SEC Filing :: Stratus Properties Inc.

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998 Commission File Number: 0-19989 Stratus Properties Inc. Incorporated in Delaware 72-1211572 (IRS Employer Identification No.) 98 San Jacinto Blvd., Suite 220, Austin, Texas 78701 Registrant's telephone number, including area code: (512) 478-5788 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No On September 30, 1998, there were issued and outstanding 14,288,270 shares of the registrant's Common Stock, par value $0.01 per share. STRATUS PROPERTIES INC. TABLE OF CONTENTS Page Part I. Financial Information Financial Statements: Condensed Balance Sheets 3 Statements of Operations 4 Statements of Cash Flow 5 Notes to Financial Statements 6 Remarks 8 Report of Independent Public Accountants 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information 16 Signature 18 Exhibit Index E-1 2 STRATUS PROPERTIES INC. Part I. FINANCIAL INFORMATION Item 1. Financial Statements.

The accompanying notes are an integral part of these financial statements. 3

The accompanying notes are an integral part of these financial statements. 4

The accompanying notes are an integral part of these financial statements. 5 STRATUS PROPERTIES INC. NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Stratus Properties Inc. (STRS or the Company), formerly FM Properties Inc., operates through a partnership in which STRS owned a 99.8 percent interest until December 1997 when STRS acquired the remaining 0.2 percent interest from the outside managing partner (See Note 1 of "Notes to Financial Statements" in the 1997 Annual Report on Form 10-K). As a result of this acquisition, STRS restated previously reported interim 1997 financial results to reflect application of consolidation accounting for its partnership investment rather than the equity method. 2. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share," which simplifies the computation of earnings per share (EPS). STRS adopted SFAS 128 in the fourth quarter of 1997 and restated prior years' EPS data as required by SFAS 128. Basic net income (loss) per share was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Third-quarter 1998 diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period plus the net effect of dilutive stock options, which represented approximately 202,000 shares. The third-quarter 1998 calculation also assumes the conversion of the Company's approximate 1.7 million shares of mandatorily redeemable preferred stock into 1.7 million shares of common stock and takes into account that the Company had $2.0 million of outstanding convertible debt, for a period of one day, that if converted would represent approximately 3,000 shares of common stock. The diluted loss per share calculation for the 1998 nine-month period excludes as anti-dilutive the conversion of the mandatorily redeemable preferred stock and convertible debt discussed above, as well as outstanding options to purchase approximately 303,000 shares of common stock, considering the loss for the period. The Company had options outstanding representing approximately 262,000 and 197,000 shares of common stock in the third quarter and nine months of 1997, respectively, which were included in these period's dilutive net income per share calculations. Outstanding options to purchase 299,000 and 235,000 shares of common stock at average exercise prices of $6.14 and $5.23 per share for the third quarter of 1998 and 1997, respectively, and outstanding options to purchase 289,000 and 235,000 shares of common stock at average exercise prices of $6.19 and $5.23 per share for the nine months ended September 30, 1998 and 1997, respectively, were not included in the computation of diluted net income (loss) per share because exercise prices were greater than the average market price for the periods presented. 3. NEW ACCOUNTING STANDARD In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activity," which establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in a derivative's fair value be recognized currently in earning unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. STRS currently uses no derivatives thus adoption of SFAS 133 would have no impact on STRS' earnings or financial position. 4. LONG-TERM DEBT In December 1997, STRS entered into a restructured credit facility consisting of a $35.0 million revolving credit facility and a $15.0 million term loan facility, with individual borrowings bearing interest at rates based on the lead lender's prime rate or LIBOR, at STRS' option. The aggregate commitment will decline to $35.0 million on January 1, 1999, 6 $15.0 million on January 1, 2000 and will be eliminated on January 1, 2001. Accordingly, the Company would classify any borrowings on this credit facility in excess of $35 million as current maturities of long-term debt during 1998. As of September 30, 1998, credit facility borrowings totaled $31.1 million of STRS' $33.1 million outstanding long-term debt. IMC Global Inc. (IGL) has guaranteed amounts borrowed under the facility in exchange for an annual fee, payable quarterly, equal to the difference between STRS' cost of LIBOR-funded borrowings before the assumption of the guarantee by IGL and the rate on the LIBOR-funded loans under the new facility. STRS cannot amend or refinance the facility without IGL's consent. At September 30, 1998, the amount available under the facility, net of outstanding letters of credit and including available cash was $22.3 million, which on January 1, 1999 would be reduced to $7.3 million. For further discussion of the restructured credit facility, see Note 4 of "Notes to the Financial Statements" in STRS' 1997 Annual Report on Form 10- K. STRS had $2.0 million of additional long-term debt outstanding on September 30, 1998 resulting from its borrowing on a convertible debt facility (see Notes 5 and 8 below). 5. OLYMPUS TRANSACTION On May 22, 1998, STRS and Olympus Real Estate Corporation (Olympus), an affiliate of Hicks, Muse, Tate & Furst Incorporated, formed a strategic alliance to develop certain of STRS' existing properties and to pursue new real estate acquisition and development opportunities. Under the terms of the agreement, Olympus made a $10 million investment in STRS mandatorily redeemable preferred stock, provided a $10 million convertible debt financing facility to STRS and agreed to make available up to $50 million of additional capital representing its share of direct investments in joint STRS/Olympus projects. Olympus has the right to nominate up to 20 percent of STRS' Board of Directors. The $10 million mandatorily redeemable preferred stock was issued at a stated value of $5.84 per share, the average closing price of STRS common stock during the 30 trading days ended March 2, 1998. STRS used the proceeds from the sale of these securities to repay debt. For further discussion about mandatorily redeemable preferred stock see Note 6 below. The $10 million convertible debt facility is available to STRS in whole or in part until May 22, 2004 and is intended to fund STRS' equity investment in new STRS/Olympus joint venture opportunities involving properties not currently owned by STRS. On September 30, 1998, STRS borrowed $2.0 million on this convertible debt facility to fund its investment in the Oly Walden General Partnership (see Note 8). Interest under this facility accrues at 12 percent and is payable quarterly or added to principal at Olympus' option. Outstanding principal under the facility is convertible at any time by the holder into STRS common stock at a conversion price of $7.31, which is 125 percent of the average closing price of STRS common stock during the 30 trading days ended March 2, 1998. If not converted into common stock, the convertible debt matures on May 22, 2004. If the combination of interest at 12 percent and the value of the conversion right does not provide Olympus with at least a 15 percent annual return on the convertible debt, STRS must pay Olympus additional interest upon retirement of the convertible debt in an amount necessary to yield a 15 percent annual return. The convertible debt is nonrecourse to STRS and will be secured solely by STRS' interest in STRS/Olympus joint venture opportunities financed with the proceeds of the convertible debt. Through May 22, 2001, Olympus has agreed to make available up to $50 million for its share of capital for direct investments in STRS/Olympus joint acquisition and development activities. In return, STRS has provided Olympus with a right of first refusal to participate for no less than a 50 percent interest in all new acquisition and development projects on properties not currently owned by STRS, as well as development opportunities on existing properties in which STRS seeks third-party equity participation. 6. MANDATORILY REDEEMABLE PREFERRED STOCK STRS has outstanding 1,712,328 shares of mandatorily redeemable preferred stock, stated value of $5.84 per share. Each share of preferred stock will share dividends and distributions, if any, ratably with STRS common stock. The preferred stock is redeemable at the holder's option at any time after May 22, 2001, for cash in an amount per share equal to 95 percent of the average closing price per share of common stock for the 10 trading days preceding the redemption date (the "common stock equivalent value") or, at STRS' option, after May 22, 2003 for the greater of the common stock equivalent value or their stated value per share, plus accrued and unpaid dividends, if any. The preferred stock must be redeemed no later than May 22, 2004. STRS has the option to satisfy the redemption with shares of its common stock on a one-for-one share basis, subject to certain limitations. 7 7. LITIGATION STRS is involved in numerous pending litigation matters with the City of Austin and others, which may affect its property development entitlements and ability to secure reimbursement of approximately $25 million relating to development of its Circle C property. Refer to Item 3 "Legal Proceedings" and Note 3 "Real Estate" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 for a detailed discussion of such litigation matters. For discussion of litigation events subsequent to the Annual Report on Form 10-K refer to "Capital Resources and Liquidity" and Part II - Other Information, "Legal Proceedings" included elsewhere in this interim report on Form 10-Q. 8. INVESTMENT IN JOINT VENTURE/GENERAL PARTNERSHIP On September 30, 1998, STRS entered into a joint venture with Olympus to develop a 75 residential lots in the Barton Creek ABC West Phase I subdivision. In the transaction STRS sold its entire interest in the project to the Oly Stratus ABC West I Joint Venture (the joint venture) for $3.3 million, of which $1.65 million was deferred and will be recognized upon sale of the developed lots by the joint venture. STRS received $2.1 million in cash, a $1.2 million note and made an equity contribution of $0.5 million representing its 50 percent ownership interest in the joint venture. STRS will continue as developer and manager of the project receiving management fees and commissions, as well as other incentives for its services. STRS will account for its investment in the joint venture using the equity method. Also, on September 30, 1998, STRS acquired a 50 percent interest in the Oly Walden General Partnership (the partnership), which owns the Walden on Lake Houston project purchased by Olympus in April 1998. STRS paid approximately $2.0 million for its investment in the general partnership, borrowing funds available to it under its $10 million convertible debt facility with Olympus (see Note 5). STRS will continue to manage this property, which currently includes over 700 developed lots and 80 acres of platted but undeveloped real estate. STRS will receive management fees and commissions for its services. STRS will account for its investment in this general partnership using the equity method. On September 30, 1998, the partnership entered into an $8.2 million project loan agreement with a commercial bank to fund the remaining development of the Walden on Lake Houston project. The three year, variable rate loan is nonrecourse to the partnership and is secured by the property held by the partnership. Interest is payable monthly and at the partnership's option accrues at either the bank's prime rate or the Eurodollar rate. On October 1, 1998, the partnership borrowed $6.1 million on this loan and used the proceeds to repay the outstanding land acquisition and development costs incurred on the project through September 30, 1998. As required under the loan agreement, on October 1, 1998 a wholly owned subsidiary of STRS deposited with the bank $2.5 million of restricted cash as additional collateral for the loan. This restricted cash balance may be reduced by $0.30 for every $1.00 in principal reduction. Olympus will pay STRS interest at 12 percent per annum for its 50 percent share, net of interest earned on the deposit. -------------------- Remarks The information furnished herein should be read in conjunction with STRS' financial statements contained in its 1997 Annual Report to stockholders included in its Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods. All such adjustments are, in the opinion of management, of a normal recurring nature. 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Stratus Properties Inc.: We have reviewed the accompanying condensed balance sheet of Stratus Properties Inc. (the Company), a Delaware corporation, as of September 30, 1998, and the related statements of operations for the three and nine-month periods ended September 30, 1998 and 1997, and the statements of cash flow for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Stratus Properties Inc. as of December 31, 1997, and the related statements of operations, stockholders' equity and cash flow for the year then ended (not presented herein), and in our report dated January 20, 1998, based on our audit, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ARTHUR ANDERSEN LLP San Antonio, Texas October 20, 1998 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Stratus Properties Inc. (STRS or the Company) is engaged in the acquisition, development and sale of commercial and residential real estate properties. STRS' principal real estate holdings are in the Austin, Texas area and consist of approximately 2,450 acres of undeveloped residential, multifamily and commercial property within the Barton Creek development, approximately 1,300 acres of undeveloped commercial and multi-family property within the Circle C Ranch development, and approximately 500 acres of undeveloped residential, multi-family and commercial property known as the Lantana tract, south of and adjacent to the Barton Creek development. STRS also owns approximately 160 developed lots, 200 acres of undeveloped residential property and 75 acres of undeveloped commercial and multi-family property located in Dallas, Houston and San Antonio, Texas which are being actively marketed. These real estate interests are managed by professional real estate developers who have been retained to provide master planning, zoning, permitting, development, construction and marketing services for the properties. Under the terms of these agreements, operating expenses and development costs, net of revenues, are funded by STRS, and the developers are entitled to a management fee and a 25 percent interest in the net profits, after recovery by STRS of its investments and a stated return, resulting from the sale of properties under their management. TRANSACTIONS WITH OLYMPUS REAL ESTATE CORPORATION (OLYMPUS) On September 30, 1998, STRS and Olympus agreed to enter into two separate joint real estate transactions, pursuant to a strategic alliance entered into on May 22, 1998 (see Note 5) The first transaction involved the sale of STRS' ABC West Phase I subdivision tract to a joint venture owned 50 percent each by STRS and Olympus. The joint venture, Oly Stratus ABC West I Joint Venture, agreed to pay $3.3 million for the 28 acre tract, which is expected to yield 75 developed single-family lots to be completed and marketed by early 1999. STRS received cash of $2.1 million, a note for $1.2 million and made an equity contribution of $0.5 million. Under terms of the joint venture, STRS will continue as developer and manager of the project receiving management fees and commissions, as well as other incentives for its services. The joint venture has received a project loan commitment for $3.4 million, which will be secured by the property held in the joint venture. Upon closing of the project loan the joint venture will reimburse STRS $1.6 million for development costs already incurred in the project and for certain Travis County fiscal deposits previously funded by STRS. The second transaction involved STRS acquiring a 50 percent interest in the Oly Walden, General Partnership, which owns the Walden on Lake Houston project that Olympus purchased in April 1998. STRS paid $2.0 million for its share of the general partnership, borrowing funds available under its $10 million convertible debt facility with Olympus (see Note 5). STRS will continue to manage this property, which currently includes over 700 developed lots and 80 acres of platted but undeveloped real estate. STRS will receive management fees and commissions for its services. As of September 30, 1998, STRS had negotiated agreements that provide for the sale of approximately 90 percent of the developed lots. These agreements require the purchasers to close on the lots pursuant to a specific schedule, which STRS anticipates will result in the sale of all such lots over a four year period. Approximately 200 lots have already closed and funded under these agreements. DEVELOPMENT ACTIVITIES Development is progressing at several sections of the Barton Creek project, including the construction of utility infrastructure which will serve a significant portion of the 2,450 acres of undeveloped property at Barton Creek, and preliminary development of approximately 200 new single- family homesites surrounding a new Tom Fazio-designed golf course. STRS expects these homesites to be available for sale by 2000. Permitting and entitlement issues now being litigated, however, raise uncertainty about the timing of completion of the projects in Barton Creek. 10 At the Lantana project, STRS has completed construction of a water system to serve the approximately 500 undeveloped acres remaining in the project. The City of Austin over the next three years will reimburse STRS $3.0 million for costs associated with the construction of the pump station at Lantana, with the first $1.0 million payment anticipated in the first quarter of 1999. The property is planned to accommodate up to 2.5 million square feet of commercial space, 1,100 multi-family units, and 330 single- family lots. STRS has commenced work on the 70,000 square foot first phase of its 140,000 square foot Lantana Corporate Center. The project has received all required permits and approvals from the City of Austin. STRS is currently pursuing the final development permits for the 330 lots which represent the residential component of the Lantana project.

