall be held by Lessor as security for the faithful performance by Lessee of all of the terms, covenants, and conditions of this Lease applicable to Lessee. If Lessee commits a default as provided for herein, including but not limited to a default with respect to the provisions contained herein relating to the condition of the Premises, Lessor may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any amount which Lessor may spend by reason of default by Lessee. If any portion of the Security Deposit is so used or applied, Lessee shall, within ten days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the Security Deposit to its original amount. Lessee's failure to do so shall be a default by Lessee. Any attempt by Lessee to transfer or encumber its interest in the Security Deposit shall be null and void. Upon execution of this Lease, Lessee shall deposit with Lessor the Security Deposit. Notwithstanding the above, Lessor agrees to waive the requirement for Lessee to make a Security Deposit provided Lessee's shareholder's equity exceeds $100 million. If at any time during this Lease, Lessee's shareholder's equity is less than $100 million, Lessee shall deposit with Lessor the Security Deposit referenced above within ten days after receipt of written demand by Lessor based on the issuance of Lessee's annual financial statements indicating the reduction in shareholder's equity below $100 million. If Lessee fails to make the Security Deposit as required, Lessee shall be deemed to be in default per Section 14.1 (a) of this Lease.


COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an amount equal to Lessee's pro-rata share of the total common area charges of the Premises ("CAC"). Lessee shall pay to Lessor as Rent, on or before the first day of each calendar month during the Lease Term, subject to adjustment and reconciliation as provided hereinbelow, the sum of One Hundred Seventy-Five Thousand Six Hundred Forty-Five Dollars ($175,645), said sum representing Lessee's estimated monthly payment of Lessee's pro rata share of CAC. It is understood and agreed that Lessee's obligation under this paragraph shall be prorated to reflect the Commencement Date and the end of the Lease Term. Lessee's estimated monthly payment of CAC payable by Lessee during the calendar year in which the Lease commences is set forth above. At or prior to the commencement of each succeeding calendar year term (or as soon as practical thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of the calendar year and the end of the Lease Term, Lessor shall provide Lessee a statement of actual CAC incurred including capital reserves for the preceding year or other applicable period in the case of a termination year. If such statement shows that Lessee has paid less than its pro rata share of actual CAC, then Lessee shall on demand pay to Lessor the amount of such deficiency. If such statement shows that Lessee has paid more than its pro rata share of CAC, then Lessor shall, at its option, promptly refund such excess to Lessee or credit the amount thereof to the Rent next becoming due from Lessee. Lessor reserves the right to revise any estimate of CAC if the actual or projected CAC show an increase or decrease in excess of 10% from an earlier estimate for the same period. In such event, Lessor shall provide a revised estimate to Lessee, together with an explanation of the reasons therefor, and Lessee shall revise its monthly payments accordingly. Lessor's and Lessee's obligation with respect to adjustments at the end of the Lease Term or earlier expiration of this Lease shall survive the Lease Term or earlier expiration. All capital repair and improvement costs incurred by Lessor shall be funded first from applicable capital reserves, if any, that are derived from CAC payments made by Lessee to Lessor or other tenants of the Property. To the extent such reserves are insufficient and the cost is not addressed by Section 9, then such cost initially shall be paid by Lessor and then amortized over the estimated useful life of the work, not to exceed 15 years, at Wells Fargo prime rate plus one percent (1%). Lessee's pro-rata share of the amortized costs of such improvement shall be added to CAC on a monthly basis over the Lease Term.


As used in this Lease, CAC shall include but is not limited to: (i) items as specified in Sections 5(b) and 16; (ii) all costs and expenses including but not limited to supplies, materials, equipment and tools used or required in connection with the operation and maintenance of the Premises; (iii) licenses, permits and inspection fees; (iv) all other costs incurred by Lessor in maintaining and operating the Premises; (v) all reasonable reserves for capital replacements and government regulations imposed on the Premises not related to Lessee's use and occupancy of the Premises; and (vi) a professional management fee equal to one percent (1%) of the annual base rent, as compensation for Lessor's accounting, management and processing services. Notwithstanding the foregoing, the following specific items (and only such specific items) shall be excluded from CAC:


(1) leasing commissions, fees and costs, advertising and promotional
expenses and other costs incurred in procuring tenants, or in the
negotiations, disputes or claims of other tenants or third parties
except as otherwise stated in this Lease;


