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Membership Interest Contribution Agreement

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EXHIBIT 10.5


MEMBERSHIP INTEREST CONTRIBUTION AGREEMENT


by and between


Cornerstone Realty Income Trust, Inc.,


Cornerstone NC Operating Limited Partnership


and


State Street I, LLC


dated as of


September 30, 2001


Exhibits


Exhibit A - Operating Partnership Agreement


Schedules


Schedule 2.1 - List of Subsidiaries Schedule 2.2 - Operating Partnership Units Schedule 4.4 - Conflicts of Cornerstone or Operating Partnership Schedule 5.3 - Liens on Membership Interests Schedule 5.4 - Conflicts of LLC Schedule 5.7(a) - August 31, 2001 Financial Statements Schedule 5.7(b) - Liabilities not Disclosed on August 31, 2001 Balance
Sheet Schedule 5.8 - Changes Since Balance Sheet Date Schedule 5.9 - Litigation Schedule 5.10 - Intellectual Property Schedule 5.11 - Leases Schedule 5.12 - Material Contracts Schedule 5.13 - Owned and Leased Real Property Schedule 5.13(l) - Permitted Liens Schedule 5.15 - Governmental Permits and Licenses Schedule 5.17 - Employment Agreements and Arrangements Schedule 5.19 - Insurance Schedule 5.20 - Bank Accounts Schedule 5.21 - Environmental Matters Schedule 5.22(c) - List of Warranties for Improvements to Real Property Schedule 6.4 - Exceptions to Conduct in the Ordinary Course Schedule 6.4(e) - Additional Borrowings Schedule 6.5 - Consents Schedule 6.6 - Exceptions for Disclosure Schedule 11.1 - Officers of Cornerstone with Knowledge Schedule 11.2 - Officers of the LLC or the Subsidiaries with Knowledge Schedule 11.3 - Indebtedness and Collateral Agreements


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MEMBERSHIP INTEREST CONTRIBUTION AGREEMENT


This MEMBERSHIP INTEREST CONTRIBUTION AGREEMENT (the "Agreement"), dated as of September 30, 2001 is entered into by and between Cornerstone Income Realty Trust, Inc., a Virginia corporation ("Cornerstone"), Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the "Operating Partnership"), and State Street I, LLC, a North Carolina limited liability company (the "LLC").


Recitals
--------


The Operating Partnership desires to acquire from the LLC, and the LLC desires to contribute to the Operating Partnership, for the consideration stated herein, all of the outstanding membership interests of each of the Subsidiaries (as defined herein) on the terms and subject to the conditions set forth herein.


The LLC desires to acquire from the Operating Partnership, and the Operating Partnership desires to distribute and transfer to the LLC, for the consideration stated herein, the Operating Partnership Units (as defined herein) of the Operating Partnership on the terms and subject to the conditions set forth herein.


Covenants
---------


NOW, THEREFORE, in consideration of the foregoing and the premises set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows:


ARTICLE I


DEFINITIONS AND INTERPRETATION


1.1 Defined Terms. Certain capitalized terms used herein are defined
------------- parenthetically in this Agreement. Capitalized terms used but not defined parenthetically herein are defined in Article X hereto. The meanings assigned to such terms shall be applicable to each use of such terms throughout this Agreement.


1.2 Singular and Plural; Gender. Whenever appropriate in the context,
--------------------------- terms used in this Agreement in the singular also include the plural, and vice versa, and each masculine, feminine or neuter pronoun shall also include the other genders.


1.3 Meaning of "Including". As used herein, the word "including" shall
---------------------- be deemed to mean "including, without limitation," unless otherwise expressly provided in any instance.


1.4 Headings. The article, section and other headings in this Agreement
-------- are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions of this Agreement.


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1.5 Drafting. The parties have participated jointly in the negotiation
-------- and drafting of this Agreement, and they agree that any ambiguity or question of intent or interpretation that may arise shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.