Revenues from developed properties represented the sale of 46 and 154 single-family units during the third-quarter and nine-month periods of 1998, respectively, compared with the sale of 66 and 151 single-family homesites, respectively, during the 1997 periods. Undeveloped property revenue for the third-quarter and nine month periods of 1998 reflect the sale of 45 and 47 acres of undeveloped property, respectively, compared with zero and 194 acres of undeveloped commercial and multi-family property during the same periods last year. The 45 acres of undeveloped property sold in the third quarter of 1998 reflects the sale of 28 acres of Barton Creek residential property to the Oly Stratus ABC West I joint venture (see Note 8) and 17 acres of additional undeveloped property within the ABC Midsection subdivision of Barton Creek for a total of $3.6 million, of which $1.65 million was deferred. (See "Transactions with Olympus" above.) STRS remains committed to its business strategy of developing single- family homesites and evaluating commercial development opportunities rather than selling undeveloped tracts of property, despite the sale of these two sections. The tract STRS sold in the ABC Midsection subdivision had limited development potential and STRS will continue as developer of the property held by the ABC West I joint venture. Revenues from sales of developed properties during the third quarter of 1998 reflect the sale of 5 lots in Barton Creek and 41 lots in Houston, Dallas and San Antonio. Cost of sales decreased to $9.2 million for the nine months ended September 30, 1998 from $18.6 million for the same period last year. The decrease resulted primarily from the reduction in sales of the Company's undeveloped properties from 194 acres during the 1997 nine-month period to 47 acres during the comparable 1998 period. Reimbursement of certain infrastructure costs, which were previously charged to expense, relating to properties previously sold of approximately $0.8 million and $3.1 million during the 1998 and 1997 nine-month periods, respectively, together with proceeds from the sale of 41 Barton Creek club memberships for approximately $1.1 million in the third-quarter and nine-month periods of 1998, also contributed to the decrease in cost of sales. The Company has fewer than 25 Barton Creek club memberships remaining, with an estimated value of approximately $0.8 million. Sales of these memberships will continue but the exact timing of the sales cannot be accurately estimated. General and administrative expenses increased during the nine months ended September 30, 1998, to $3.2 million from $2.1 million during the comparable period last year. The increase resulted primarily from the Company's ongoing efforts to resolve, through litigation, attempts by the City of Austin to restrict the Company's development entitlements and to secure reimbursements of approximately $25 million of infrastructure costs incurred in the development of the Circle C property. Legal expenses for the nine months of 1998 totaled approximately $1.2 million. General and administrative expenses were $0.7 million and $0.6 million during the third quarter of 1998 and 1997, respectively. During 1995, legislation was enacted that enabled the Company to create a series of municipal utility districts (MUDs) to serve the Barton Creek development. Once established, the MUDs issue bonds, the proceeds of which are used to reimburse the Company for costs related to the installation of major utility, drainage and water quality infrastructure. During the first nine months of 1998, the Company received approximately $4.6 million in partial reimbursement of infrastructure costs relating to the Barton Creek and Circle C developments. The proceeds were used in part to fund current development expenditures and to repay debt. The Company expects to receive additional reimbursements for previously incurred infrastructure costs related to the Barton Creek development from the proceeds of MUD bonds issued in the future. However, the timing and the amount of future reimbursements are uncertain. See Part II, Item 1, "Legal Proceedings" for information regarding litigation concerning Circle C reimbursable costs. Net interest expense totaled $495,000 and $1,480,000 in the 1998 third-quarter and nine-month periods, respectively, compared to $547,000 and $1,608,000 during the same periods one year ago. The decrease reflects lower average debt outstanding in the current year. In addition, capitalized interest for the third-quarter and nine-month periods of 1998 was $47,000 and $293,000, respectively, compared to $342,000 and $1,174,000 for the comparable periods of 1997. Other income totaled $4.6 million and $5.4 million for the third- quarter and nine-month periods of 1997. These amounts are primarily the result of the Company's September 1997 sale of several working interests and overriding royalty interests in oil and gas properties for $4.5 million, which resulted in a $4.5 million gain. In addition, the third- quarter and nine-month periods included royalty income generated from these properties, prior to their sale, of $0.1 million and $0.8 million, respectively. CAPITAL RESOURCES AND LIQUIDITY Net cash provided by operations totaled $3.6 million during the nine months ended September 30, 1998 compared with $24.5 million during the nine months ended September 30, 1997. The decrease reflects the substantial reduction of undeveloped commercial properties sold and the funding of Travis County fiscal deposits and reimbursable infrastructure construction costs of approximately $3.0 million during the first nine months of 1998. Cash used in investing activities of $6.8 million for the nine months ended September 30, 1998 reflects net real estate and facilities costs of $4.3 million and STRS' investment in two joint ventures of $2.5 million (see Note 8). The nine-month period of 1997 reflects net, real estate and facilities costs of $6.8 million. Financing activities provided cash of $6.0 million during the nine months ended September 30, 1998 from the issuance of the mandatorily redeemable preferred stock associated with the Olympus transaction (see Note 6), drawing approximately $2.0 million on the convertible debt facility (see Note 5) offset in part by net repayments of $6.0 million on the credit facility (see Note 4). STRS used the excess proceeds to fund real estate development expenditures. Higher revenues in the prior year, mainly from the sale of undeveloped properties, allowed the Company to repay $15.8 million of outstanding debt during the nine months ended September 30, 1997. STRS development expenditures during the first nine months of 1998 were funded largely from borrowings under its credit facility, which provides aggregate available credit of $50 million through December 31, 1998, reducing to $35 million through December 31, 1999 and $15 million through December 31, 2000. At September 30, 1998, outstanding debt on this credit facility totaled $31.1 million and the amount available under the facility, net of outstanding letters of credit and including available cash was $22.3 million, which on January 1, 1999 would be reduced to $7.3 million. Anticipated capital expenditures for the remainder of 1998 are expected to be funded by operating cash flow and additional borrowings, with the level of such capital expenditures subject to change based on the resolution of ownership of certain reimbursements of previously incurred infrastructure costs and other legal and regulatory issues, as further discussed in Part II, Item 1, "Legal Proceedings." On September 30, 1998, the Oly Walden General Partnership, a 50 percent owned, unconsolidated subsidiary of STRS (see Note 8 and Transaction with Olympus), entered into an $8.2 million project loan agreement with a commercial bank to fund the remaining development of the Walden on Lake Houston project. The three year, variable rate loan is nonrecourse to the partnership and is secured by the property held by the partnership. Interest is payable monthly and accrues at either the bank's prime rate or the Eurodollar rate at the partnership's option. On October 1, 1998, the partnership borrowed $6.1 million on this loan and used the proceeds to repay the outstanding land acquisition and development costs incurred on the project through September 30, 1998. As required under the loan agreement, on October 1, 1998 a wholly owned subsidiary of STRS deposited with the bank $2.5 million of restricted cash as additional collateral for the loan. This restricted cash balance may be reduced by $0.30 for every $1.00 in principal reduction. Olympus will pay STRS interest at 12 percent per annum for its 50 percent share, net of interest earned on the deposit. STRS may be required to deposit additional restricted cash for similar joint venture loans in the future. The future performance of STRS continues to be dependent on future cash flows from real estate sales, which will be significantly affected by future real estate values, regulatory issues, development costs, the ability of the Company to continue to protect its land use and development entitlements, and interest rate levels. Significant development expenditures remain to be incurred for STRS' Austin-area properties prior to their eventual sale. These factors, combined with the debt reduction requirements under the credit facility, could impede STRS' ability to develop its properties and expand its business. The closing of the Olympus transaction (see Note 5) improved the Company's capital resources by providing the Company $10 million from equity proceeds and provides for up to an additional $60 million of capital in the future, subject to certain conditions. The Company is continuing to consider a number of other capital raising alternatives, including various forms of debt financing, joint venture/partnership arrangements with Olympus and other means. While bank financing for development of the Company's existing properties is available, obtaining land acquisition financing is generally expensive and remains uncertain. Although STRS believes its efforts will successfully address the capital resource needs discussed above, there can be no assurance that STRS will generate sufficient cash flow or obtain sufficient funds to make required interest and principal payments under the facility. IMPACT OF YEAR 2000 COMPLIANCE The Year 2000 ("Y2K") issue is the result of computerized systems being written to store and process the year portion of dates using two digits rather than four. Date-aware systems (i.e. any system or component that performs calculations, comparisons, sequencing or other operations involving dates) may fail or produce erroneous results on or before January 1, 2000 because the year 2000 will be interpreted as the year 1900. STRS State of Readiness STRS has been pursuing a strategy to ensure all its significant computer systems will be Y2K compliant, i.e, able to process dates from and after January 1, 2000, including leap years, without critical systems failure (Y2K Compliant or Y2K Compliance). Certain computerized business systems and related services are provided under contract by a services company currently owned 10 percent by STRS (the Services Company) which is responsible for ensuring Y2K Compliance for the systems it manages. The Services Company has separately prepared a plan for its Y2K Compliance. Progress of the Y2K plan is being monitored by STRS executive management and reported to the Audit Committee of the STRS Board of Directors. In addition, the independent accounting firm functioning as STRS' internal auditors is assisting management in monitoring the progress of the Y2K plan. STRS believes all critical components of the plan are on schedule for completion by the end of the second quarter of 1999. The majority of computerized date-sensitive hardware and software components used by STRS or the Services Company are covered by maintenance contracts with the vendors who originally implemented them. Almost all of these vendors have already been contacted regarding Y2K Compliance of their products. Where necessary, software modifications to ensure compliance will be provided by the appropriate vendors under their maintenance contracts. Information Technology (IT) Systems. The major STRS system which is not fully Y2K Compliant is its accounting system. By the end of 1998 the Services Company will install, for an affiliated entity, a Y2K Compliant version of the same accounting system used by STRS, allowing any installation issues to be identified and rectified prior to installation of this system at STRS in the second quarter of 1999. FMS also provides payroll and cash disbursements processing for STRS. The Services Company has implemented the Y2K version of the payroll interface software and will conduct Y2K Compliance testing of third party-provided payroll services in early 1999. The Services Company will also conduct Y2K testing of the interfaces to its primary bank and bank-provided computerized disbursement services in early 1999 after the bank has completed its internal Y2K Compliance work. Non-IT Systems. With a few minor exceptions involving water quality and other environmental monitoring and associated laboratory analysis systems, STRS does not rely upon process control, engineering, or other "Non-IT" systems in its business. STRS expects to complete an assessment of its risks in this area during the first quarter of 1999. Third Party Risks. STRS computer systems are not widely integrated with the systems of their suppliers or customers. The primary potential risk attributable to third parties would be from a temporary disruption of STRS operations due to a failure by a supplier to meet its contractual obligations for services and/or materials (rather than a failure associated with integrated computer systems). An assessment of third-party risk is scheduled for completion in the fourth quarter of 1998. Based on preliminary work performed to date, STRS does not believe overall risk from third parties is significant. The Costs to Address STRS Y2K Issues Expenditures for the necessary modifications required during 1998 and 1999 will largely be funded by routine software and hardware maintenance fees paid by STRS or the Services Company to the related software providers. Based on current information, STRS believes that the cost of Y2K Compliance will not be material and will be provided for through its normal operating and capital budgets. If the software modifications and conversions referred to above are not made, or are delayed, the Y2K issue could have a material impact on STRS operations. Additionally, current estimates are based on management's best estimates, which are derived using numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There also can be no assurance that the systems of other companies will be converted on a timely basis or that failure to convert will not have a material adverse effect on STRS. The Risks of STRS Y2K Issues Based on preliminary risk assessment work conducted thus far, STRS believes the most likely Y2K-related failures would probably be temporary disruption in certain materials and services provided by third parties, which would not be expected to have a material adverse effect on STRS' financial condition or results of operations. A more definitive assessment of this risk will be available at the conclusion of the risk assessment phase of the Y2K project, which is scheduled for completion in the fourth quarter of 1998. STRS Contingency Plans Companies, including STRS, cannot make Y2K Compliance certifications because the ability of any organization's systems to operate reliably after midnight on December 31, 1999 is dependent upon factors that may be outside the control of, or unknown to, the organization. In Securities and Exchange Commission (SEC) Staff Legal Bulletin No. 5, the SEC opined that "it is not, and will not, be possible for any single entity or collective enterprise to represent that it has achieved complete Year 2000 compliance and thus to guarantee its remediation efforts. The problem is simply too complex for such a claim to have legitimacy. Efforts to solve Year 2000 problems are best described as `risk mitigation'." Although STRS believes the likelihood of any or all of the above risks occurring to be low, specific contingency plans are being developed to address certain risk areas. The schedule for contingency plan development has a projected completion date of March, 1999. While there can be no assurances that STRS will not be materially adversely affected by Y2K problems, it is committed to ensuring that it is fully Y2K ready and believes its plans adequately address the above-mentioned risks. CAUTIONARY STATEMENT Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future reimbursement for infrastructure costs, future events related to financing and the IGL guarantee, the anticipated outcome of the litigation and regulatory matters, the expected results of STRS' business strategy, Y2K Compliance and other plans and objectives of management for future operations and activities. Important factors that could cause actual results to differ materially from STRS' expectations include, economic and business conditions, business opportunities that may be presented to and pursued by the Company, changes in laws or regulations and other factors, many of which are beyond the control of the Company and other factors that as described in more detail under the heading "Cautionary Statements" in STRS' Form 10-K for the year ended December 31, 1997. ---------------------------- The results of operations reported and summarized above are not necessarily indicative of future operating results. PART II. - OTHER INFORMATION Item 1. Legal Proceedings. The Company is involved in various regulatory matters and litigation involving development of its Austin properties. For a detailed discussion on these matters see Item 3, "Legal Proceedings" and Note 3, "Real Estate" in STRS' 1997 Annual Report on Form 10-K. Below is a partial list of the cases in which the Company is currently involved. The current status is summarized and should be read in conjunction with the above referenced sections of the STRS 1997 Annual Report on Form 10-K. Annexation Litigation: Circle C Land Corp. v. The City of Austin, Texas, Cause No. 97-13994 (Travis County 53rd Judicial District Court, TX filed 12/19/97). In December 1997, the City of Austin (the "City") enacted an ordinance purporting to annex all land within the Southwest Travis County Water District, including the Company's Circle C lands. The Company filed suit seeking reimbursement of developer funded municipal utility districts ("MUD") infrastructure costs that the City is required to pay the Company as a result of the annexation. A summary judgement hearing is currently set for November 24, 1998 to establish the City's liability for developer reimbursements. A jury trial, if necessary, is scheduled for January 20, 1999. Circle C WQPZ Litigation: L.S. Ranch, Ltd. and Circle C Land Corp., v. The City of Austin, Texas, Cause No. 97-1048 (Hays County 207th Judicial District Court, TX filed 10/31/97). In November 1997, the Company sought a declatory judgement in the Hays County District Court confirming the validity of the Circle C Water Quality Protection Zone ("WQPZ"), which includes approximately 553 acres owned by the Company and located outside