MORTGAGE LOAN ISSUES RELEASE AND SUBSTITUTION OF COLLATERAL By: Lawrence J. Wolk October, 2004

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1 MORTGAGE LOAN ISSUES RELEASE AND SUBSTITUTION OF COLLATERAL By: Lawrence J. Wolk October, 2004 When a Lender and Borrower negotiate the terms of a loan secured by mortgages covering multiple parcels, they bring different concerns and priorities to the negotiation. The Borrower/Owner customarily seeks the greatest latitude/control in operating the properties and in disposing of collateral. The Lender seeks to protect its investment and if it agrees to any release or substitution of collateral, wants to be assured that its likelihood of recouping its loan/investment is not diminished. These differing perspectives are quite evident when the parties discuss and negotiate provisions relating to the release of collateral, and reduction of the outstanding indebtedness, or the release of collateral and the substitution of new collateral in its place. In such circumstances, the following issues are often confronted by the parties: 1. No Event of Default Lenders commonly make this a condition of any release/substitution. Lender may seek to expand this requirement to a "default" under the loan, or also to a "default" under other loan facilities. Counsel for Borrower should seek to limit the restriction to an Event of Default (beyond applicable cure periods) under the loan only. If possible, Borrower counsel should also try to narrow the restriction to material and monetary Events of Default. 2. Notice - Certainly Lender is entitled to a reasonable notice period prior to granting any release. Short turn around time and "deemed" approval are helpful to Borrower, especially when dealing with a loan servicer. 3. Blackout Period/Limit on Releases/Substitutions A "blackout period" during which no collateral may be released might be required. Lender may also seek to limit the number of releases and frequency of releases/substitutions. This will vary depending upon the number of assets and will certainly differ if the loan is secured by 100 cellular towers rather than three office buildings. 4. Legal sufficiency of New Collateral and Remaining Collateral - The documents should provide that the appropriate subdivision or other approvals have been obtained by Borrower so that substitute collateral and remaining unreleased collateral meet all "legal" requirements. All guarantees and other documentation should be restated and confirmed. With respect to release and substitution, Lenders usually require the same "documents" as are required for a new loan, including a spreader or new mortgage, title endorsements, and likely, an opinion of counsel.

2 With respect to substitutions, the Lender, may have legal (entity specific) or internal constraints as to the type of substitute collateral permitted. 5. Payment of Cost/Due Diligence - Lender will want legal and other "review" costs paid by Borrower. Lender will also undertake its customary loan due diligence (appraisal, environmental report) with respect to substitute collateral. 6. Release Fee or Substitution Fee - Lender may seek a fee based upon the value of the parcel to be released or substituted as if the transaction were a "new" loan. There may also be a prepayment fee based upon yield maintenance. When there is no substitution Lender will likely require a reduction in the outstanding principal balance allocable to the "value" of the collateral to be released. The criteria for measuring "value" and the required reduction of principal is a subject of negotiation. 7. Leases When collateral is to be released, Lender should be concerned with the effect upon leases on the remaining parcels. Lender may also be concerned if many of the remaining leases rollover within the near term. 8. Sale to third party Customarily Lenders want the sale of the released parcel to be arms length with a third party. Borrower counsel could argue that so long as Lender receives the appropriate reduction of outstanding loan principal, and so long as the substitute collateral meets Lender's valuation standards, Borrower should be permitted to convey the property to a related party. The Lender's concern is that Borrower may be substituting a less valuable asset or releasing the most valuable asset from a pool with a required pay down of less than lender "should" receive. There may also be the "New York Times" syndrome at work. Even if Lender is paid a fair amount, Lender doesn't want to read in the paper that Borrower has flipped the released parcel for a significant amount in excess of the release price. 9. Loan to Value and Debt Service Coverage Collateral - Here is where Lender and Borrower counsel often strongly disagree. Lenders customarily seek a second bite of the apple, requiring that upon release or substitution, the Loan to Value Ratio and Debt Service Coverage is equal to the greater (lower loan to value and higher debt service coverage) of the level at (i) origination/funding of loan, or (ii) in the 12 months preceding the Release. Borrower's Counsel may seek to have the floor pegged at the lesser of the level during the last 12 months or at loan origination. 10. Contiguous Parcels - The release of a contiguous parcel raises additional issues to be addressed and documented by the parties. The