ARTICLE II


MEMBERSHIP INTEREST CONTRIBUTION; CLOSING


2.1 Contribution of the Membership Interests. On the terms and subject to
---------------------------------------- the conditions set forth in this Agreement, the LLC agrees to contribute and deliver to the Operating Partnership, and the Operating Partnership agrees to accept from the LLC (the "Acquisition"), in exchange for the consideration set forth in Section 2.2 below, all of issued and outstanding membership interests (the "Membership Interests") of each of the subsidiaries of the LLC as set forth on Schedule 2.1 (the "Subsidiaries").
------------


2.2 Consideration. The consideration to be paid by the Operating
------------- Partnership to the LLC in connection with the Acquisition shall be the number of Operating Partnership units (the "Operating Partnership Units") set forth in Schedule 2.2 representing a limited partnership interest in the Operating ------------- Partnership with the rights and preferences as set forth in the Operating Partnership Agreement, a copy of which is attached hereto as Exhibit A. The Operating Partnership Units shall be granted and delivered to the LLC at Closing.


2.3 Completion of Contribution. The closing of the Acquisition (the
-------------------------- "Closing") shall take place on October 1, 2001 (effective September 30, 2001 at 11:59 P.M.) or such other date that the Operating Partnership and the LLC shall mutually agree upon in writing. The date on which the Closing actually occurs is referred to herein as the "Closing Date"; provided, however that the effective date of the Closing shall be deemed to be September 30, 2001 at 11:59 P.M. In no event shall the Closing take place after October 15, 2001 (the "Drop-Dead Date").


2.4 Contribution Adjustment.
-----------------------


(a) Prior to the Closing, the Subsidiaries shall distribute to the
LLC all of the cash assets of the Subsidiaries except the
Subsidiaries shall retain sufficient cash to satisfy all accrued
expenses and accounts payable accruable through the Closing. To
the extent that the Subsidiaries do not have sufficient cash to
satisfy all accrued expenses and accounts payable accruals, then
the LLC shall contribute such deficit to the Operating
Partnership. To the extent that the Subsidiaries have excess cash
to satisfy all accrued expenses and accounts payable accruals,
then the Subsidiaries shall refund such excess to the LLC. The
deficit or excess, as the case may be, shall be referred to as
the "Contribution Adjustment."


(b) The Operating Partnership shall deliver its calculation of the
Contribution Adjustment (the "Contribution Adjustment Notice") to
the LLC within 30 days of Closing. The LLC may object to the
Contribution Adjustment


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by delivery of a written statement of objections (stating the
basis of the objections with reasonable specificity) to Operating
Partnership within 10 days following delivery of the Contribution
Adjustment Notice. If LLC makes such objection, the Operating
Partnership and LLC shall seek in good faith to resolve such
differences within 10 days following the delivery of such
objections. If LLC does not so object to the Contribution
Adjustment within such 10 day period, the Contribution Adjustment
shall be considered final and binding upon the parties and the
Contribution Adjustment shall be made within 45 days of Closing .
If LLC and the Operating Partnership are unable to mutually
resolve any disputes with respect to the Contribution Adjustment
within the periods described above, the parties shall, within 10
days following the expiration of such periods, engage a mutually
agreed upon Mediator (the "Mediator") to act as a Mediator and
determine, in accordance with the provisions of this Section 2.4,
the appropriate Contribution Adjustment.