the boundaries of any MUD. The City contested the Hays County District Court's jurisdiction but was denied in its motion to transfer venue and all other requested relief. The City appealed the trial court's decision to the Third Court of Appeals. The City also requested that the Third Court of Appeals stay any action in the Hays County District Court, including the Company's motion for summary judgment, pending the Third Court of Appeals' review of the District Court's denial of the plea to the jurisdiction. The Third Court of Appeals refused to stay the summary judgment and, in response, the City filed a writ with the Texas Supreme Court. The Supreme Court accepted the writ and stayed all underlying litigation. Subsequently, the Third Court of Appeals confirmed the trial court's denial of the plea to the jurisdiction. The Company then filed a motion to lift the stay with the Supreme Court. The Supreme Court issued an order lifting the stay allowing the Hays County District Court litigation to proceed to summary judgment and resolution. On September 4, 1998, following summary judgment hearing, the Hays County District ruled that the WQPZ enabling legislation was constitutional and the WQPZ validly created. The City of Austin requested a stay of the Hays County District Court's order, which was denied. Subsequently, the City filed for injunctive relief in the Court of Appeals for the Third District of Texas, which the appellate court denied. On October 1, 1998, the city filed a petition for writ of injunction with the Supreme Court of Texas reiterating its request to stay the Hays County District Court's ruling. On October 22, 1998, the Supreme Court granted a temporary stay. It is anticipated that the Hays County District Court's ruling concerning the constitutionality of the enabling legislation and the validity of the WQPZ will be appealed or resolved in connection with the Supreme Court's resolution of the City of Austin, Texas v. Horse Thief Hollow Ranch, Ltd., et al described below. The City's WQPZ Action: The City of Austin, Texas v. Horse Thief Hollow Ranch, Ltd. et al., Cause No. 98-00248 (Travis County 345th Judicial District Court, TX filed 1/9/98). On January 9, 1998, the City filed a lawsuit (the "Travis County Suit") in the Travis County District Court against 14 water quality zones and their owners, including the Barton Creek WQPZ. The City challenges the constitutionally of the legislation authorizing the creation of water quality zones. The Attorney General of Texas agreed to intervene in the Travis County suit and the Circle C WPQZ litigation above, to defend the legislation. The City filed a motion for partial summary judgement against one defendant and against the State of Texas. All defendant parties filed motions with regard to summary judgement. A summary judgment hearing was conducted in the Travis County District Court on July 9, 1998. The Travis County District Court entered an order granting the City of Austin's summary judgment motion and declaring the water quality zone legislation unconstitutional. All parties agreed to the form of an order which permits an expedited appeal directly to the Supreme Court of Texas. The Company, and other defendant parties, filed appeals. The Texas Supreme Court has noted probable jurisdiction and set an expedited briefing and hearing schedule. Oral argument will be presented to the Texas Supreme Court on December 9, 1998. MUD Reimbursement Litigation: Circle C Land Corp. v. Phoenix Holdings, Ltd., Cause No. 97-01388 (Travis County 261st Judicial District Court, TX filed 2/5/97). During February 1997, STRS filed a petition for declaratory judgement against Phoenix Holding Ltd. ("Phoenix") in order to secure its ownership of approximately $25 million of MUD reimbursements that pertain to existing infrastructure that serves the Circle C development. Phoenix filed a counter claim against Circle C in June 1997. On February 20, 1998 the District Court granted the Company's motion for summary judgement on the primary case and Phoenix dismissed its counterclaims with prejudice, but reserved the right to appeal the summary judgement of the primary case. On April 10, 1998, Phoenix appealed the summary judgement on the primary case to the Third Court of Appeals. A hearing has been scheduled for December 9, 1998 and a ruling is expected in the first half of 1999. Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits to this report are listed in the Exhibit Index appearing on page E-1 hereof. (b) One Current Report on Form 8-K, was filed by the registrant reporting an event under Item 5 on September 9, 1998 during the period covered by this Quarterly Report on Form 10-Q. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRATUS PROPERTIES INC. By: /s/ C. Donald Whitmire, Jr. ---------------------------- C. Donald Whitmire, Jr. Vice President & Controller (authorized signatory and Principal Accounting Officer) Date: November 13, 1998 STRATUS PROPERTIES INC. EXHIBIT INDEX Exhibit Number 3.1 Amended and Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to the Company's 1992 Form 10-K. 3.2 By-laws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to the Company's 1992 Form 10-K. 4.1 The Company's Certificate of Designations of Series A Participating Cumulative Preferred Stock. Incorporated by reference to Exhibit 4.1 to the Company's 1992 Form 10-K. 4.2 Rights Agreement dated as of May 28, 1992 between the Company and Mellon Securities Trust Company, as Rights Agent. Incorporated by reference to Exhibit 4.2 to the Company's 1992 Form 10-K. 4.3 Amendment No. 1 to Rights Agreement dated as of April 21, 1997 between the Company and the Rights Agent. Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated April 21, 1997. 4.4 Amended, Restated and Consolidated Credit Agreement dated as of December 15, 1997 among the Partnership, Circle C Land Corp., certain banks, and The Chase Manhattan Bank, as Administrative Agent and Document Agent. Incorporated by reference to Exhibit 4.4 to the 1997 Form 10-K. 4.5 Certificate of Designations of the Series B Participating Preferred Stock of Stratus Properties Inc. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 3, 1998. 4.6 Investor Rights Agreement, dated as of May 22, 1998, by and between Stratus Properties Inc. and Oly/Stratus Equities, L.P. Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated June 3, 1998. 4.7 Loan Agreement, dated as of May 22, 1998, by and among Stratus Ventures I Borrower L.L.C., Oly Lender Stratus, L.P. and Stratus Properties Inc. Incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated June 3, 1998. 10.1 Third Amended and Restated Agreement of General Partnership of FM Properties Operating Co. dated as of December 15, 1997 between the Company and STRS L.L.C. Incorporated by reference to Exhibit 10.1 to the Company's 1997 Form 10-K. 10.2 Amended and Restated Services Agreement, dated as of December 23, 1997 between FM Services Company and the Company. Incorporated by reference to Exhibit 10.2 to the Company's 1997 Form 10-K. 10.3 Joint Venture Agreement between Freeport- McMoRan Resource Partners, Limited Partnership and the Partnership, dated June 11, 1992. Incorporated by reference to Exhibit 10.3 to the Company's 1992 Form 10-K. E-1 10.4 Development and Management Agreement dated and effective as of June 1, 1991 by and between Longhorn Development Company and Precept Properties, Inc. (the _Precept Properties Agreement_). Incorporated by reference to Exhibit 10.8 to the Company's 1992 Form 10-K. 10.5 Assignment dated June 11, 1992 of the Precept Properties Agreement by and among FTX (successor by merger to FMI Credit Corporation, as successor by merger to Longhorn Development Company), the Partnership and Precept Properties, Inc. Incorporated by reference to Exhibit 10.9 to the Company's 1992 Form 10-K. 10.6 STRS Guarantee Agreement dated as of December 15, 1997 by the Company. Incorporated by reference to Exhibit 10.6 to the Company's 1997 Form 10-K. 10.7 Amended and Restated IGL Guarantee Agreement dated as of December 22, 1997 by IMC Global Inc. Incorporated by reference to Exhibit 10.7 to the Company's 1997 Form 10-K. 10.8 Master Agreement, dated as of May 22, 1998, by and among Oly Fund II GP Investments, L.P., Oly Lender Stratus, L.P., Oly/Stratus Equities, L.P., Stratus Properties Inc. and Stratus Ventures I Borrower L.L.C. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 3, 1998. 10.9 Securities Purchase Agreement, dated as of May 22, 1998, by and between Oly/Stratus Equities, L.P. and Stratus Properties Inc. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated June 3, 1998. 10.10 Oly Stratus ABC West I Joint Venture Agreement between Oly ABC West I, L.P. and Stratus West I.L.P. dated September 30, 1998. 10.11 Amendment No. 1 to the Oly Stratus ABC West I Joint Venture Agreement dated November 9, 1998. 10.12 Management Agreement between Oly Stratus ABC West I Joint Venture and Stratus Management L.L.C. dated September 30, 1998. 10.13 Loan Agreement dated September 30, 1998 between Oly Stratus ABC West I Joint Venture and Oly Lender Stratus, L.P. 10.14 General Partnership Agreement dated April 8, 1998 by and between Oly/Houston Walden, L.P. and Oly/FM Walden, L.P. 10.15 Amendment No. 1 to the General Partnership Agreement dated September 30, 1998 by and among Oly/Houston Walden, L.P., Oly/FM Walden, L.P. and Stratus Ventures I Walden, L.P. 10.16 Development Loan Agreement dated September 30, 1998 by and between Oly Walden General Partnership and Bank One, Texas, N.A. 10.17 Guaranty Agreement dated September 30, 1998 by and between Oly Walden General Partnership and Bank One, Texas, N.A. E-2 10.18 Management Agreement dated April 9, 1998 by and between Oly/FM Walden, L.P. and Stratus Management, L.L.C. Executive Compensation Plans and Arrangements (Exhibits 10.20 through 10.23) 10.20 The Company's Performance Incentive Awards Program, as amended. Incorporated by reference to Exhibit 10.21 to the STRS Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.21 STRS Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.9 to the Company's 1997 Form 10-K. 10.22 STRS Stock Option Plan for Non-Employee Directors, as amended. Incorporated by reference to Exhibit 10.10 to the Company's 1997 Form 10-K. 10.23 Stratus Properties Inc. 1998 Stock Option Plan. 15.1 Letter dated October 20, 1998 from Arthur Andersen LLP regarding unaudited interim financial statement. 27.1 Financial Data Schedule. E-3

OLY STRATUS ABC WEST I JOINT VENTURE (A Texas Joint Venture) JOINT VENTURE AGREEMENT __________________________________ Dated as of September 30, 1998 __________________________________ TABLE OF CONTENTS Page ARTICLE 1 Definitions 1.1 Definitions 1 ARTICLE 2 Organization 2.1 Formation of Joint Venture 6 2.2 Name 6 2.3 Character of Business 6 2.4 Registered Office and Agent 7 2.5 Fiscal Year 7 ARTICLE 3 Capital Contributions 3.1 Capital Contributions to the Partnership 7 3.2 Additional Capital Contributions 7 3.3 No Return of Capital Contributions 9 3.4 Interest 10 ARTICLE 4 Rights and Obligations of Partners 4.1 Management of Partnership 10 4.2 Management Committee 10 4.3 Major Decisions 12 4.4 Budgets and Reports 12 4.5 Powers of the Operating Partner 12 4.6 Liability of Partners 13 4.7 Other Activities of Partners 13 ARTICLE 5 Exculpation and Indemnity 5.1 Exculpation 13 5.2 Indemnity 13 ARTICLE 6 Distributions and Allocations 6.1 Distributions 14 6.2 Tax Allocations 14 ARTICLE 7 Admissions, Transfers and Withdrawals 7.1 Admission of New Partners 14 7.2 Transfer of Partnership Interests 15 7.3 Buy/Sell 15 7.4 No Substituted Partners 17 7.5 Withdrawal of Partners 18 ARTICLE 8 General Accounting Provisions and Books 8.1 Books of Account; Tax Returns 18 8.2 Place Kept; Inspection 18 8.3 Tax Matters Partner 18 ARTICLE 9 Amendments and Waivers 9.1 Amendments and Waivers 18 9.2 Certain Other Amendments 19 ARTICLE 10 Dissolution and Termination 10.1 Dissolution 19 10.2 Accounting on Dissolution 20 10.3 Termination 20 10.4 No Negative Capital Account Obligation 20 10.5 No Other Cause of Dissolution 21 10.6 Merger 21 ARTICLE 11 Miscellaneous 11.1 Waiver of Partition 21 11.2 Entire Agreement 21 11.3 Severability 21 11.4 Notices 21 11.5 Governing Laws 22 11.6 Successors and Assigns 22 11.7 Counterparts 22 11.8 Headings 22 11.9 Other Terms 22 11.10 Power of Attorney 22 11.11 Transfer and Other Restrictions 23 OLY STRATUS ABC WEST I JOINT VENTURE JOINT VENTURE AGREEMENT This Joint Venture Agreement (this "Agreement") of OLY STRATUS ABC WEST I JOINT VENTURE, a Texas joint venture (the " Partnership"), is made effective as of September 30, 1998 (the "Effective Date"), by and between Oly ABC West I, L.P., a Texas limited partnership, as the financial partner (the "Financial Partner") and Stratus ABC West I, L.P., a Texas limited partnership, as the operating partner (the "Operating Partner"). (The Financial Partner and the Operating Partner are collectively referred to herein as the "Partners"). RECITALS A. The parties hereto desire to form a joint venture under the Act (as defined below). B. The Partnership is being formed for the purpose of acquiring, owning, developing and reselling that certain property located in Travis County, Texas and known as Lots 1 through 26 and Lots 137 through 185, inclusive, Block A, Barton Creek ABC West Phase I (the "Property"). C. The initial Partners hereto desire to enter into this Agreement to establish their respective rights and obligations with respect to the Partnership and to provide for the orderly management of the affairs of the Partnership. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Partners hereby agree as follows: ARTICLE 1 Definitions 1.1 Definitions. As used in this Agreement, the follow-ing terms shall have the following meanings: "Act" shall have the meaning set forth in Section 2.1. "Affiliate" shall mean, when used with reference to a specified Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. As used in this definition of Affiliate, the term "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise. "Business" shall mean all tangible and intangible property of the Partnership as of the date of the Buy/Sell offer and any proceeds therefrom subject to all obligations or liabilities associated therewith. "Business Day" shall mean any day other than a Saturday, Sun-day, or holiday on which national banking associations in the State of Texas are authorized or required to be closed. "Business Plan" shall mean the business plan attached hereto as Exhibit A and incorporated herein, and as may be amended from time to time in accordance with the provisions hereof or as may attached hereto within sixty (60) days of the execution of this Agreement upon approval of the Management Committee. "Buy-Sell" shall have the meaning set forth in Section 7.3. "Buy/Sell Closing Date" shall have the meaning set forth in Section 7.3. "Buy/Sell Election Period" shall have the meaning set forth in Section 7.3. "Buy/Sell Offer" shall have the meaning set forth in Section 7.3. "Buy/Sell Purchaser" shall have the meaning set forth in Section 7.3 . "Buy/Sell Seller" shall have the meaning set forth in Section 7.3. "Capital Account" shall mean a separate account maintained for each Partner in accordance with the provisions of Regulation section 1.704-1(b)(2)(iv). Each Partner shall have only one Capital Account, regardless of the number of classes of units or other interests in the Partnership owned by such Partner. Initially, the Capital Account of each Partner shall have a positive balance equal to its initial Capital Contribution. Such Capital Account shall thereafter be adjusted in accordance with the following provisions: (a) Additions. The Capital Account shall be increased by the sum of (i) except as otherwise provided in paragraph (f) below in the case of a contribution of a promissory note, the amount of cash and the fair market value (determined as of the date of contribution, without regard to section 7701(g) of the Code, including a constructive contribution resulting from a termination and reconstitution of the Partnership under section 708(b)(1)(B) of the Code) of property contributed, or deemed to have been contributed, to the capital of the Partnership by the Partner, net of any liabilities assumed by the Partnership in connection with such contribution or to which the contributed property is subject under section 752 of the Code, plus (ii) the amount of any net income or other item of income or gain allocated to the Partner pursuant to Article 6 hereof. (b) Subtractions. The Capital Account shall be reduced by the sum of (i) the amount of any net loss or other item of expense, loss or deduction allocated to the Partner pursuant to Article 6 hereof, plus (ii) the Distribution Value (determined without regard to section 7701(g) of the Code) of any cash or other property distributed, or deemed to have been distributed, by the Partnership to the Partner, net of any liabilities assumed by the distributee in connection with the distribution or to which the cash or other distributed property is subject under section 752 of the Code. (c) Other Adjustments. The Capital Account shall otherwise be adjusted by the Financial Partner in accordance with the other capital account maintenance rules of Regulation section 1.704-1(b)(2)(iv). In connection with the foregoing: (d) Determination of Fair Market Value. In determining the balance of each Partner's Capital Account, and for all other purposes of this Agreement, the fair market value of an asset contributed to or distributed by the Partnership shall be determined in good faith by the Partners (which shall use their reasonable efforts not to overstate or understate the fair market value of any such asset). Notwithstanding the preceding sentence, it is understood that no Partner shall have any obligation to contribute any real property asset to the Partnership unless all Partners have agreed to the fair market value of the asset. (e) Capital Account of Transferee. A transferee of all or part of an interest in the capital and profits of the Partnership shall succeed to the Capital Account of the transferor to the extent that such Capital Account relates to the transferred interest. (f) Contribution of Note. Notwithstanding any other provision of this definition of Capital Account, if a Partner has contributed his promissory note to the capital of the Partnership and such note is not readily traded on an established securities market, then the principal of such note shall not be credited to the Partner's Capital Account until and to the extent that either (i) the Partnership makes a taxable disposition of the note or (ii) principal payments are made on the note, all in accordance with Regulation section 1.704-1(b)(2)(iv)(d)(2). "Capital Contribution" shall mean the gross amount of cash or the fair market value of other property contributed or caused to be contributed to the capital of the Partnership by a Partner with respect to such Partner's capital account. "Cash Flow" of the Partnership for any period shall mean any and all cash revenues generated from the ownership, sale of lots, sale of undeveloped parcels, lease and other operation of the Partnership assets and any and all capital transaction proceeds minus the sum of (i) any operating and capital expenses incurred in the operation of the business of the Partnership, including without limitation any payments of interest and principal (other than