(2) tenant improvement work for any tenant, including Lessee;


(3) rental on ground leases or other underlying leases;


(4) wages, bonuses, and fringe benefits and other compensation of
employees above the grade of Building Manager;


(5) costs of any items to the extent which Lessor actually is reimbursed
by insurance;


(6) increased insurance or real estate taxes assessed specifically to any
tenant of the Buildings (other than Lessee) to the extent which
Lessor is entitled to reimbursement by any other tenant;


(7) charges for electricity, water, or other utilities and applicable
taxes (not applicable to Lessee) to the extent which Lessor is
entitled to reimbursement by any other tenant;


(8) cost of any HVAC, janitorial or other services provided to tenants
(other than Lessee) on an extra cost basis after regular business
hours to the extent Lessor is entitled to reimbursement by such other
tenant;


(9) cost of installing, operating and maintaining any specialty service,
such as an observatory, broadcasting facilities, child or daycare,
luncheon club or athletic or recreation club unless required by any
governmental authority;


(10) cost of any work or services performed for any facility other than
the Premises, unless required by any governmental authority;


(11) any cost representing an amount paid to a person, firm, corporation
or other entity related to Lessor that is not commercially
reasonable;


(12) any cost of painting or decorating any interior parts of the
Buildings other than common areas or areas within the Premises;


(13) costs of relamping all light fixtures in non-public areas of the
buildings (other than the Premises) including, without limitation,
labor and materials for light tubes, bulbs, starters, ballasts and
their equivalents;


(14) any cost associated with operating an on or off-site management
office for the Premises(it is understood by Lessee and Lessor that
the 1% management fee paid by Lessee to Lessor covers the cost of
such offices);


(15) Lessor's general overhead not directly attributable to operation and
management of the Premises(e.g., the activities of Lessor's officers
and executives or professional development expenditures) (it is
understood by Lessee and Lessor that the 1% management fee paid by
Lessee to Lessor covers such cost);


(16) costs of any mitigation or impact fees or subsidies (however
characterized), imposed or incurred in connection with the initial
construction of the Buildings;


(17) cost of the initial stock of tools and equipment for operation,
repair and maintenance of the Premises;


(18) late fees or charges incurred by Lessor due to late payment of
expenses;


(19) cost of acquiring sculptures, paintings and other art objects;
provided that the maintenance, repair, and replacement of such items
shall be a CAC expense;


(20) charitable or political contributions;


(21) Lessor shall not recover any item of cost more than once.


Lessor shall at all times use its reasonable efforts to operate the Premises in a commercially reasonable manner at costs not disproportionately higher than those experienced by other comparable buildings in the Mountain View/Palo Alto, California area. It is expressly understood by Lessee and Lessor that this Lease is intended to be triple net and that the above-listed exceptions to CAC shall in no manner alter, modify, or diminish the responsibility of Lessee to pay all sums due pursuant to this Lease.


Lessee shall have the right to review the basis and computation analysis used to derive the CAC applicable to this Lease annually. Lessee or its audit representatives shall have the right to inspect and audit Lessor's books and records with respect to this Lease once each lease year to verify actual CAC. The Lessor's books and records shall be kept in accordance with generally accepted accounting principles. If Lessee's audit of the CAC reveals an overcharge of more than five percent (5%), Lessor promptly shall reimburse Lessee for the actual out-of-pocket cost of the audit. Any overcharge or underpayment of CAC shall be due from one party to the other within thirty (30) days after the amount of the overcharge or underpayment has been fixed. The foregoing rights also shall apply with respect to verification of any amounts charged by Lessor to Lessee for utility costs. It is expressly agreed by Lessee and Lessor that the 1% management fee to be paid by Lessee to Lessor is a "fixed fee" and that Lessee shall have no right to audit or contest such fee.


LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges, which may be imposed on Lessor according to the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of Rent or any other sum due from Lessee is not received by Lessor or Lessor's designee within ten (10) days after such amount is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payments made by Lessee. Acceptance of such late charges by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor shall it prevent Lessor from exercising any of the other rights and remedies granted hereunder. Notwithstanding the above, Lessor agrees to waive one late charge per any twenty-four month period if it is the result of a non-recurring unusual event such as an accounting error.


QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee paying Rent and performing its covenants and conditions under this Lease, Lessee shall and may peaceably and quietly have, hold and enjoy the Premises for the Lease Term, subject, however, to the rights reserved by Lessor hereunder. Lessor shall provide Lessee with Non-Disturbance Agreements from any existing and future lienholders of Lessor in a commercially reasonable form. Lessee shall have access twenty four (24) hours per day and seven (7) days per week to Premises and parking facilities.


IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:


1. POSSESSION: Once this Lease is signed by both Lessee and Lessor, Lessee shall have the right to come onto the Premises and commence the development of the Premises and the construction of the Buildings. All of the terms and conditions of this Lease shall become effective once this Lease is signed by both Lessee and Lessor, except that Lessee's obligation to pay base rent and CAC shall not start until the Commencement Dates. Lessee, by signing this Lease, is accepting the Premises in an "as is" condition, subject to Lessor's on-going remediation of Hazardous Materials as described in Section 32.3, and agrees to meet all City of Mountain View conditions and requirements applicable to the construction and occupancy of the Lessee Improvements, including, but not limited to the Findings Report and Zoning Permit dated April 3, 1998, and is agreeing to be responsible for all governmental permits and fees, design, engineering, testing, inspection, construction, and completion of all Lessee Improvements (as defined in Section 2)., except for the Off-Site Work as specifically listed in Exhibit A.3 and any pre-existing Hazardous Materials as described in Section 2.5 n.


1.1 COMMENCEMENT DATES: The initial term of this Lease for Buildings 2, 3, 4, and 5 shall commence on March 15, 1999, and the initial term of this Lease for Building 1 shall commence on May 15, 1999, subject to any Uncontrollable Delays as defined in Section 2.5(a) (the "Commencement Date"). The Commencement Date shall be delayed one day for each day of an Uncontrollable Delay.


2. DEVELOPMENT OF THE PREMISES:


2.1 LESSEE IMPROVEMENTS: Lessee shall have the sole responsibility for constructing the Building Shells and the Lessee Interior Improvements (as those terms are defined in this Section 2) and shall pay all costs related thereto, less the Lessor Allowance (as defined below). The Building Shells and the Lessee Interior Improvements shall be collectively defined as the "Lessee Improvements."


2.2 BUILDING SHELLS: "Building Shells" shall be defined as all work shown on Exhibit B, including all of the on-site improvements for the five buildings to be built on the Premises.


2.3 LESSEE INTERIOR IMPROVEMENTS: The "Lessee Interior Improvements" shall be defined as all items required for occupancy that are not part of the Building Shell or the Off-Site Work


2.4 OFF-SITE WORK: "Off-Site Work" shall be defined as only the work specifically shown on Exhibit A.3 attached hereto. The Off-Site Work shall be the responsibility of and shall be completed at the sole cost of Lessor.


2.5 LESSEE IMPROVEMENT REQUIREMENTS: Lessee represents that the Lessee Improvements will be in good order and repair, and comply with applicable law and all requirements for occupancy as of the date Lessee takes occupancy and opens for business. Lessee and Lessor agree to the following with respect to the Lessee Improvements:


a. Subject to Section 2.5(n) below, Lessee shall be responsible at its sole
cost and expense for all work necessary to complete the Lessee
Improvements, including but not limited to governmental and city fees,
permits and approvals, engineering, design, construction, testing, and
inspections. Lessor shall have no responsibility or liability for: (i) the
Lessee Improvements except for payment of the Lessor Allowance as specified
below, (ii) any delay of the Commencement Date or the date Lessee can take
occupancy and open for business regardless of the reason, including without
limitation delays caused by the City of Mountain View, delays in the design
of the Lessee Improvements, construction delays, work stoppages and
strikes, or delays caused by the shortage of materials, except
Uncontrollable Delays (defined below) (iii) Lessee's obligation to commence
paying Rent on the Commencement Date, subject to Uncontrollable Delays,
(iv) claims asserted by Lessee or Lessee's Agents based on the construction
of the Lessee Improvements, and (v) any claims, responsibility, or
liability Lessor may assume by signing for building permits for the Lessee
Improvements. "Uncontrollable Delay(s)" shall mean any delay caused by
events described in Section 2.5 (n).