3 release parcel must be legally subdivided and must be a separate lot from the remaining parcel for real estate tax purposes. There must be sufficient parking spaces available in each of the released and the remaining parcel. The release must not violate any of the existing leases or set back requirements. The remaining parcel and released parcel must each be self sufficient in all respects, including, without limitation, with respect to utility services, and ingress and egress. It may be necessary to execute a reciprocal easement agreement to be recorded against both parcels and approved by the Lender. 11. Documenting the Agreement - Many Lenders will include release/substitution provisions in the Loan Documents. This is preferable for Borrower as it runs with the documents and allows Borrower, in securitized loans, to set forth a clear procedure for the servicer. Some Lenders view release as an "accommodation" for the Borrower (customer) provided solely based on the relationship and may seek to include the language in a side letter, available to the existing Borrower only. Attached are two unnegotiated form Sections utilized by national life insurance companies to address these issues. Exh. A - Lender Form Side Letter addressing Substitution and partial Release; and Exh. B - Proposed Lender Form loan document inserts addressing for inclusion in loan documents.

4 Exhibit A REFERENCE TO SIDE LETTER IN LOAN COMMITMENT LENDER FORMS PARTIAL RELEASE OF COLLATERAL [Note: If the Release Parcel is non-contiguous, but related (e.g. it is located in the same shopping center as the remaining parcel), many of the provisions relating to release of a contiguous parcel will still be required.] At the time of closing of the Loan, Lender will enter into a side letter agreement with Borrower agreeing that beginning after the loan year, and upon the satisfaction of all of the conditions listed below, Lender will, on a one time basis, release ( Release ) the parcel described on Exhibit hereto (hereafter referred to as Release Parcel ): (i) (ii) (iii) (iv) no default has occurred under the Loan Instruments and no event has occurred which with the giving of notice or lapse of time or both, would constitute a default under the Loan Instruments; Borrower has given at least ninety (90) days prior written notice to Lender of its desire to have the Release Parcel released [and has provided Lender with all documents relating to the sale of the Release Parcel at least thirty (30) days prior to the closing of the sale of the Release Parcel; all such documentation must be satisfactory to Lender in both form and substance]. Borrower shall remit to Lender, together with the written notice required by the previous clause (ii), a non-refundable administrative fee, for Lender s efforts in reviewing the documentation for the Release, equal to the greater of (a) [to be negotiated] basis points of the portion of the Loan amount allocated to the Release Parcel, as determined and approved by Lender ( Allocated Loan Amount ) or (b) $ ; At the time of the Release, Borrower shall pay to Lender an additional fee of percent ( %) of the Allocated Loan Amount plus a Make-Whole Amount equal to and Lender shall reduce on a pro rata basis, the monthly payment required under the Loan. Such adjustments to the monthly payments shall be made on a monthly payment date. (v) Borrower shall have provided to Lender, in form and substance satisfactory to Lender (a) an endorsement to Lender s title insurance policy to the effect that the lien, and the priority of

5 the lien, of the Mortgage has not been affected by the Release, other than the exclusion of the Release Parcel from the Property and (b) such other documentation as Lender may reasonably request; (vi) (vii) (viii) (ix) Borrower shall provide written confirmation from each of the Limited Guarantors [and (Insert Name Of Any Other Guarantor)] that the Release does not release such guarantor from its obligations and liabilities as guarantor under the guaranty of the Non-Recourse Exceptions [and under (Insert Name Of Any Other Guaranty)] and from its obligations under the Environmental Indemnity Agreement. The portion of the Property remaining after the Release must have a value (as determined by an MAI appraisal acceptable to Lender) at least equal to the greater of (i) % of the MAI appraised value of the at the time of the Release or (ii) % of the MAI appraised value of the at the time of the closing of the Loan and a debt service coverage ratio, as determined by the Lender in its sole opinion, at least equal to the greater of the debt service coverage ratio of the (i) at the time of Release or (ii) at the time the Loan was made; Borrower shall pay all fees and expenses incurred by Lender in connection with any Release including, without limitation, all of Lender s attorneys fees and title insurance premiums and other charges. [Optional - A Release shall not be permitted more than ]. It is understood and agreed that the foregoing consent and waiver shall be personal to [Borrower's Name] and shall not apply to any successor or assignee of Borrower s interest in the Property (as hereinafter defined)