payments of principal that are refinanced by the Partnership) on Partnership indebtedness required by the lender of such indebtedness during the quarterly period in question, and (ii) a reasonable reserve for necessary or desirable operating and capital expenses of the Partnership that are anticipated to be incurred or to become due and payable within six (6) months as the Management Committee, in the exercise of its reasonable discretion and as is consistent with the Operating Budget and the Business Plan, shall determine. "Code" shall mean the Internal Revenue Code of 1986 and any successor statute, as amended from time to time. "Contribution Percentage" of a Partner shall be based on the actual equity capital contributions of such Partner in relation to the total equity capital contributions of all Partners. "Deadlock" shall mean the failure of the Partners to agree with respect to any Major Decision or other issue with respect to the Partnership which could have a material adverse effect or impact to the Partnership if such issue remains unresolved between the Partners. "Deemed Recipient" shall have the meaning set forth in Section 3.2. "Default Amount" shall have the meaning set forth in Section 3.2. "Default Date" shall have the meaning set forth in Section 3.2. "Defaulting Partner" shall have the meaning set forth in Section 3.2. "Distribution Period" shall mean (i) the period beginning on the Effective Date and ending on December 31, 1998 and (ii) each calendar quarter thereafter. "Distribution Value" shall mean the dollar amount of any cash distribution and the fair market value, as jointly determined in good faith by the Partners (each of which shall use its reasonable efforts not to overstate or understate fair market value), of any non-cash property distribution at the time of the distribution, net of the distributee's share of any liabilities to which the distributed property is subject and net of any liabilities assumed by the distributee. "Effective Date" shall have the meaning set forth in the preamble to this Agreement. "Escrow Agent" shall have the meaning set forth in Section 7.3. "Financial Partner" shall mean Oly ABC West I, L.P., together with its successors and assigns. "Indemnified Parties" shall have the meaning set forth in Section 7.3 . "Loan" shall have the meaning set forth in Section 3.1. "Lender" shall have the meaning set forth in Section 3.1. "Major Decision" means any decision with respect to (1) approval of the Business Plan, including the decision to make additional Capital Contributions except as provided in Section 3.2(a), (2) approval of the Operating Budget, (3) approval of the plans and specifications for the Property, and the subsequent approval of all material change orders or amendments given in substitution for such approved plans and specifications, (4) approval of any financing or refinancing, whether secured or unsecured, unless previously approved in the Business Plan or annual Operating Budget, (5) approval of acquisition of any additional property, (6) approval of admission or withdrawal of any Partners to the Partnership, (7) approval of any sale, exchange or other disposition of the Property unless pursuant to governance deadlock provision in Section 7.3 below or in the Business Plan or annual Operating Budget, (8) approval of any amendments to the Agreement, (9) approval of any termination or dissolution of the Partnership and (10) appointment of a successor property manager pursuant to Section 4.1. "Management Agreement" shall have the meaning set forth in Section 4.1. "Management Committee" shall have the meaning set forth in Section 4.2. "Mandatory Additional Contribution " shall have the meaning set forth in Section 3.2. "Non-Defaulting Partners" shall have the meaning set forth in Section 3.2. "Offer Amount" shall have the meaning set forth in Section 7.3. "Offer Deposit" shall mean the sum of Five Hundred Thousand and No/100 Dollars ($500,000.00) in cash. "Offeree" shall have the meaning set forth in Section 7.3. "Offeror" shall have the meaning set forth in Section 7.3. "Olympus" shall have the meaning set forth in the preamble of this Agreement. "Olympus Representative" shall have the meaning set forth in Section 4.2. "Operating Budget" shall mean the budget attached hereto as Exhibit B and incorporated herein, as may be amended from time to time in accordance with the provisions hereof, or to be attached hereto within sixty (60) days of the execution of this Agreement upon approval by the Management Committee in accordance with this Agreement. "Operating Partner" shall mean Stratus ABC West I, L.P., together with its successors or assigns. "Partner" shall mean any Person executing this Agreement as of the Effective Date as a partner or hereafter admitted to the Partnership as a partner as provided in this Agreement, but does not include any Person who has ceased to be a Partner of the Partnership. "Partnership" shall have the meaning set forth in the preamble to this Agreement. "Partnership Interest" shall have the meaning set forth in Section 7.3 . "Person" shall mean an individual, partnership, joint venture, limited part-nership, limited liability company, foreign limited liability company, trust, business trust, estate, corporation, custodian, trustee, exec-utor, administrator, nominee, association, cooperative or entity in a representative capacity. "Property " shall have the meaning set forth in the preamble of this Agreement. "Receipt Amount" shall have the meaning set forth in Section 7.3. "Regulation" shall mean Treasury Regulations promulgated under Title 26 of the United States Code. "Replacement Loan" shall have the meaning set forth in Section 3.2. "Representative" shall have the meaning set forth in Section 4.2. "Required Capital Contributions" shall have the meaning set forth in Section 3.1. "Required Interest" shall mean both of the Partners. "Sharing Ratio" shall have the meaning set forth on Schedule I attached hereto. "Stratus" shall have the meaning set forth in the preamble of this Agreement. "Stratus Representative" shall have the meaning set forth in Section 4.2. ARTICLE 2 Organization 2.1 Formation of Joint Venture. The Partners have formed a joint venture pursuant to and in accordance with the provisions of the Texas Revised Partnership Act, as amended from time to time (the "Act"). 2.2 Name. The name of the Partnership is Oly Stratus ABC West I Joint Venture. The Management Committee may change the name of the Partnership from time to time and shall give prompt written notice thereof to the Operating Partner; provided, however, that such name may not contain any portion of the name or mark of the Operating Partner without the Operating Partner's consent. 2.3 Character of Business. The purpose of the Partnership shall be (i) to acquire, hold, develop, sell, encumber, or otherwise act with respect to investments, direct or indirect, in the Property, and (ii) to engage in such other business as may be conducted by a joint venture organized under the laws of the State of Texas. 2.4 Registered Office and Agent. The name and address of the Partnership's initial registered agent are Olympus Real Estate Corporation, 200 Crescent Court, Suite 1650, Dallas, Texas 75201. The Partnership's initial principal place of business shall be 200 Crescent Court, Suite 1650, Dallas, Texas 75201. The Financial Partner may change such registered agent, registered office, or principal place of business from time to time. The Financial Partner shall give prompt written notice of any such change to the Operating Partner. The Partnership may from time to time have such other place or places of business within or without the State of Texas as may be determined by the Financial Partner. 2.5 Fiscal Year. The fiscal year of the Partnership shall end on December 31 of each calendar year unless, for United States federal income tax purposes, another fiscal year is required. The Partnership shall have the same fiscal year for United States federal income tax purposes and for accounting purposes. ARTICLE 3 Capital Contributions 3.1 Capital Contributions to the Partnership. The Partners shall contribute or be deemed to have contributed capital to the Partnership in the amounts respectively set forth opposite their names on Schedule I to this Agreement on the Effective Date (collectively, the "Required Capital Contributions"). Also, in addition to the Required Capital Contributions, the Partners acknowledge that in order to purchase and develop the Property, the Partnership will need to secure from a third party lender (the "Lender") a term loan, which shall be in the amount set forth in the Business Plan and on terms and conditions satisfactory to the Management Committee and approved in accordance with this Agreement (the "Loan"). 3.2 Additional Capital Contributions. (a) After the funding of the Required Capital Contribution set forth above (including any amounts deemed to have been contributed), and to the extent not available from proceeds of the Loan, either (i) the Partners may agree to make additional Capital Contributions to the Partnership as are deemed advisable by the Partners (each exercising their independent discretion) and by amendment to the Business Plan, or (ii) if either (A) there has been a default or an event of default under the Loan or (B) additional capital is necessary to complete any capital improvement program approved in the Business Plan, or (C) funds are necessary for continued operation of the Property consistent with the Business, then the Financial Partner may elect to call or not call for additional Capital Contributions (in each case, the "Mandatory Additional Contribution") to be made to the Partnership to cure any default or event of default under the Loan or to complete such capital improvement program or fund operations. The Mandatory Additional Contribution in question shall be made by the Partners pro rata, based on the Contribution Percentages of the Partners. This Section 3.2 is solely for the benefit of the Partners, and shall not, nor shall it be deemed to, create any rights in, or provide any benefit to, any other person or entity, and the decision to make additional contributions to the Partnership shall be made in the sole and absolute discretion of the Financial Partner, except as may be provided in the Business Plan. (b) Each Partner shall be required to make its Mandatory Additional Contribution to the Partnership on or before twenty-one (21) days after written notice to such Partner ("Default Date"). In the event any Partner fails to make a Mandatory Additional Contribution as required by this Section 3.2 within the time period set forth herein (such Partner, being herein referred to as the "Defaulting Partner"), then, the "Non-Defaulting Partners" (herein so called) shall be entitled, as their sole and exclusive remedy for such failure, by giving written notice to the Defaulting Partner to make a loan (the "Replacement Loan") to the Defaulting Partner in the amount of such Mandatory Additional Contribution, which Replacement Loan (i) shall be applied solely to fund the delinquent Mandatory Additional Contribution, (ii) shall have a term of one hundred twenty (120) days from the date of such loan and (iii) shall bear interest at the lesser of (A) eighteen percent (18%) per annum and (B) the maximum rate of interest which may be charged, collected or contracted for under applicable law, with accrued interest due at the maturity of such loan (each such Replacement Loan together with all accrued interest thereon from time to time, the "Default Amount"). Anything contained in this Agreement to the contrary notwithstanding, any Partner who becomes a Defaulting Partner shall immediately and without any further demand, notice or cure period (time being of the essence herein) automatically cease to have a right to vote on all Partnership decisions from and after the Default Date for any purposes hereunder for the remainder of the life of the Partnership (unless reinstated as described below); provided, however, if a Defaulting Partner shall pay the Default Amount in full to the Non-Defaulting Partners who elected to make such loan, on or before the expiration of the 120-day term of the Replacement Loan to such Defaulting Partner, such Defaulting Partner's voting rights hereunder shall be automatically re- instated (effective as of the date such Default Amount is paid in full) for all purposes including voting rights. If the Default Amount is not paid in full on or before the expiration of the 120-day period, the Defaulting Partner's voting rights shall not be reinstated upon the subsequent payment of the Default Amount. (c) The Partners further agree that if the Default Amount is not repaid to the Non-Defaulting Partners within the 120-day term, then, without demand, notice or cure period (time being of the essence herein), such Default Amount shall for all purposes hereunder be deemed to be a Capital Contribution by the Non-Defaulting Partners to the Partnership effective as of the expiration of such 120-day term of such Replacement Loan, which deemed Capital Contribution shall be credited as an amount equal to the product of 200% times the Default Amount, and the Capital Account of the Defaulting Partner shall for all purposes be appropriately reduced to reflect such treatment; provided, however, with respect to any Default Amount attributable to a Replacement Loan made more than one hundred twenty (120) days after the initial Replacement Loan (which is not repaid during its 120-day term) is made by one or more Non- Defaulting Partner, the deemed Capital Contribution shall be credited as an amount equal to the product of 300% times the Default Amount, and in each case the distribution percentages of the Defaulting Partner (i.e., the pro rata share of the particular distribution which such Partner would otherwise receive under such sections) shall be reduced by, and the distribution percentages of each Non- Defaulting Partner who makes its pro rata share of such loan shall be increased by an amount equal to the quotient of (i) 200% (or 300%, as the case may be) times the Default Amount, divided by (ii) the aggregate Capital Contributions made by the Partners to the Partnership prior to the date of calculation (including the Mandatory Additional Contributions of all Non-Defaulting Partners but excluding the Default Amount then in question). (d) The new distribution percentages computed in accordance with this Section 3.2 shall remain in effect under this Agreement unless and until there is a subsequent adjustment to the distribution percentages. Notwithstanding the foregoing, no Partner's distribution percentage shall be reduced under any circumstance to less than zero, nor shall any Partner's distribution percentage be increased under any circumstance to more than 100%. Mandatory Additional Contributions shall be made pro rata, based on the relative Contribution Percentages of the Partners. (e) Each Partner which becomes a Defaulting Partner hereby irrevocably grants to the other Partners a continuing, first priority, perfected security interest in the Partnership Interest of such Defaulting Partner to secure the prompt payment of each Replacement Loan made to such Defaulting Partner until such time, if ever, as the Default Amount with respect to the Replacement Loan under consideration has been converted to a deemed Capital Contribution pursuant to Section 3.2(c). On or before fifteen (15) days after any written request of any Non- Defaulting Partner, the Defaulting Partner shall execute and deliver a UCC-1 financing statement in form and substance acceptable to such Non-Defaulting Partner to evidence such security interest, the failure of which shall constitute a default under the Replacement Loan. Prior to a default or maturity of a Replacement Loan, and without limiting the remedies of the Non-Defaulting Partners, at the election of the Non-Defaulting Partners, all distributions payable to any Defaulting Partner under this Agreement shall be payable directly to the Non-Defaulting Partners (pro rata based on the relative amount of the Replacement Loan made by such Non-Defaulting Partner) until the Replacement Loan(s) of such Defaulting Partner are paid in full (or converted to a deemed Capital Contribution), shall be paid directly to the Non-Defaulting Partners until the entire amount of the Replacement Loan is paid in full. Any amounts paid directly to a Non-Defaulting Partner pursuant to the terms of the preceding sentence shall be treated as paid to the person (the "Deemed Recipient") entitled to receive the amount of the distribution in the absence of the requirements of the preceding sentence (thereby discharging the Partnership's obligation to make the payment in question to the Deemed Recipient) and then as applied by the Deemed Recipient on behalf of the Defaulting Partner to the repayment of the Defaulting Partner's loan. (f) EXCEPT AS SET FORTH IN SECTION 3.1 OR THIS SECTION 3.2, NO ADDITIONAL CAPITAL CONTRIBUTIONS SHALL BE REQUIRED BY ANY PARTNER UNLESS AN EXPRESS WRITTEN CALL FOR A CAPITAL CONTRIBUTION IS MADE BY THE MANAGEMENT COMMITTEE TO EACH OF THE PARTNERS. 3.3 No Return of Capital Contributions. No Partner is entitled to a return of its Capital Contribution, but shall look solely to distributions from the Partnership as provided for in Article 6 of this Agreement. 