b. The Building Shells shall be constructed at Lessee's sole cost by an
independent contractor to be employed by and under the supervision of
Lessee. The Building Shells shall be constructed in accordance with the
site plan, civil engineering drawings, utility plans, landscape plans,
elevations, plans and specifications, and working drawings for the five
buildings and the on-site work (the "Shell Plans"). The Shell Plans are to
be prepared at Lessee's sole cost and approved by Lessor, which approval
shall not be unreasonably withheld, conditioned or delayed, and thereafter
attached hereto as Exhibit C. Lessor shall review and approve all of
Lessee's plans and specifications for the Lessee Interior Improvements to
be made to the Premises after completion of all working drawing (the
"Lessee Interior Plans") and thereafter shall be attached hereto as Exhibit
D. In connection with Lessor's approval, Lessor shall designate any special
tenant improvements that Lessor may require be removed upon expiration or
earlier termination of this Lease. All plans shall be reviewed and approved
or disapproved by Lessor within 5 business days of delivery to Lessor.


c. Lessee shall be responsible for ensuring the Lessee Improvements conform
to the approved plans and all applicable statutes, rules, regulations,
ordinances, and the City of Mountain View Building Department
interpretations necessary for occupancy.


d. The Lessee Improvements shall be completed in a good and workmanlike
manner, in compliance with all government codes, laws, requirements and
regulations, and with all necessary permits.


e. Lessor and its designated representatives, shall at all times during the
construction of the Lessee Improvements have access to the Premises to
monitor the progress of construction, but Lessor shall have no obligation
to verify Lessee's work or compliance with Lessee's obligations herein;
provided however, that such access shall not unreasonably interfere with
the activities of Lessee or its contractors.


f. All of Lessor's reimbursements to Lessee for Lessee Improvements shall
be paid by Lessor within ten (10) days after receipt of the following from
Lessee and subject to the limitations set forth in Section 2.5 (h) below:
(a) Lessee providing Lessor with evidence of the costs paid by Lessee for
the Lessee Improvements, (b) Lessee providing Lessor with copies of
conditional lien releases for sums paid or final and unconditional lien
releases upon completion, as applicable, from all suppliers,
subcontractors, and the general contractor applicable to the Lessee
Improvements, and (c) Lessee, on completion, providing Lessor with a copy
of all approved final inspections and evidence of unconditional occupancy
approval from the City of Mountain View applicable to the Lessee
Improvements at the Premises. Lessee may elect to be reimbursed as work
progresses, or choose to postpone reimbursement until occupancy and receive
said reimbursements plus 0.583% per month simple interest (7% per annum)
calculated from the point the progress payment could have been requested
and ending upon the Commencement Date.


g. Lessor shall reimburse Lessee for the cost of the Lessee Improvements to
be constructed by Lessee in an amount not to exceed the sum of (i) Twenty
Five Dollars ($25.00) per square foot for the Lessee Interior Improvements,
plus (ii) Thirty Six Dollars ($36.00) per square foot for the Building
Shells, plus an additional Six Dollars ($6.00) per square foot for the
Building Shell of Building Number 1 (collectively, the "Lessor Allowance").
For purposes of these calculations, the maximum square footage of the
Premises shall not exceed 515,700 square feet. In the event the cost of the
Lessee Improvements is more than the Lessor Allowance for whatever reason
other than as described in Section 2.5(n), such costs for the Lessee
Improvements shall be paid in cash by Lessee. Lessee shall, at its sole
cost and expense, pay any and all costs necessary to complete the Lessee
Improvements per the approved plans and specifications less the Lessor
Allowance.


h. Lessee acknowledges that Lessor shall cause a notice of
non-responsibility to be posted at the Premises and Lessor shall cause a
notice of non-responsibility to be recorded in the Santa Clara County
public records related to Lessee's Improvements.


i. Once the plans and specifications are approved by Lessor, Lessee and
Lessee's Agents shall not materially change or modify the Lessee
Improvements without signed engineering and architectural drawings and
specific written approval of Lessor which shall not be unreasonably
withheld, conditioned or delayed. Any requests for modifications shall be
reviewed and approved or disapproved by Lessor within five (5) business
days of delivery to Lessor.


j. The Lessee Improvements shall at a minimum consist of the following:


The Building Shells shall at a minimum include the following:


1. Five separate buildings with a total rentable square footage of
not less than 515,700 square feet.
2. No building shall be larger than 125,000 square feet or sm ...