(c) If the Mediator is engaged pursuant to this Section 2.4, then,
within 10 days of the engagement, the Mediator shall be furnished
with a copy of this Agreement, a letter from LLC describing LLC's
position on the disputed amount and a letter from Operating
Partnership describing Operating Partnership's position on the
disputed amount. Neither party shall make any additional
submission except pursuant to the Mediator's written request. The
Mediator shall have 30 days to review such documents and such
other information as the Mediator deems appropriate. Within such
30-day period, the Mediator will furnish both parties with its
written determination with respect to each of the unresolved
issues in dispute. In arriving at its determination, the Mediator
may select either the LLC's or the Operating Partnership's
position, or make its own determination. The determination of the
Mediator with respect to the Contribution Adjustment will be
final and binding upon the parties and a judgment, based on the
Mediator's determination, may be entered into a court of
competent jurisdiction. The Contribution Adjustment shall be made
within 5 days after the Mediator's determination. The fee of the
Mediator shall be borne by the Operating Partnership, if the
mediator accepts LLC's position, by the LLC, if the Mediator
accepts the Operating Partnership's position, and by the
Operating Partnership and LLC equally if the Mediator accepts
neither the Operating Partnership's nor the LLC's position. In
the process of preparing and reviewing the Contribution
Adjustment and conducting of review by either party or the
Mediator, each party will grant the other party all reasonable
access to the records of the business and any workpapers,
including auditor's workpapers, prepared with respect to the
Contribution Adjustment.


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ARTICLE III


REPRESENTATIONS AND WARRANTIES OF THE LLC


In order to induce the Operating Partnership to enter into this Agreement and each of the other Acquisition Documents to which it is or shall be a party, and to consummate the transactions contemplated hereby and thereby, the LLC hereby represents and warrants to the Operating Partnership on and as of the date hereof:


3.1 Organization and Good Standing. The LLC is a North Carolina limited
------------------------------ liability company duly organized, validly existing and in good standing under the laws of North Carolina with all requisite power and authority to own, operate and lease its properties and to carry on its business as now being conducted. The LLC is qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary except where the failure to be qualified would not have a Material Adverse Effect on the LLC.


3.2 Power and Authority. The LLC has all the requisite limited liability
------------------- company power and authority to execute, deliver and perform this Agreement and the other Acquisition Documents to which it is or shall be a party and to consummate the transactions contemplated hereby and thereby.


3.3 Due Authorization. The execution, delivery and performance by the LLC
----------------- of this Agreement and the other Acquisition Documents to which it is or shall be a party and the consummation of the transactions contemplated hereby and thereby by the LLC have been duly authorized by all necessary limited liability company proceedings.


3.4 No Conflicts. Neither the execution and delivery by the LLC of this
------------ Agreement or the other Acquisition Documents to which it is or shall be a party nor the consummation by the LLC of the transactions contemplated hereby or thereby:


(a) violates or conflicts with the LLC's Articles of Organization or
any other organizational document;


(b) violates, or conflicts with, or constitutes a default under, or
results in a breach of, any term or provision of, or requires any
consent (except for those disclosed on Schedule 5.4),
-------------
authorization or approval under, any term or provision of any
Lien, lease, license or other agreement or instrument to which
the LLC or the Subsidiaries are a party or by which it or the
Subsidiaries' properties are bound, except to the extent that
such circumstance would not reasonably be expected to have or
result in a material adverse effect on the ability of the LLC to
consummate the Acquisition and the transactions contemplated in
the other Acquisition Documents to which it is a party or to
carry out its obligations hereunder or thereunder; or


(c) (i) legally requires the LLC to obtain any Consent from, or make
any filing with, any governmental agency, court, body or
instrumentality


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(whether federal, state, local or foreign) ("Governmental
Authority") or other Person (except for those disclosed on
Schedule 5.4); or (ii) violates any provision of (x) any
Applicable Law or (y) any judicial, administrative or arbitration
order, award, judgment, writ, injunction or decree (collectively,
"Judgment") to which the LLC is a party or to which it or any of
its properties are subject.


3.5 Enforceability. This Agreement is, and when executed and delivered,
-------------- each of the other Acquisition Documents to which the LLC is or shall be a party shall be, a valid and binding agreement of the LLC, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors rights generally, and the application of equitable principles (whether considered in a proceeding at law or in equity).


3.6 Litigation. The LLC is not engaged in, and there is not, to the
---------- Knowledge of the LLC pending, nor has the LLC received any written notice of, any Legal Proceeding which would prevent or otherwise inhibit the LLC from consummating the transactions contemplated hereby or carrying out its obligations hereunder or under the other Acquisition Documents to which it is or shall be a party.