3.4 Interest. No Partner shall be entitled to interest on its Capital Contribution or its Capital Account, provided that each Partner's Capital Contribution shall accrue the Preferred Return (which shall not be deemed to be interest) as set forth herein. Any interest actually received by reason of temporary investment of any part of the Partnership's funds shall be included in the Partnership's funds. ARTICLE 4 Rights and Obligations of Partners 4.1 Management of Partnership. The management, control and direction of the Partnership and its operations, business and affairs shall be vested exclusively in the Management Committee, which shall have the right, power and authority, acting solely by itself and without the necessity of approval by any Partner or any other person, to carry out any and all of the purposes of the Partnership and to perform or refrain from performing any and all acts that the Management Committee may deem necessary, desirable, appropriate or incidental thereto, except as otherwise provided in this Agreement; provided, however, that the Operating Partner shall manage the Partnership and its operations, business and affairs solely as described in Section 4.5. The Management Committee may assume the management duties and responsibilities of the Operating Partner as set forth in Section 4.5 at any time in the event the Management Committee determines in its good faith discretion that either (i) the Operating Partner has acted negligently or with willful misconduct in performing its duties or (ii) the monthly financial reports of the Partnership reveal a material adverse deviation from the Business Plan more than three (3) times within any twelve (12) month period. The Management Committee agrees that prior to its exercise of its right to assume the management duties and responsibilities of the Operating Partner as result of either default by the Operating Partner, the Management Committee shall first deliver written notice of said default to the Operating Partner and give the Operating Partner ten (10) days thereafter in which to cure said default, the Operating Partner so elects. Notwithstanding anything to the contrary provided herein, the Property shall be managed in accordance with the terms and conditions of that certain Management Agreement (the "Management Agreement") dated of even date herewith by and between the Partnership and Stratus Management L.L.C. 4.2 Management Committee. (a) The "Management Committee" (herein so called) shall consist of four (4) representatives, two (2) of which shall be designated by Stratus (jointly, the "Stratus Representative") and two (2) of which shall be designated by Olympus (jointly, the "Olympus Representative") (individually, a "Representative and collectively, the "Representatives"). The initial Representatives designated by Stratus and Olympus are set forth opposite such Partner's name below: Partner Initial Representative ------- -------------------------- Stratus William H. Armstrong, III Stratus J.B. Brown Olympus Hal R. Hall Olympus Greg Adair Olympus and Stratus may appoint alternates for the Representatives appointed by it, which alternates shall have all the powers of the Representatives in their absence or inability to serve. Olympus hereby appoints Timothy B. Smith as an alternate Representative. Olympus and Stratus may change its designated Representatives effective upon written notice from Olympus or Stratus designating such Representative to the other Partners. One of the Olympus Representatives shall serve as Chairman of the Management Committee and shall set the agenda for such meetings. (b) The Representatives shall meet quarterly (or more often as the Management Committee may reasonably determine) in the offices of the Partnership or by telephone conference, unless the Representatives jointly agree that the meeting is unnecessary or that a different schedule or location for the meeting is appropriate, to discuss current material management issues (but not day-to-day operations matters which are in accordance with the operation parameters set forth in the Business Plan, Operating Budget or otherwise set forth in writing) or Major Decisions. At each meeting the Representatives shall each receive one (1) vote. All action taken by the Management Committee shall require the approval or consent of at least three (3) Representatives except Major Decisions which require unanimous consent as described in Section 4.3 below. Representatives may bring to any meeting such employees, agents, professionals and advisors as they deem necessary or appropriate to assist them at such meeting. A quorum shall consist of at least one Stratus Representative and one Olympus Representative unless both Olympus Representatives have declined to attend two (2) consecutive meetings, which are scheduled with at least seventy-two (72) hours prior notice for each meeting at the offices of the Partnership, in which event the quorum may be two (2) Stratus Representatives, and vice versa. (c) The Financial Partner, at the direction of the Management Committee, shall be authorized and empowered to (i) make all day-to-day management decisions (provided that such decisions are consistent with the operation parameters set forth in the Business Plan, Operating Budget or otherwise in writing) except for Major Decisions, (ii) direct the Operating Partner, (iii) perform all acts and enter into and perform all contracts and other undertakings that the Financial Partner may, in the exercise of its reasonable discretion, deem necessary, advisable, appropriate or incidental thereto and (provided that the performance of such acts are consistent with the operation parameters set forth in the Business Plan, Operating Budget or otherwise in writing), (iv) terminate the property manager in the event of a default in the Management Standard (as that term is defined in the Management Agreement), provided, if the property manager is terminated, then the Partnership (as a Major Decision) shall designate a successor property manager. 4.3 Major Decisions. All Major Decisions shall be made by both the Stratus Representative and the Olympus Representative. Accordingly, neither Stratus nor Olympus, on behalf of the Management Committee, shall have the right or the power to make any binding commitment on behalf of the Partnership in respect of a Major Decision unless and until all of the Representatives have authorized the same in writing. 4.4 Budgets and Reports. (a) By January 31st of each calendar year hereafter during the term hereof, the Operating Partner shall prepare a revised Operating Budget and the Business Plan for the operation of the Partnership. The Management Committee shall have thirty (30) days after receipt thereof to either approve the submitted Business Plan and Operating Budget or respond with required changes to same. (b) The Operating Partner agrees to use diligence and to employ all reasonable efforts to ensure that the actual costs of operating the Partnership shall not exceed the Operating Budget, either in total or for any one accounting category. The Operating Partner shall secure the written approval of the Management Committee for any expenditure that (i) exceeds fifteen percent (15%) of the annual budgeted amount for the Partnership in any one accounting category on such Operating Budget or (ii) exceeds ten percent (10%) of the annual budgeted amount for the Partnership in all accounting categories of the Operating Budget. During each applicable calendar year, the Operating Partner agrees to promptly inform the Management Committee of any major increases in costs and expenses or any major decreases in revenue that were not foreseen during the budget preparation period and thus were not reflected in the Operating Budget. (c) The Operating Partner shall also submit any additional financial or operational reports as the Financial Partner may from time to time reasonably request. 4.5 Powers of the Operating Partner. Subject to Section 4.3, the Operating Partner shall have the duties, rights and obligations to implement the operations of the Partnership as described in the Business Plan, Operating Budget or approved in writing by the Management Committee. Without limiting the generality of Section 4.1, but subject to Section 4.3 , the Operating Partner, acting on behalf of the Partnership, shall oversee the activities of property manager, or, if the Management Agreement is terminated, until a successor property manager is appointed, perform the duties, rights and obligations of the property manager; provided, however, neither the Operating Partner nor the property manager shall take any action that has a material economic affect on the Partnership without the prior approval of the Management Committee, including, without limitation, approving the form and substance of all contracts, loan documents or other documents necessary to operate the business of the Partnership. 4.6 Liability of Partners. The Partners shall be personally liable for the debts and obligations of the Partnership if (but solely to the extent) required by applicable law; provided, however, that all such debts and obligations shall be paid or discharged first with the property of the Partnership (including insurance proceeds) before the Partners shall be obligated to pay or discharge any such debt or obligation with its personal assets. Notwithstanding the preceding sentence, the Partners shall not be personally liable for any debts or obligations which are nonrecourse or which, under the terms thereof, do not create or impose such liability. 4.7 Other Activities of Partners. Except as otherwise agreed in writing, each Partner (i) may carry on and conduct in any way or in any capacity, including, but not limited to, for such Partner's own right and for such Partner's own personal account, as a partner in any other partnership, as a venturer in any joint venture, as a member or manager in any limited liability company, as an employee, officer, director or stockbroker of any corporation, or as a participant in any syndicate, pool, trust, association or other business organization, a business that competes, directly or indirectly, with the business of the Partnership, (ii) will be free in any capacity to conduct business activities the same or similar as conducted by the Partnership and (iii) may make investments in any kind of property. The Partnership will have absolutely no claim or right to any such business or assets thereof. Further, the Partnership will have claim to and will own only those assets contributed to the Partnership or acquired with Partnership funds or credit. Neither this Agreement nor any principle of law or equity shall preclude or limit, in any respect, the right of any Partner or any affiliate thereof to engage in or derive profit or compensation from any activities or investments, nor give any other Partner any right to participate or share in such activities or investments or any profit or compensation derived therefrom. ARTICLE 5 Exculpation and Indemnity 5.1 Exculpation. Neither the Partners nor any affiliate of the Partners, nor any officer, director, manager, member, employee, agent, stockholder, or partner of the Partners or any of its affiliates, shall be liable, responsible, or accountable in damages or otherwise to the Partnership or any Partner by reason of, or arising from or relating to the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Partnership, except to the extent that any of the foregoing is determined, by a final, nonappealable order of a court of competent jurisdiction, to have been primarily caused by the gross negligence, willful misconduct, or bad faith of the person claiming exculpation. 5.2 Indemnity. The Partnership shall indemnify the Partners, each affiliate of the Partners, and each officer, director, stockholder, manager, member, and partner of the Partners or any of its affiliates, and if so determined by the Partners, each employee or agent of the Partners or any of its affiliates, against any claim, loss, damage, liability, or expense (including reasonable attorneys' fees, court costs, and costs of investigation and appeal) suffered or incurred by any such indemnitee by reason of, or arising from or relating to the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Partnership, except to the extent any of the foregoing (i) is determined by final, nonappealable order of a court of competent jurisdiction to have been primarily caused by the gross negligence, willful misconduct, or bad faith of the person claiming indemnification or (ii) is suffered or incurred as a result of any claim (other than a claim for indemnification under this Agreement) asserted by the indemnitee as plaintiff against the Partnership. Unless a determination has been made (by final, nonappealable order of a court of competent jurisdiction) that indemnification is not required, the Partnership shall, upon the request of any indemnitee, advance or promptly reimburse such indemnitee's reasonable costs of investigation, litigation, or appeal, including reasonable attorneys' fees; provided, however, that the affected indemnitee shall, as a condition of such indemnitee's right to receive such advances and reimbursements, undertake in writing to repay promptly the Partnership for all such advancements or reimbursements if a court of competent jurisdiction determines that such indemnitee is not then entitled to indemnification under this Section 5.2. No Partner shall be required to contribute capital in respect of any indemnification claim under this Section 5.2 unless otherwise provided in any other written agreement to which such Partner is a party. ARTICLE 6 Distributions and Allocations 6.1 Distributions. No later than thirty (30) days after the end of each Distribution Period during which the Partnership has Cash Flow, such Cash Flow shall be distributed, after the payment of all third party obligations, to each Partner in proportion to the Sharing Ratios. 6.2 Tax Allocations. For United States federal income tax purposes, allocations of items of income, gain, loss, deduction, expense, and credit for each fiscal year of the Partnership shall be in accordance with each Partner's economic interest in the respective item, as determined by the Management Committee pursuant to Section 704(b) of the Code, and the regulations promulgated thereunder and subject to the requirements of Section 704(c) of the Code and the regulations promulgated thereunder. Unless the Management Committee determines otherwise, allocations shall be made to each Partner in the same manner as such Partner (i) would be required to contribute to the Partnership or (ii) would receive as distributions if the Partnership were to liquidate the assets of the Partnership at their book value and distribute the proceeds in accordance with Section 6.1; provided, however, that if any such allocation is not permitted by applicable law, the Partnership's subsequent income, gain, loss, deduction, expense and credit shall be allocated among the Partners so as to reflect as nearly as possible the allocation used in computing capital accounts. ARTICLE 7 Admissions, Transfers and Withdrawals 7.1 Admission of New Partners. After the Effective Date, new Partners may be admitted to the Partnership only with the written consent of, and upon such terms and conditions as are approved by the unanimous approval of the Management Committee. No admission of any new Partner shall cause the Partner's interest in Partnership allocations, distributions and capital to be less than one percent (1%), and no Partner's Sharing Ratio in the Partnership shall be reduced or diluted unless approved in writing by such Partner or unless otherwise provided in any other written agreement to which such Partner is a party. 7.2 Transfer of Partnership Interests. No Partner may transfer or encumber all or any portion of such Partner's interest in the Partnership without the prior written consent of the Management Committee; provided, however, that Olympus may transfer all or any portion of its interest in the Partnership to an Affiliate of Olympus Real Estate Corporation without the consent of Stratus, and provided, further, that Stratus may transfer all or any portion of its interest in the Partnership to a wholly owned subsidiary of Stratus Properties Inc. without the consent of Olympus. Additionally, any interest in the Partnership held by Olympus or its Affiliates may be transferred in the exercise of rights of the limited partners of Olympus Real Estate Fund II, L.P. ("Fund II") to remove the general partner under the limited partnership agreement of Fund II. 7.3 Buy/Sell Option. (a) In the event of a Deadlock at any time during the term of the Partnership, either Partner may exercise a "buy-sell" right (the "Buy-Sell") as follows: either Partner (the "Offeror") exercising such Buy-Sell (A) shall deliver to the other Partner (the "Offeree") a written notice (the "Buy/Sell Offer") stating the Offeror's exercise of such right and setting forth the Buy/Sell Offer and a description of any negotiations or discussions with third parties that Offeror may have had with respect to the sale of the Partnership Interest and the Business, which Buy/Sell Offer shall represent the dollar amount (without reduction for any deemed or imputed expenses of sale) that the Offeror would be willing to pay to the Partnership in cash for the Business (the "Offer Amount") and (B) simultaneously with the delivery of the Buy/Sell Offer, shall deliver into escrow with a title insurance company located in Dallas, Texas selected by the Offeror (the "Escrow Agent"), a good faith deposit in the amount of the Offer Deposit. The Offeror hereby instructs the Escrow Agent that the Escrow Agent shall either (i) in the event the Offeree elects to sell its interest in the Partnership (the "Partnership Interest") in accordance with the terms hereof, apply such Offer Deposit to the purchase price as of the Buy/Sell Closing Date (as hereinafter defined) or if the Offeror fails to timely purchase the Offeree's Partnership Interest in accordance with the terms hereof, disburse such Offer Deposit in accordance with Section 7.3(g), or (ii) in the event the Offeree elects to purchase the Offeror's Partnership Interest, disburse such Offer Deposit in accordance with Section 7.3(e). (b) The notice transmitting the Buy/Sell Offer shall be deemed to constitute an offer by the Offeror to purchase the Offeree's Partnership Interest for a price equal to the Receipt Amount. "Receipt Amount" shall mean the aggregate amount which the Partner whose Partnership Interest is to be transferred, whether Offeror or Offeree, would receive as a Partnership distribution if (i) the Business were sold for cash for the Offer Amount, (ii) all debts and liabilities of the Partnership but without taking into account any deemed or imputed expenses which would occur for the sale to third parties (e.g. imputed brokerage fees, etc.) were paid in full from such proceeds and (iii) prorations were made with respect to all current assets and current liabilities of the Partnership. (c) The Offeree shall have forty-five (45) days from the date of the Buy/Sell Offer to elect, by written notice to the Offeror signed by the Partner constituting the Offeree, whether to sell such Offeree's Partnership Interest to the Offeror or whether to purchase (or cause its designee to purchase) the Offeror's Partnership Interest in the Partnership (the "Buy/Sell Election Period"). (d) If the Offeree fails to make an election within such forty-five (45) day period, or fails to comply with subsection (e) below, such Offeree shall be conclusively deemed to have elected to sell its Partnership Interest in the Partnership to the Offeror according to the terms of this Section 7.3. (e) If the Offeree makes an election to purchase within such forty-five (45) day period by sending written notice to the Offeror as required by subsection (c), and by delivering into escrow with the Escrow Agent a good faith deposit in the amount of the Offer Deposit, then , the original Offeror shall be conclusively deemed to have elected to sell its Partnership Interest in the Partnership to the Offeree for a price equal to the applicable Receipt Amount. In the event the Offeree timely makes an election to purchase, the Offeree hereby instructs the Escrow Agent that the Escrow Agent shall (i) return the Offeror's Offer Deposit to the Offeror and (ii) hold the Offeree's Offer Deposit and shall either apply such Offeree's Offer Deposit to the purchase price or disburse such Offeree's Offer Deposit in accordance with Section 7.3(g). (f) The Partner (the "Buy/Sell Purchaser") that is obligated to purchase the Partnership Interest in the Partnership of the other Partner (the "Buy/Sell Seller") pursuant to this Section 7.3 shall fix a closing date (the " Buy/Sell Closing Date") for such purchase that is not a Business Day that is not later than forty-five (45) days after the expiration of the Buy/Sell Election Period, by written notice to the Buy/Sell Seller at least fifteen (15) days in advance of Buy/Sell Closing Date. The closing of such purchase shall take place on the Buy/Sell Closing Date at the address of the Escrow Agent. At such closing, the Partner constituting the Buy/Sell Seller shall execute and deliver to the Buy/Sell Purchaser (or its designee) such instruments of assignment, bills of sale, amendments to this Agreement and other instruments and documents as the