6 Exhibit B SUBSTITUTION OF COLLATERAL/RELEASE OF COLLATERAL During the Term of the Loan, if Borrower proposes to sell a property which is part of the Subject Property to a bona fide third party purchaser, then as limited below and provided there is no default under the Loan Documents, Borrower will be permitted to substitute (a "Substitution") a property (the "New Property") and obtain a release from Lender's lien for the property to be sold (the "Release Property")subject to the following for each Substitution: A. SUBSTITUTION I. SUBSTITUTIONS: a) The quality of the New Property is comparable to or greater than the Release Property; b) The appraised value of the New Property is not less than the greater of (i) the appraised value of the Release Property determined at the time of Closing or (ii) the appraised value of the Release Property at the time of the Substitution, the appraised values to be determined by appraisals satisfactory to Lender prepared by an appraiser appointed by Lender; c) The Debt Service Coverage Ratio (defined below) for the 12- month period following the Substitution based on Projected Net Operating Income for the Subject Property exclusive of the Release Parcel but inclusive of the New Property will not be less than the greater of [INSERT MINIMUM REQUIRED COVERAGE] or (ii) the Debt Service Coverage Ratio based on Net Operating Income for the Subject Property inclusive of the Release Property, for the 12 month period prior to the Substitution; d) The New Property conforms in all respects to Lender's underwriting standards and criteria as well as such other environmental, engineering, legal matters, title requirements, all as Lender may determine in its sole discretion. The New Property will not negatively impact the Subject Property with regard to overall credit risk, tenant quality, lease expiration and similar matters. A sale of a property and Substitution will not be permitted if (a) leases of more of the net rentable square footage of the Subject Property exclusive of the Release Parcel but inclusive of the New Property would expire within 12 months following the date of Substitution or within 12 months before or after the Maturity Date of the Loan or (b) leases of more of the net rentable square footage of the Subject Property exclusive of the Release Parcel but inclusive of the New Property would expire during any 12 month period during the remainder of the Term.

7 e) Borrower executes and delivers appropriate amendments to the Loan Documents making the New Property part of the security for the Loan, Indemnitor executes an Environmental Indemnity with respect to the New Property and Lender receives such title assurances and endorsements to its existing policies confirming the priority of its lien on the New Property and extending the coverage of all insurance (including endorsements) offered under the existing policies to the New Property, consenting to the release of the Release Property, and otherwise confirming no adverse changes in title coverage or the amount thereof; f) Borrower and the New Property satisfy each of the Closing conditions set forth in this instrument that would have been applicable if the New Property had been included in the original Subject Property; g) Borrower pays Lender a fee of $@. h) Borrower pays all of Lender's fees and expenses relating to the Substitution, including third party reports, title costs and outside counsel fees, if applicable; i) Lender receives not less than 90 days prior written notice of the proposed substitution, such notice to include a full package of information concerning the New Property. j) Prior to release of the Release Property Lender receives evidence satisfactory to Lender that the property is being sold to a bona fide third party purchaser; and k) Borrower satisfies such conditions as Lender may reasonably require to the release including providing any consents or approvals which may be necessary pursuant to laws or documents affecting the Release Property and that the property which remains encumbering by the mortgage complies with applicable laws and has direct access to streets and utilities. II. LIMITATIONS: Borrower's right to substitute properties is limited as follows: (1) no Substitution will be allowed during the first 24 months of the Term; (2) the aggregate number of Substitutions allowed during the Term may not (3) No Substitution will be permitted which would cause the aggregate of the original loan amounts allocated to properties subject to a Substitution to exceed $@; (4) Substitutions will not be allowed more frequently than once in month period; and

8 (5) Any proposed Substitution which does not comply with any of the terms and conditions set forth above, or if an event of default exists under the Loan Documents will not be permitted. Defined Terms: "Debt Service Coverage Ratio" means the Net Operating Income of the Subject Property divided by the amount of scheduled annual payments of debt service (which will be based on the payments after the commencement of amortization for loans with an interest only period) on the Loan. "Net Operating Income" means the total gross rental income received during the most recent 12-month period, plus other income received during the most recent 12-month period, less actual fixed and operating expenses for the most recent 12-month period. "Projected Net Operating Income" means the gross rental income and expense reimbursements projected by Borrower (and approved by Lender) to be received over the subsequent 12-month period from tenants free from bankruptcy (1) which are in occupancy and paying rent at the commencement of the 12-month period (but, except for apartment properties, only to the extent of the rent payable prior to the lease expiration date if the lease expires during the 12-month period) and (2) with signed leases at the commencement of the 12-month period which are anticipated to take occupancy and commence paying rent within the subject 12-month period (only to the extent of the rent actually payable during the 12-month period) less Projected Expenses, all as reasonably approved by Lender. "Projected Expenses" means those fixed and operating expenses for the same 12-month period used for determining Projected Net Operating Income as provided by Borrower (and approved by Lender, but in no event less than expenses for the 12-month period prior to the Substitution adjusted upward by an inflation factor reasonably selected by Lender) that are customary and necessary to the normal operation of a like-kind property in the same submarket where the relevant property is located, including security, building services, employee salaries and benefits, cleaning costs, all utilities, repairs and maintenance, insurance premiums, real estate taxes and a market based management fee, all as reasonably approved by Lender. B. PARTIAL RELEASE I. PERMITTED RELEASE: During the Term of the Loan, if Borrower proposes to sell a property which is part of the Subject Property, then as limited below and provided there is no default under the Loan Documents, Borrower will be permitted to obtain a Release (a "Release") of the property (the "Release Property") subject to the following for each Release:

9 a) The loan to value ratio on the Subject Property excluding the Release Property will be not greater than the lesser of or (ii) the loan to value ratio of the Subject Property including the Release Property immediately prior to the Release as determined by an appraisal satisfactory to Lender prepared by an appraiser appointed by Lender; b) The Debt Service Coverage Ratio for the 12-month period following the Release based on Projected Net Operating Income for the Subject Property exclusive of the Release Property will not be less than the greater of [INSERT MINIMUM REQUIRED COVERAGE] or (ii) the Debt Service Coverage Ratio based on Net Operating Income of the Subject Property inclusive of the Release Property for the 12-month period prior to the Release; c) Borrower will execute and deliver appropriate amendments to the Loan Documents and Lender will receive appropriate title assurances and endorsements to Lender's existing policies, and otherwise confirming no adverse changes in title coverage or the amount thereof; d) Lender receives [INSERT PERCENTAGE IN EXCESS OF 100%] of the outstanding principal amount allocated to the Release Property to be applied to the outstanding principal balance of the Loan; (b) accrued interest and all other sums due on the Loan Amount allocated to the Release Property; and (c) a prepayment premium on the Loan Amount allocated to the Release Property, calculated in accordance with Exhibit B; e) Borrower pays Lender a fee of $@ for each Release; f) Borrower pays all of Lender's fees and expenses relating to the Release, including title costs and outside counsel fees, if applicable; g) Lender receives not less than 60 days prior written notice of the proposed release; h) Prior to release of the Release Property Lender receives evidence satisfactory to Lender that the Release Property is being sold to a bona fide third party purchaser; and i) The Release must not negatively impact the Subject Property with regard to overall credit risk, tenant quality, geographic risk, lease expiration and similar matters. Lender will not release a property if (a) leases of more of the net rentable square footage of the Subject Property exclusive of the Release Property would expire within 12 months following the date of Release or within 12 months before or after the Maturity Date of the Loan and (b) leases of more of the net rentable square footage of the Subject Property exclusive of the Release Property would expire during any 12 month period during the remainder of the Term. II. LIMITATIONS: Borrower's right to obtain a release of a property is limited as follows: a) no Release will be allowed during the months of the Term;

10 b) the aggregate number of Releases allowed during the Term may not c) No Release will be permitted which would cause the aggregate of the original loan amounts allocated to properties subject to a Release to exceed $@; d) Releases will not be allowed more frequently than once in month period; and e) Any proposed Release which does not comply with any of the terms and conditions set forth above, or if an event of default exists under the Loan Documents will not be permitted. Defined Terms: "Debt Service Coverage Ratio" means the Net Operating Income of the Subject Property divided by the amount of scheduled annual payments of debt service (which will be based on the payments after the commencement of amortization for loans with an interest only period) on the Loan. "Net Operating Income" means the total gross rental income received during the most recent 12-month period, plus other income received during the most recent 12-month period, less actual fixed and operating expenses for the most recent 12-month period. "Projected Net Operating Income" means the gross rental income and expense reimbursements as projected by Borrower (and approved by Lender) to be received over the subsequent 12-month period from tenants free from bankruptcy (1) which are in occupancy and paying rent at the commencement of the 12-month period (but, except for apartment properties, only to the extent of the rent payable prior to the lease expiration date if the lease expires during the 12-month period and (2) from tenants with signed leases at the commencement of the 12-month period which are anticipated to take occupancy and commence paying rent within the subject 12-month period (but only to the extent of the rent actually payable during the 12-month period) less Projected Expenses, all as reasonably approved by Lender. "Projected Expenses" means those fixed and operating expenses for the same 12-month period used for determining Projected Net Operating Income as projected by Borrower (and approved by Lender but in no event less than expenses for the 12-month period prior to the Substitution adjusted upward by an inflation factor reasonably selected by Lender) that are customary and necessary to the normal operation of a like-kind property in the same submarket where the relevant property is located, including security, building services, employee salaries and benefits, cleaning costs, all utilities, repairs and maintenance, insurance premiums, real estate taxes and a market based management fee, all as approved by Lender. # _v4