3.7 No Brokers. No broker has acted on behalf of the LLC in connection
---------- with this Agreement, the other Acquisition Documents or the transactions contemplated hereby or thereby, and there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with the LLC or any action taken by the LLC.


3.8 Securities Law Compliance. The LLC understands and acknowledges that
------------------------- the Operating Partnership Units have not been registered under the Securities Act or the state securities or blue sky laws of any jurisdiction, and that the transactions contemplated by this Agreement have not been reviewed by, passed on by or submitted to any federal or state agency or commission. The LLC is acquiring the Operating Partnership Units for its own account, for investment, and not with a view to, or for resale in connection with, a distribution thereof, and the LLC acknowledges that the Operating Partnership Units acquired hereunder cannot be transferred without being registered under the Securities Act or pursuant to a valid exemption therefrom. The LLC represents that it is an "accredited investor" within the meaning of Rule 501(a)(8) and that it has determined that its equity investors are "accredited investors" within the meaning of Rule 501(a).


ARTICLE IV


REPRESENTATIONS AND WARRANTIES OF CORNERSTONE AND THE
OPERATING PARTNERSHIP


In order to induce the LLC to enter into this Agreement and each of the other Acquisition Documents to which it is or shall be a party, and to consummate the transactions contemplated hereby and thereby, Cornerstone and the Operating Partnership hereby jointly and severally represent and warrant to the LLC on and as of the date hereof:


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4.1 Organization and Good Standing. The Operating Partnership is a
------------------------------ limited partnership organized, validly existing and in good standing under the laws of the Commonwealth of Virginia. Cornerstone is a corporation organized, validly existing and in good standing under the laws of the Commonwealth of Virginia.


4.2 Power and Authority. Cornerstone and the Operating Partnership each
------------------- have the requisite corporate or partnership power and authority, as the case may be, to execute, deliver and perform this Agreement and the other Acquisition Documents to which it is or shall be a party and to consummate the transactions contemplated hereby and thereby.


4.3 Due Authorization. The execution, delivery and performance by
----------------- Cornerstone and the Operating Partnership of this Agreement and the other Acquisition Documents to which they are or shall be a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership proceedings.


4.4 No Conflicts. Neither the execution and delivery by Cornerstone or
------------ the Operating Partnership of this Agreement or the other Acquisition Documents to which they are or shall be a party nor the consummation by them of the transactions contemplated hereby or thereby:


(a) violates or conflicts with the Operating Partnership's
Certificate of Partnership or other organizational document or
Cornerstone's Articles of Incorporation, by-laws, or any other
organizational document;


(b) violates, or conflicts with, or constitutes a default under, or
results in a breach of, any term or provision of, or requires any
consent (except for those disclosed on Schedule 4.4),
------------
authorization or approval under, any term or provision of any
Lien, lease, license or other agreement or instrument to which
Cornerstone or the Operating Partnership is a party or by which
their respective properties are bound, except to the extent that
such circumstance would not reasonably be expected to have or
result in a material adverse effect on the ability of Cornerstone
or the Operating Partnership to consummate the Acquisition and
the transactions contemplated in the other Acquisition Documents
to which it is a party or to carry out its obligations hereunder
or thereunder; or


(c) (i) legally requires Cornerstone or the Operating Partnership to
obtain any Consent from, or make any filing with, any
Governmental Authority or other Person (except for those
disclosed on Schedule 4.4); or (ii) violates any provision of (x)
any Applicable Law or (y) any Judgment to which Cornerstone or
the Operating Partnership is a party or to which it or any of its
properties are subject.


4.5 Enforceability. This Agreement is, and when executed and delivered,
-------------- each of the other Acquisition Documents to which Cornerstone or the Operating Partnership is or shall be a party shall be, a valid and binding agreement of Cornerstone or the Operating Partnership, as the case may be, enforceable against such party in accordance with its terms, subject to applicable


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bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors rights generally, and the application of equitable principles (whether considered in a proceeding at law or in equity).