Buy/Sell Purchaser and the Buy/Sell Seller (or such designee) may reasonably require for the conveyance to such Buy/Sell Purchaser (or such designee) of all of the Buy/Sell Seller's right, title and interest in and to the Buy/Sell Seller's Partnership Interest in the Partnership against receipt by the Buy/Sell Seller of a wire transfer of immediately available funds in an amount equal to the applicable Receipt Amount; and the Buy/Sell Seller hereby irrevocably constitutes and appoints the Buy/Sell Purchaser as its attorney-in-fact to execute, acknowledge and deliver any of such instruments or documents. Each of the Buy/Sell Seller and Buy/Sell Purchaser shall each bear their respective closing costs and expenses (including, but not limited to, all attorney's fees and costs and all applicable transfer and income taxes) incurred in the purchase or sale of the Buy/Sell Seller's Partnership Interest in the Partnership hereunder. Such sale of such Partnership Interest shall be made without representation, warranty or recourse, except for representations and warranties in form and substance reasonably acceptable to the Buy/Sell Purchaser and the Buy/Sell Seller with respect to existence, good standing, title, no encumbrance, authority, authorization, no conflicts, and such other customary matters as may be reasonably requested by the Buy/Sell Purchaser. If the Buy/Sell Offer or the closing of the purchase contemplated thereby causes the maturity of any Partnership indebtedness to be accelerated, the Buy/Sell Seller shall be released from liability resulting from such accelerated indebtedness and the Buy/Sell Purchaser shall pay such indebtedness in full (including without limitation, any accrued but unpaid interest and any prepayment premiums or penalties) at Buy/Sell Purchaser's sole cost and expense and shall indemnify and hold Buy/Sell Seller harmless from and against any losses, damages, costs or expenses (including attorneys' fees) incurred by Buy/Sell Seller, or the Buy/Sell Seller's Affiliates, employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns and Affiliates of the foregoing (the "Indemnified Parties"), as a direct or indirect result thereof, other than any losses, damages, costs or expenses (including attorneys' fees) incurred by any of the Indemnified Parties as a direct result of such Indemnified Party's bad conduct. As a precondition to the closing of the Buy/Sell transaction, the Buy/Sell Seller shall be released from liability from any indebtedness of the Partnership, including, without limitation, the release of any guaranty and collateral pledged to secure any guaranty debt. Anything contained in this Agreement to the contrary notwithstanding, in the event the sale of the Partnership Interest is not consummated because of a default on the part of Buy/Sell Seller or if a condition precedent cannot be fulfilled because Buy/Sell Seller frustrated such fulfillment, Buy/Sell Purchaser may, at its election, pursue an action for specific performance and/or costs and expenses. (g) In the event that the Buy/Sell Purchaser defaults in its obligation to purchase the Partnership Interest of the Buy/Sell Seller in the Partnership on the Buy/Sell Closing Date, the Buy/Sell Seller shall have the right to (i) solicit third party offers on behalf of the Partnership for the purchase of the Business, to accept the best such offer, as determined by the Buy/Sell Seller in its sole and absolute discretion, and to consummate the sale of the Business to such third party pursuant to such offer, (ii) purchase the Partnership Interest of the Buy/Sell Purchaser for a purchase price equal to ninety percent (90%) of the aggregate Partnership distributions that the Buy/Sell Purchaser would be entitled to receive under this Agreement if the Business were sold for cash for the Offer Amount and all debts and liabilities of the Partnership (excluding imputed sale expenses) were paid in full from such proceeds and proration were made with respect to all current assets and current liabilities of the Partnership, (iii) specifically enforce the Buy/Sell Purchaser's obligation to purchase the Partnership interest of the Buy/Sell Seller, and (iv) notify the Escrow Agent holding the Offer Deposit of the Buy/Sell Purchaser immediately to deliver such Offer Deposit to the Buy/Sell Seller as liquidated damages for the breach by such Buy/Sell Purchaser (and the Buy/Sell Purchaser covenants and agrees to cause, and hereby instructs, the Escrow Agent to deliver such Offer Deposit to the Buy/Sell Seller). The delivery of the Offer Deposit to the Buy/Sell Seller shall not constitute a return of capital. The Buy/Sell Purchaser hereby constitutes and appoints the Buy/Sell Seller as its attorney-in-fact to execute and deliver on behalf of the Buy/Sell Purchaser all documents as may be reasonably required in connection with the delivery by the Escrow Agent of the Offer Deposit to the Buy/Sell Seller. 7.4 No Substituted Partners. Except as permitted by Section 7.1, no transferee of any partnership interest in the Partnership may become a substituted Partner. Rather, any transferee of any Partnership interest of a Partner shall be entitled solely to rights as assignee of the rights to receive all or part of the share of the income, gains, losses, deductions, expenses, credits, distributions, or returns of capital to which his or its transferor would otherwise be entitled with respect to the Partnership interest so transferred. 7.5 Withdrawal of Partners. Except as permitted by Section 7.2 hereof, no Partner shall have any right to withdraw or resign from the Partnership without the unanimous consent of the Management Committee. ARTICLE 8 General Accounting Provisions and Books 8.1 Books of Account; Tax Returns. The Financial Partner shall prepare and file, or shall cause to be prepared and filed, all United States federal, state, and local income and other tax returns required to be filed by the Partnership and shall keep or cause to be kept complete and appropriate records and books of account in which shall be entered all such transactions and other matters relative to the Partnership's operations, business and affairs as are usually entered into records and books of account that are maintained by persons engaged in business of like character or are required by the Act. Except as otherwise expressly provided herein, such books and records shall be maintained in accordance with the basis utilized in preparing the Partnership's United States federal income tax returns, which returns, if allowed by applicable law, may upon the approval of the Management Committee be prepared on an accrual basis. 8.2 Place Kept; Inspection. The books and records shall be maintained at the principal place of business of the Partnership, and all such books and records shall be available for inspection and copying at the reasonable request, and at the expense, of any Partner during the ordinary business hours of the Partnership. 8.3 Tax Matters Partner. The Financial Partner shall be the tax matters partner of the Partnership and, in such capacity, shall exercise all rights conferred, and perform all duties imposed, upon a tax matters partner under Sections 6221 through 6233 of the Code and the regulations promulgated thereunder; provided, however, that the Operating Partner shall have the right to review and approve any actions taken by the Financial Partner in its capacity as the tax matters partner. Notwithstanding the foregoing, the Financial Partner shall have the right to select the methodology to be used pursuant to Section 704(c) of the Code subject to the Operating Partner's consent, which consent shall not be unreasonably withheld. ARTICLE 9 Amendments and Waivers 9.1 Amendments and Waivers. Except as expressly provided in Section 9.3 of this Agreement, the Management Committee may amend or waive any provision of this Agreement which merely (i) corrects an error or clarifies an ambiguity in this Agreement, (ii) does not adversely affect the Financial Partner or the Operating Partner in any material respect or (iii) changes Schedule I to this Agreement to reflect the Sharing Ratios or Partnership Interests of the Partners as from time to time amended in accordance with this Agreement. The Management Committee shall amend Schedule I to this Agreement to reflect any additional Capital Contributions. The Partners agree to look to the books and records of the Partnership for determination of the actual amount of Capital Contributions made to the Partnership, as provided in Section 3.1 of this Agreement. 9.2 Certain Other Amendments. Notwithstanding any provision to the contrary contained herein, no amendment to or waiver of any provision of this Agreement shall be effective against a given Partner without the consent or vote of such Partner if such amendment or waiver would (i) cause the Partnership to fail to be treated as a joint venture under the Act, (ii) change Section 3.1 of this Agreement to increase a Partner's obligation to contribute to the capital of the Partnership, (iii) change Section 5.1 or 5.2 of this Agreement to affect adversely any Partner's rights to exculpation or indemnification, (iv) change Section 6.1 or 6.2 of this Agreement to affect adversely the participation of such Partner in the income, gains, losses, deductions, expenses, credits, capital or distributions of the Partnership (including any amendments to admit one or more new Partner or Partners), (v) change Section 7.1 of this Agreement to affect adversely the anti-dilution rights of such Partner, (vi) change the percentage of Partners necessary for any consent or vote required hereunder to the taking of any action or (vii) amend Section 9.2 of this Agreement. ARTICLE 10 Dissolution and Termination 10.1 Dissolution. The Partnership shall be dissolved upon the first to occur of the following events: (i) the election of the both Partners to dissolve the Partnership; (ii) the election of the Financial Partner to dissolve the Partnership if all or substantially all Partnership assets shall have been sold or disposed of or shall consist of cash; (iii) both the Partners shall have withdrawn from the Partnership within the meaning of the Act, or any other dissolution event specified in the Act shall have occurred; (iv) the Financial Partner shall have (A) made a general assignment for the benefit of creditors, (B) filed a voluntary petition in bankruptcy, (C) filed a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any bankruptcy or debtor relief law, (D) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any bankruptcy or insolvency proceeding brought against it or (E) sought, consented to, or acquiesced in the appointment of a trustee, receiver or liquidator of the Financial Partner or of all or any substantial part of its property; (v) if within sixty (60) days after the commencement of any proceeding against the Financial Partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any bankruptcy or debtor relief law, the proceeding shall not have been dismissed; or (vi) if within sixty (60) days after the appointment (without the Financial Partner's consent or acquiescence) of a trustee, receiver or liquidator of the Financial Partner or of all or any substantial part of its property, the appointment shall not have been vacated or stayed if within sixty (60) days after the expiration of any such stay, the appointment shall not have been vacated. Notwithstanding the foregoing, the Partnership shall not be dissolved upon the occurrence of an event specified in (iii) through (vi) of this Section 10.1 if within ninety (90) days after such occurrence a majority in interest (under applicable federal income tax principles) of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor Financial Partner. 10.2 Accounting on Dissolution. Following the dissolution of the Partnership pursuant to Section 10.1 of this Agreement, the books of the Partnership shall be closed, and a proper accounting of the Partnership's assets, liabilities and operations shall be made by the Financial Partner, all as of the most recent practicable date. The Financial Partner shall serve as the liquidator of the Partnership unless it has been removed or unless it otherwise fails or refuses to serve. If the Financial Partner does not serve as the liquidator, one or more other persons or entities may be selected to serve by the Operating Partner. The expenses incurred by the liquidator in connection with the dissolution, liquidation and termination of the Partnership shall be borne by the Partnership. 10.3 Termination. As expeditiously as practicable, but in no event later than one year (except as may be necessary to realize upon any material amount of property that may be illiquid), after the dissolution of the Partnership pursuant to Section 10.1 of this Agreement, the liquidator shall cause the Partnership to pay the current liabilities of the Partnership and (i) establish a reserve fund (which may be in the form of cash or other property, as the liquidator shall determine) for any and all other liabilities, including contingent liabilities, of the Partnership in a reasonable amount determined by the liquidator to be appropriate for such purposes or (ii) otherwise make adequate provision for such other liabilities. To the extent that cash required for the foregoing purposes is not otherwise available, the liquidator may sell property, if any, of the Partnership for cash. Thereafter, all remaining cash or other property, if any, of the Partnership shall be distributed to the Partners in accordance with the provisions of Section 6.1 of this Agreement. The Partners must agree on the value and distributee for all in-kind distributions or else all property must be sold and the proceeds distributed in accordance herewith. At the time final distributions are made in accordance with Section 6.1 of this Agreement, a certificate of cancellation shall be filed in accordance with the Act, and the legal existence of the Partnership shall terminate, but if at any time thereafter any reserved cash or property is released because in the judgment of the liquidator the need for such reserve has ended, then such cash or property shall be distributed in accordance with Section 6.1 of this Agreement. 10.4 No Negative Capital Account Obligation. Notwithstanding any other provision of this Agreement to the contrary, in no event shall any Partner who has a negative capital account upon final distribution of all cash and other property of the Partnership be required to restore such negative account to zero. 10.5 No Other Cause of Dissolution. The Partnership shall not be dissolved, or its legal existence terminated, for any reason whatsoever except as expressly provided in this Article 10. 10.6 Merger. Subject to the rights of the Partners pursuant to Section 9.2, the Partnership may, with the written consent of the Financial Partner acting with the unanimous approval of the Management Committee, adopt a plan of merger and engage in any merger permitted by applicable law. ARTICLE 11 Miscellaneous 11.1 Waiver of Partition. Each Partner hereby irrevocably waives any and all rights that he or it may have to maintain an action for partition of any of the Partnership's property. 11.2 Entire Agreement. This Agreement constitutes the entire agreement among the Partners with respect to the subject matter hereof and supersedes any prior agreement or understanding among them with respect to such subject matter. 11.3 Severability. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement or the application of such provision to other persons or circumstances or in other jurisdictions shall not be affected thereby. Also, if any provision of this Agreement is invalid or unenforceable under any applicable law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. 11.4 Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if sent by overnight courier, hand delivered, mailed (first class registered mail or certified mail, postage prepaid), or sent by telex or telecopy if to the Partners, at the addresses or telex or facsimile numbers set forth on Schedule I hereto, and if to the Partnership, at the address of its principal place of business at 200 Crescent Court, Suite 1650, Dallas, Texas 75201 (fax 214/740-7340), or to such other address as the Partnership or any Partner shall have last designated by notice to the Partnership and all other parties hereto in accordance with this Section 11.4. Notices sent by hand delivery shall be deemed to have been given when received; notices mailed in accordance with the foregoing shall be deemed to have been given three days following the date so mailed; notices sent by telex or telecopy shall be deemed to have been given when electronically confirmed; and notices sent by overnight courier shall be deemed to have been given on the next business day following the date so sent. 11.5 Governing Laws. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas (without regard to principles of conflicts of laws). 11.6 Successors and Assigns. Except as otherwise specifically provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their respective successors and permitted assigns. 11.7 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall constitute one and the same instrument. 11.8 Headings. The section and article 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 provision hereof. 11.9 Other Terms. All references to "Articles" and "Sections" contained in this Agreement are, unless specifically indicated otherwise, references to articles, sections, subsections, and paragraphs of this Agreement. Whenever in this Agreement the singular number is used, the same shall include the plural where appropriate (and vice versa), and words of any gender shall include each other gender where appropriate. As used in this Agreement, the following words or phrases shall have the meanings indicated: (i) "or" shall mean "and/or", (ii) "day" shall mean a calendar day, (iii) "including" or "include" shall mean "including without limitation", and (iv) "law" or "laws" shall mean statutes, regulations, rules, judicial orders, and other legal pronouncements having the effect of law. Whenever any provision of this Agreement requires or permits a Partner to take or omit to take any action, or make or omit to make any decision, unless the context clearly requires otherwise, such provision shall be interpreted to authorize an action taken or omitted, or a decision made or omitted, by the Partner acting alone and in good faith. 11.10 Power of Attorney. By execution of this Agreement, the Operating Partner hereby makes, constitutes and appoints the Financial Partner, with full power of substitution and re-substitution in the Financial Partner (in its sole discretion), such Partner's true and lawful attorney-in-fact (the "Attorney") for and in the Operating Partner's name, place and stead and for its use and benefit, to prepare, execute, certify, acknowledge, swear to, file, deliver or record any or all of the following, authorized pursuant to the terms of this Agreement: (i) any agreement, certificate, report, consent, instrument, filing or writing made by or relating to the Partnership that the Attorney deems necessary, desirable, or appropriate for the lawful purpose of (A) organizing the Partnership under the Act, (B) admitting Partners with respect to the Partnership, (C) pursuing or effecting any rights or remedies available under this Agreement or otherwise with respect to a defaulting Partner, (D) qualifying the Partnership to do business in any jurisdiction and (E) complying with any law, agreement or obligation applicable to the Partnership; (ii) any agreement, certificate, report, consent, instrument, filing or writing made by or relating to the Partnership necessary, desirable or appropriate to effectuate the business purposes of, or the dissolution, termination or liquidation of, the Partnership pursuant to applicable law or the respective terms of this Agreement; and (iii) any amendment to or modification or restatement of this Agreement or any other agreement, certificate, report, consent, instrument, filing or writing of any type described in subsection (i) or (ii) of this Section 11.10, provided that any amendment of or modification to this Agreement shall first have been adopted in accordance with Article 9 of this Agreement. 11.11 Transfer and Other Restrictions. INTERESTS IN THE PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD UNLESS SUCH INTERESTS HAVE BEEN REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. INTERESTS IN THE PARTNERSHIP ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, VOTING AND OTHER TERMS AND CONDITIONS SET FORTH IN (1) ARTICLE 7 AND (2) VARIOUS INVESTMENT AGREEMENTS BETWEEN OR AMONG CERTAIN PARTNERS. COPIES OF SUCH AGREEMENTS MAY BE OBTAINED FROM THE PARTNERSHIP OR THE FINANCIAL PARTNER AT THEIR PRINCIPAL EXECUTIVE OFFICES. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the undersigned have executed this instrument effective as of the Effective Date. FINANCIAL PARTNER: OLY ABC WEST I, L.P., a Texas limited partnership By: Oly Texas GP II, LLC, a Texas limited liability company, its sole general partner By:/S/ Hal R. Hall --------------- Name: Hal R. Hall Title:Vice President OPERATING PARTNER: STRATUS ABC WEST I, L.P., a Texas limited partnership By: STRS L.L.C., a Delaware limited liability company, General Partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ---------------------------- William H. Armstrong, III, President & CEO EXHIBIT A Business Plan [ATTACHED] EXHIBIT B Operating Budget [To be attached within sixty (60) days of the Effective Date and to encompass the 1999 Operating Budget] SCHEDULE I Partnership Capital Contributions and Sharing Ratios Initial Capital Sharing Partner and Address Contribution Ratios Financial Partner: Oly ABC West I, L.P. $494,250.00 50.01% 200 Crescent Court, Suite 1650 Dallas, Texas 75201 (214) 740-7340 Operating partner: Stratus ABC West I, L.P. $494,250.00 49.99% 98 San Jacinto Blvd., Suite 2200 Austin, Texas 78701 (512) 478-6340 ------------ -------- Total All Partners $988,500.00 100.00%

Exhibit 10.11 FIRST AMENDMENT TO JOINT VENTURE AGREEMENT OF OLY STRATUS ABC WEST I JOINT VENTURE THIS FIRST AMENDMENT TO JOINT VENTURE AGREEMENT OF OLY STRATUS ABC WEST I JOINT VENTURE (this "Amendment") is entered into this 9th day of November, 1998 by and among Oly ABC West I, L.P., a Texas limited partnership ("Olympus") and Stratus ABC West I, L.P., a Texas limited partnership ("Stratus"). W I T N E S S E T H WHEREAS, Oly Stratus ABC West I Joint Venture, a Texas joint venture (the "Partnership") was formed on September 30, 1998, pursuant to that certain Joint Venture Agreement of Oly Stratus ABC West I Joint Venture (the "Joint Venture Agreement"), with Olympus as the Financial Partner and Stratus as the Operating Partner. WHEREAS, Olympus and Stratus desire to amend the Joint Venture Agreement in certain respects. NOW, THEREFORE, Olympus, FM and Stratus hereby agree as follows: 1. Definitions. The following terms hereby replace or are hereby inserted as definitions in Section 1.1 of the Joint Venture Agreement: "Development Loan Agreement" shall mean that certain Development Loan Agreement dated November 9, 1998, by and between Oly Stratus ABC West I Joint Venture and Bank One, Texas, National Association. "Escrow Deposit" shall have the meaning set forth in the Development Loan Agreement. 2. Escrow Deposit. The following is hereby inserted as the new Section 3.3 of the Joint Venture Agreement and the current Section 3.3 and 3.4 are renumbered Section 3.4 and 3.5, respectively: 3.3 Escrow Deposit. Pursuant to the Development Loan Agreement, the Escrow Deposit was delivered by an affiliate of the Operating Partner (the "Guarantor") on behalf of the Partnership to Bank One, Texas. In consideration of the payment of the Escrow Deposit by the Guarantor, the Partnership agrees to pay to the Guarantor an amount equal to twelve percent (12%) per annum, minus the interest accruing on the outstanding portion of the Escrow Deposit compounded at the rate of return on the Escrow Deposit held by Bank One, Texas (the "Interest Spread"), until the Escrow Deposit has been released or applied to the loan evidenced by the Development Loan Agreement. In the event the Escrow Deposit is applied to the loan evidenced in part by the Development Loan Agreement, the Financial Partner shall elect to call a Mandatory Additional Contribution in an amount necessary to reimburse the Guarantor for the portion of the Escrow Deposit and the Interest Spread which has not been paid by the Partnership to the Guarantor. 4. Distributions. Section 6.1 of the Joint Venture Agreement is hereby deleted in its entirety and the following is inserted in its place: 6.1 Distributions. No later than thirty (30) days after the end of each Distribution Period during which the Partnership has Cash Flow, such Cash Flow shall be distributed as set forth below and in the order of priority as set forth below. (i) First, to the payment of debt pursuant to the terms of the Development Loan Agreement; then (ii) Second, to the payment of the Escrow Deposit and the Interest Spread; then (iii) Third, to the payment of the Mezzanine Financing pursuant to the terms of the Mezzanine Loan Agreement; then (iv) Fourth, to the return, pari passu of the Capital Contributions to each Partner; then (v) Fifth, to each Partner in proportion to the Sharing Ratios. Notwithstanding anything to the contrary contained in this Section 6.1, to the extent there is available Cash Flow, the Partners agree to make distributions to the Financial Partner in the amount of its federal income tax liability; provided, however, before any future distributions of Cash Flow are made for items (iii) through (v) above, the Operating Partner shall receive a proportionate distribution based on the Sharing Ratio. 5. Release from Liability Under the Buy/Sell. The following is hereby inserted to the end of Section 7.3(f) of the Joint Venture Agreement: Notwithstanding anything to contrary contained in this Agreement, in the event the closing of the Buy/Sell transaction occurs, at such closing the Escrow Deposit shall be paid in full by the Partnership. 6. Confirmation of the Joint Venture Agreement. Except as modified by this Amendment, the Joint Venture Agreement is hereby confirmed. 7. Counterparts. This Amendment may be executed in several counterparts, all of which, when taken together, shall constitute one and the same agreement. An executed copy of this Amendment transmitted by telecopy shall be sufficient as an original for all purposes. 8. Captions. The captions preceding the various provisions of this Amendment have been inserted solely for convenience of reference and shall not be used in construing this Amendment. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Olympus and Stratus have executed this Amendment the day and year first set forth above. OLYMPUS: OLY ABC WEST I, L.P., a Texas limited partnership By: Oly Texas GP II, LLC, a Texas limited liability company, its sole general partner By:/s/ Ron J. Hoyl ------------------ Name: Ron J. Hoyl Title: Vice President STRATUS: STRATUS ABC WEST I, L.P., a Texas limited partnership By: STRS L.L.C., a Delaware limited liability company, its general partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ------------------------------- William H. Armstrong, III President and CEO

Exhibit 10.12 MANAGEMENT AGREEMENT (ABC WEST I) THIS MANAGEMENT AGREEMENT (this "Agreement") is executed as of the 30th day of September, 1998, to be effective conditioned upon and as of the date of the acquisition of the Property by Owner, by and between Oly Stratus ABC West I Joint Venture, a Texas joint venture (hereinafter called "Owner"), and Stratus Management L.L.C., a Delaware limited liability company (hereinafter called "Property Manager"). W I T N E S S E T H: WHEREAS, Owner is acquiring that certain real property located in Travis County, Texas, more particularly described on Exhibit A attached hereto and made a part hereof for all purposes, together with all of the improvements located thereon (collectively, the "Property"), consisting of seventy five (75) individual lots (individually, a "Lot" and collectively, the "Lots"). WHEREAS, Owner desires to engage Property Manager to develop, manage, maintain and operate the Property and Property Manager desires to accept such engagement, upon the terms and conditions hereinafter set forth. WHEREAS, Owner has provided to Property Manager, Owner's current Business Plan (hereinafter defined) and the operating and capital budgets approved by Owner as of the date hereof. NOW, THEREFORE, for and in consideration of the premises and mutual covenants and agreements contained in this Agreement and the compensation to be paid hereunder, Owner and Property Manager hereby agree as follows: ARTICLE I ENGAGEMENT OF PROPERTY MANAGER Owner hereby engages Property Manager and Property Manager hereby accepts such engagement on the terms and conditions hereinafter provided as manager for the Property. Property Manager shall develop, manage, maintain and operate the Property in an efficient and first class manner consistent with the Business Plan and Budget (hereinafter defined) and shall exercise due diligence in all of its endeavors. All of Property Manager's duties under this Agreement shall be subject to funds being made available to Property Manager by Owner for the Property Manager to perform its duties. ARTICLE II SERVICES TO BE PERFORMED BY PROPERTY MANAGER 2.1 Expenses. All reasonable obligations or reasonable expenses approved by Owner in writing and incurred by Property Manager in the performance of its duties hereunder in accordance with the provisions hereof shall be at the expense of Owner except as otherwise specifically provided in this Agreement. Without Owner's prior written consent or as authorized in the Business Plan or Budget, Property Manager shall not incur any cost not specifically set forth in the most recently approved Budget. 2.2 Contracts. To the extent necessary to fulfill its obligations under this Agreement, Property Manager shall (i) identify and, with the prior written approval of Owner or as set forth in the Business Plan or Budget, enter into, in Owner's name, contracts with engineers, tradesmen and other independent contractors to perform services necessary or advisable for the development, operation, maintenance or repair of the Property; and (ii) with the prior written approval of Owner or as set forth in the Business Plan or Budget, place orders, in Property Manager's name on behalf of Owner, for such equipment, tools, appliances, materials and supplies as are reasonable and necessary to properly develop, maintain, manage, operate or repair the Property. Except with the prior written consent of Owner, every contract entered into by Property Manager for or in connection with the Property shall include as a condition thereof the right by Owner to terminate, with or without cause, on thirty (30) days prior written notice, without the payment of a cancellation fee. Owner shall be obligated to pay the cost of any contract or agreement described in this section only if such cost is provided for in the Preliminary Budget or the most recently approved Budget or is otherwise approved by Owner in writing. 2.3 Maintenance, Repair and Sale of Property. Property Manager shall supervise the development and sale of the Property and shall maintain the improvements, appurtenances and grounds of the Property in accordance with the "Management Standard" (as defined in Section 4.1hereof), including within such maintenance, without limitation thereof, such normal maintenance and repair work as may be necessary or, with Owner's prior written consent, desirable. 2.4 Insurance. (a) Owner Obligations. Owner shall cause to be placed and kept in force all forms of insurance as Owner deems prudent and reasonable given the nature of the Property. All insurance coverage shall be placed with such companies, in such amounts, and with such beneficial interests appearing therein as Owner deems prudent and reasonable given the nature of the Property. Owner shall procure appropriate clauses in, or endorsements on, all of the policies whereby the insurer names Property Manager as an additional insured, and the insurer waives subrogation and agrees to not terminate any such policy or reduce coverage or amount without giving Owner at least thirty (30) days prior written notice. (b) Property Manager Obligations. Property Manager shall promptly investigate and make a full and timely written report to Owner and, if Owner requests, to Owner's insurance company as to all accidents, claims for damages relating to the ownership, operation and maintenance of the Property and any damage or destruction to the Property and the estimated cost of repair thereof and shall prepare any and all reports required by Owner and, if Owner requests, by its insurance company in connection therewith. All such reports shall be timely filed with the insurance company as required under the terms of the insurance policy involved. Without obtaining the prior written approval of Owner, which may be granted or withheld in Owner's sole discretion, Property Manager shall not settle any claims against insurance companies arising out of any policies or take any other action in connection with such settlements, including the execution of proofs of loss, the adjustment of losses, signing of receipts and collection of money. The cost of the insurance and the payment of all premiums therefor shall be the sole responsibility of, and at the sole expense of, Owner. Property Manager shall assist Owner in completing any insurance applications, questionnaires, etc. reasonably requested by Owner or Owner's insurance agent or insurance company. 2.5 Operating Budgets; Business Plans. Notwithstanding the delivery of the approved Budget and Business Plan, unless some or all of the obligations of this Section 2.5 are specifically waived in writing by Owner, Property Manager shall prepare the items described herein. (a) Preliminary Budgets. Within thirty (30) days of the date this Agreement is fully executed, Property Manager shall prepare and deliver to Owner, for Owner's approval, a proposed budget and operating plan for the upcoming one hundred twenty (120) days, which budget and operating plan shall reflect thereon projections of all receipts (if any) and operating costs and expenses, capital expenditures and reserves that Property Manager, in the exercise of good business judgment, believes will be received or necessary to be incurred, as the case may be, to develop and maintain the Property during such one hundred twenty (120) days. Within ninety (90) days of the date this Agreement is fully executed, Property Manager shall further prepare and deliver to Owner an additional proposed budget and operating plan (such proposed budget and operating plan, together with the foregoing budget and operating plan, the "Preliminary Budget" and the "Preliminary Plan", respectively), for the upcoming calendar year, which budget and operating plan shall reflect thereon projections of all receipts (if any) and operating costs and expenses, capital expenditures and reserves that Property Manager, in the exercise of good business judgment, believes will be received or necessary to be incurred, as the case may be, to develop and maintain the Property during such calendar year. (b) Annual Budgets. Thereafter, on or prior to October 31st of each calendar year during the Term (as defined in Section 4.4) hereof, beginning on the first October 31st, after the date hereof, Property Manager shall submit to Owner, for Owner's approval, proposed budgets and operating plans for the Property on an annual basis for the upcoming calendar year, which proposed budgets and operating plans shall reflect thereon projections of all receipts (if any) and operating costs and expenses, capital expenditures and reserves that Property Manager, in the exercise of good business judgment, believes will be received or necessary to be incurred, as the case may be, to develop and maintain the Property during such calendar year. Such proposed budgets and operating plans (including the Preliminary Budget and the Preliminary Plan) shall be submitted by Property Manager solely as good faith estimates, without warranty of their accuracy or attainability; provided, however, that, except as otherwise expressly provided in this Agreement, Property Manager shall not be reimbursed by Owner for, and Property Manager hereby expressly indemnifies Owner against, any loss, expense or claim in connection with any unauthorized expenditure or liability incurred by any action taken by Property Manager. Property Manager shall use its best efforts to manage the development of the Property in a manner consistent with, and subject to, both the total cost limitations and categories in the most recently approved Budget. (c) Contents. Without limiting the foregoing, each Budget and Business Plan (including the Preliminary Budget and the Preliminary Plan) shall include between them: (i) a projected income statement for the Property, (ii) a projected balance sheet for the Property, (iii) a schedule of projected operations and cash flow, (iv) a reasonable estimate and projected budget of gross receipts and operating expenses, itemized in a manner acceptable to Owner, (v) a projected budget for capital expenditures and replacements, (vi) an identification of staffing to be employed, (vii) a separate estimate of the Property Management Fee (as defined in Section 31.), (viii) a narrative description of the program for the development and marketing of the Property, and (ix) any and all other matters reasonably requested by Owner. (d) Owner Approval. Owner shall, within thirty (30) days after receipt of a proposed Budget and Business Plan (including the Preliminary Budget and the Preliminary Plan), approve or disapprove such Budget and Business Plan in its sole discretion. As used herein, the terms "Business Plan" and "Budget" shall refer to the currently approved Budget and Business Plan approved by Owner as amended and/or modified from time to time. Owner shall provide Manager written notice of its approval or disapproval; provided, that in the event Owner fails to do so, the Budget or Business Plan, as the case may be, from the previous year shall control until a new budget or business plan is approved. Within fifteen (15) days after Owner submits any objection to the proposed budget or business plan, Manager will submit a revised budget or business plan to Owner, as the case may be. If Owner does not approve such revised budget or business plan within fifteen (15) days of its submission to Owner, the budget or business plan as the case may be, from the previous year shall control until a new budget or business plan is approved. 