4.6 Cornerstone Formation of Operating Partnership. Cornerstone
---------------------------------------------- represents that the Operating Partnership has engaged in no business except in connection with this Agreement and that the Operating Partnership has no liabilities or obligations to any Person, except pursuant to this Agreement.


4.7 Litigation. Cornerstone and the Operating Partnership are not
---------- engaged in, and there is not, to the Knowledge of Cornerstone pending, nor has Cornerstone received any written notice of, any Legal Proceeding which would prevent or otherwise inhibit Cornerstone or the Operating Partnership from consummating the transactions contemplated hereby or carrying out its obligations hereunder or under the other Acquisition Documents to which it is or shall be a party.


4.8 No Brokers. No broker has acted on behalf of Cornerstone or the
---------- Operating Partnership in connection with this Agreement, the other Acquisition Documents or the transactions contemplated hereby or thereby, and there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with Cornerstone or the Operating Partnership or any action taken by them.


4.9 Capitalization.
--------------


(a) Cornerstone. The authorized capital stock of Cornerstone
-----------
consists of (i) Common Shares, no par value, of which 100,000,000 shares
are authorized and 47,581,920 shares were issued and outstanding as of
September 20, 2001; and (ii) Preferred Shares, no par value, of which
25,000,000 shares are authorized and 127,988 were issued and outstanding as
of September 20, 2001 as Series A Convertible Preferred Shares. All shares
of Cornerstone to be issued upon conversion of the Operating Partnership
Units (as described more fully in the Limited Partnership Agreement) will,
at the time of issuance, be duly authorized, validly issued, fully paid and
non-assessable, and will be free and clear of any Liens or other
encumbrances which would prevent or otherwise encumber the delivery of such
shares to the owners of the Operating Partnership Units upon their
conversion.


(b) Operating Partnership. All of the Operating Partnership Units to
---------------------
be delivered to the LLC at the Closing have been duly authorized by all
necessary action on the part of the Operating Partnership, and will be
validly issued to the LLC. The Operating Partnership Units to be delivered
to the LLC at the Closing will be free of any Liens or other encumbrances
which would prevent or otherwise encumber the delivery of the Operating
Partnership Units to the LLC, and have not been reserved for any other
purpose, and such Operating Partnership Units are available for issuance as
provided pursuant to this Agreement.


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4.10 Securities Documents. Cornerstone has filed with Securities and
-------------------- Exchange Commission (the "SEC") each report, registration statement and definitive proxy statement (the "SEC Documents") required to be filed under the Exchange Act since January 1, 2001. As of the time it was filed with the SEC, or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing: (a) each of the SEC Documents complied in all material respects with the applicable requirements of the Exchange Act; and (b) none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.


4.11 Operations Since Balance Sheet Date. Since the date of the most
----------------------------------- recent balance sheet included in the SEC Documents, Cornerstone and its subsidiaries have conducted business in the ordinary course and in conformity with past practice, except as otherwise disclosed in the SEC Documents.


4.12 Securities Law Compliance. Each of Cornerstone and the Operating
------------------------- Partnership understand and acknowledge that the Membership Interests have not been registered under the Securities Act or the state securities or blue sky laws of any jurisdiction, and that the transactions contemplated by this Agreement have not been reviewed by, passed on by or submitted to any federal or state agency or commission. The Operating Partnership is acquiring the Membership Interests for its own account, for investment and not with a view to, or for resale in connection with, a distribution thereof, and the Operating Partnership acknowledges that the Membership Interests acquired hereunder cannot be transferred without being registered under the Securities Act or pursuant to a valid exemption therefrom.


ARTICLE V


REPRESENTATIONS AND WARRANTIES OF
THE LLC REGARDING THE TRANSACTION


In order to induce Cornerstone and the
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