2.6 Property Account and Owner Account. (a) Owner Account. Property Manager shall establish and maintain in a banking or other financial institution approved by Owner or set forth in the Business Plan from time to time throughout the term of this Agreement, a separate bank or similar account in the name of Owner for the deposit of moneys of Owner received, if any, with respect to the Property (the "Owner Account"). Property Manager shall also establish such other special bank or similar accounts as may be approved by Owner. All revenue from the Property shall be promptly deposited in the Owner Account. (b) Property Account. Operating expenses of the Property shall be paid by the Property Manager from an account established in a financial institution approved by Owner to process funds as described in Section 2.7 (the "Property Account") 2.7 Disbursements by Owner to Property Manager. (a) Monthly Payments. On or before the twentieth (20th) day of each calendar month, Property Manager shall deliver to Owner a written request for disbursement, setting forth, in reasonable detail, the costs and expenses reasonably estimated to be paid by Property Manager for the upcoming calendar month, together with any other working capital needs of the Property for the upcoming calendar month, in each case, in accordance with the Budget (the "Required Monthly Funds"). Property Manager shall also submit reasonable substantiation as requested by Owner for all requested disbursements. In the event that any requested disbursement is not consistent with, or in compliance with, the Budget, Property Manager shall set forth such requested disbursements in a separate report and shall set forth a brief explanation for the reason for such discrepancy. On or before the first day of the month for which the particular request for the Required Monthly Funds is made, Owner shall transfer, via wire transfer, from the Owner Account to the Property Account designated by Property Manager the Required Monthly Funds approved by Owner. (b) Emergency Withdrawals. Property Manager shall only be entitled to make withdrawals from the Property Account in accordance with the Budget or the Business Plan or in connection with a bona fide emergency due to casualty or act of God under circumstances in which it would be unreasonable to seek to obtain Owner's approval, in which case Property Manager shall be entitled to exceed, by a reasonable amount, the amounts set forth in the Budget in order to address such bona fide emergency situation; provided that as soon as practicable after such emergency, Property Manager shall fully inform Owner of the circumstances surrounding such situation and obtain, on a "going- forward" basis only, Owner's approval with respect to Property Manager's handling of similar emergency events at the Property in the future. It is understood that any action taken by Property Manager under this Section 2.7(b) in connection with any particular emergency event shall be considered as being within Property Manager's scope of authority under this Agreement but shall not create any precedent or duty on the part of Property Manager or Owner to take any action in connection with any future event. Nothing contained in this Section 2.7(b) or elsewhere in this Agreement is intended to provide any benefit to any third parties who are not parties hereto or successors or permitted assigns of parties hereto or impose upon Property Manager or Owner any duty or obligation to any third parties who are not parties hereto or successors or permitted assigns of parties hereto, nor shall it have the effect of giving, any enforceable rights to any third parties who are not parties hereto or successors or permitted assigns of parties hereto, whether such claims are asserted as third party beneficiary rights or otherwise. The Owner and Property Manager hereby acknowledge and agree that, if the Owner fails to deposit funds in the Property Account in an amount sufficient to fund the expenses authorized in the Budget, Property Manager shall not be required to incur any out of pocket costs in order to perform Property Manager's obligations under this Agreement. 2.8 Costs Not Reimbursed to Property Manager. Unless otherwise provided herein, Owner shall not be obligated to reimburse Property Manager for the payment by Property Manager of (a) any expense for office equipment or office supplies of Property Manager other than those used on the Property and approved in writing by Owner; (b) any overhead expenses of Property Manager incurred in its general offices; (c) unless otherwise consented to by Owner in writing, any salaries, wages and expenses for any personnel, including, without limitation, personnel spending all or a portion of their working hours at or providing services to the Property specifically performing Property Manager's duties hereunder; (d) the cost of fidelity insurance; (e) any accounting costs or overhead costs incurred in connection with the preparation and delivery of the statements and reports required hereunder; or (f) any travel costs incurred by Property Manager not specifically provided for in the Budget. 2.9 Records; Reporting. (a) Records. All statements, receipts, invoices, checks, leases, contracts, worksheets, financial statements, books and records, and all other instruments and documents relating to or arising from the development, operation or management of the Property shall be the property of Owner; provided, that throughout the term of this Agreement, all of such items shall be maintained by Property Manager in a manner consistent with the terms of this Agreement and with books and records customarily maintained by managing agents of properties similar in location, size and revenue to the Property. Owner and Property Manager shall have the right to inspect and to copy all such items, at such party's expense, at all reasonable times, and from time to time, during the term of this Agreement. Upon the termination of this Agreement, all of such books, records and all other information relating to the Property promptly shall be delivered to Owner; provided, however, that at Property Manager's sole expense, Property Manager or its representatives shall have the right, for a reasonable period of time not to exceed three (3) years following such termination, to inspect such books, records and other information for data that directly relates to the period during which Property Manager managed the Property and to make copies thereof, at the offices of Owner upon reasonable advance notice to Owner. (b) Statements. Property Manager shall prepare and deliver to Owner on a monthly and on a calendar quarterly basis, Property Manager's written estimates of the amounts, if any, by which any categories of the Preliminary Budget or the Budget must be adjusted to adequately fund the development, operation and maintenance of the Property for the then current month or quarter as the case may be, although Owner shall be under no obligation to change the Preliminary Budget or the Budget. Such reports shall include the following information: (i) a statement of operations on the Property during such month or quarter as the case may be, and the cost thereof, (ii) a statement of year-to-date operations on the Property, and the cost thereof, (iii) a statement of the actual cost of operations on the Property during such month or quarter as the case may be compared to the Preliminary Budget or the Budget which identifies any variance between such costs and the Preliminary Budget or the Budget, and (iv) a description and explanation of such variances. Property Manager also shall furnish Owner, within thirty (30) days after Owner's request, such further information covering the operation and maintenance of the Property as Owner may reasonably require, including, but not limited to, the following: (i) income statement (accrual basis for taxes and insurance), month and year-to-date versus Budget; (ii) variance report (narrative form, month and year-to-date), (iii) balance sheet, (iv) general ledger, (v) rent roll (including security deposit listing), (vi) accounts receivable aging report, (vii) bank reconciliation for each account, (viii) calculation of Property Management Fee, (ix) schedule of reserve and escrow accounts, (x) schedule of capital expenditures, (xi) a re-forecast report, on a quarterly basis, of current full year operations compared to the Budget with explanations for all material variances, (xii) a marketing qualitative summary of property operations for the preceding month including comments on revenues, expenses, marketing, leases, competition, legal and other issues affecting the Property, and (xiii) any and all other reports reasonably requested by Owner. (c) Annual Accounting Report. Property Manager agrees (i) to deliver to owner, within twenty (20) days after the end of each fiscal year, an annual accounting report (including balance sheet, income statement and other financial statements), showing the results of gross receipts, gross operating expenses, net operating income, net cash flow and the Property Management Fee which would be payable if the Agreement were terminated as of the end of such fiscal year and any other information necessary to make the computations required hereby or which may be requested by Owner, all for such fiscal year and (ii) to cooperate fully with Owner, at no additional expense to Property Manager, but without limiting Property Manager's obligations under Section 2.9(e), in supplying all of the information and documentation necessary for a nationally recognized firm of certified public accountants selected by Owner (the "Auditor") to prepare and deliver to Owner an audit of the annual accounting report provided by Property Manager to Owner pursuant to this Section 2.9(c) within forty-five (45) days after the end of each fiscal year. (d) Additional Fiscal Reports. Property Manager shall, upon the request of Owner, prepare for Owner or assist Owner in the preparation of such additional financial reports with respect to the Owner or the Property as Owner may reasonably request or may be required in the preparation of the audited annual accounting to be prepared pursuant to this Section 2.9. Property Manager acknowledges and agrees that the Property Management Fee to be paid under this Agreement includes compensation to Property Manager for the preparation of papers and schedules reasonably necessary for the Auditor to conduct its review of the Property's books and records. To the extent such papers and schedules are not properly prepared, Property Manager agrees to reimburse Owner for the reasonable additional cost and expense incurred by Owner for the Auditor to prepare such papers or schedules. (e) No Liability for Returns Required by Law. Property Manager shall be responsible for preparing and filing any forms, reports or returns (except Owner's tax returns) that may be required by law relating to the Property. Property Manager shall also be responsible for any forms, reports or returns that may be required by law relating to any of Property Manager's employees. 2.10 Compliance with Legal Requirements. Property Manager shall take such action as may be necessary to comply with any and all orders or requirements affecting the Property by any federal, state, county or municipal authority having jurisdiction thereover. Property Manager, however, shall not take any such action as long as Owner is contesting, or has affirmed Owner's intention to contest and institutes proceedings contesting, any such order or requirement, except that if failure to comply promptly with any such order or requirement would or might expose Property Manager to criminal liability, Property Manager shall comply with same. Property Manager shall promptly notify Owner in writing of all such orders and notices or requirements. Nothing contained herein shall require Property Manager to employ counsel to represent Owner in any such proceeding or suit. 2.11 Taxes. Property Manager shall timely render the Property for taxation, and obtain and verify bills for real estate, personal property, and all other taxes and assessments, if any, against the Property and promptly pay such tax bills and any other Impositions (as defined below), and assist and cooperate with Owner in connection with all such taxes and assessments in all ways reasonably requested by Owner including applications or petitions of Owner for reduction of taxes or assessments. Owner shall have the option but not obligation to employ a third party consultant to accomplish the foregoing, in which event, Property Manager shall assist and cooperate with such consultant. As used herein, "Impositions" shall mean all taxes, assessments, special assessments, rents and charges for any easement or agreement maintained as part of or for the benefit of the Property, use and occupancy taxes and charges, water and sewer for public and private utilities, excises, levies, license and permit fees and other governmental charges, general and special, ordinary and extraordinary, unforeseen and foreseen, of any kind and nature whatsoever which at any time prior to or during the term of this Agreement may be assessed, levied, confirmed, imposed upon or grow or become due and payable out of or in respect of, or become a lien on (i) the Property or any part thereof or any appurtenances thereto, or upon any personal property located, or used in connection with, the Property, (ii) the rent, income or other payments (if any) received by or for the account of Owner or anyone claiming by, through or under Owner, (iii) any use or occupation of the Property, (iv) such franchises, licenses and permits as may be appurtenant to the use of the Property and (v) any document to which Owner is a party transferring an interest or estate in the Property. ARTICLE III FEES TO PROPERTY MANAGER In consideration for the performance of Property Manager's duties and responsibilities under this Agreement, in exchange for its services provided to Owner and the Property, Owner shall pay to Property Manager (i) a management fee (the "Management Fee") equal to One Thousand Two Hundred and No/100 Dollars ($1,200.00) for each Lot sold, which shall be payable monthly in arrears, (ii) a sales commission (the "Sales Commission") in an amount equal to six percent (6%) of the purchase price for each Lot sold, if, as and when the purchase and sale of such Lot is closed, which shall be payable at the closing of the purchase and sale of each such Lot, and (iii) a property development fee (the "Development Fee") in an amount equal to Sixty Thousand and No/100 Dollars ($60,000.00), which shall be payable in installments of Five Thousand and No/100 Dollars ($5,000.00) for twelve months to be paid on the first day of each month following the execution of this Agreement; provided, however, that in the event all Lots within the Property are sold prior to the expiration of the 12-month period, any unpaid portion of the $60,000 shall be payable upon closing of the sale of the last Lot. ARTICLE IV RELATIONSHIP OF PROPERTY MANAGER TO OWNER 4.1 Use and Maintenance of Premises. Property Manager shall employ its best efforts to develop, operate and maintain the Property in a manner (referred to herein as the "Management Standard") consistent with (i) first class standards (consistent with the Business Plan), (ii) prudent business and management practices applicable to the development, operation, management and maintenance of the Property and (iii) the requirements of any deeds of trust, certificates of occupancy, permits, licenses, consents or other recorded or unrecorded agreements now or hereafter affecting the Property or as required by the joint venture agreement of Owner (collectively referred to herein as the "Key Documents"). Property Manager shall use all contacts, discount programs and cost-savings measures at its disposal to obtain services, products and tax and insurance rates for the Property at the lowest cost, without sacrificing the quality of such services or products. Property Manager shall perform such other acts and deeds as are reasonable, necessary and proper in the discharge of its duties under this Agreement. Property Manager may with prior written approval of Owner obtain goods or services for the Property from direct or indirect affiliates of Property Manager, its officers, directors, shareholders or employees, but only if such goods and services are of at least equal quality and of no higher prices than comparable goods and services obtainable from unaffiliated parties and such goods and services are otherwise competitive with comparable goods and services. 4.2 Sale or Refinancing of the Property. Upon the express request of Owner but not otherwise, Property Manager shall assist and cooperate in any attempt(s) by Owner to sell, finance or refinance all or any portion of the Property. Such assistance and cooperation by Property Manager and Property Manager's personnel shall not be deemed to create a broker-principal or similar relationship unless Owner and Property Manager enter into a separate written agreement engaging Property Manager as broker with respect to all or any portion of the Property. Such assistance and cooperation shall include, without limitation, answering prospective purchasers' or lenders' questions about the Property or any portion thereof, preparing rent rolls, notifying tenants about the sale of the Property and obtaining estoppel certificates and other documents from all tenants of the Property in the form required by the prospective purchaser or lender. Property Manager shall also provide, promptly upon request by Owner, (a) an estoppel certificate executed by Property Manager certifying that no uncured default by the Owner exists under this Agreement or, if such a default(s) exists, stating the nature thereof, (b) a certificate in favor of Owner and any lender executed by Property Manager confirming, to the best of Property Manager's actual knowledge, that any representations and warranties made (or to be made) by Owner with respect to the Property, or the condition or operation thereof, in any loan documents executed (or to be executed) by Owner in connection with any sale, financing or refinancing of the Property, are substantially true, correct and complete, or, if not substantially true, correct or complete, stating with particularity why such representations and warranties are not substantially true, correct or complete, and (c) a subordination and attornment agreement executed by Property Manager in accordance with the provisions of Section 5.9 of this Agreement. 4.3 Approvals and Consents to Property Manager. Owner and Property Manager hereby acknowledge and agree that William H. Armstrong, III is authorized by Owner to grant approvals and consents required under this Agreement to Property Manager, and otherwise instruct Property Manager with respect to Property Manager's obligations and performance under this Agreement. 4.4 Term. This Agreement shall commence on the date hereof and continue until such time as it is terminated as provided herein (a) for Cause (as herein defined) or (b) upon the mutual agreement of the parties. The entire term of this Agreement is sometimes herein referred to as the "Term". 4.5 Termination by Owner. Owner, at its option, may terminate this Agreement for "Cause" at any time upon giving written notice thereof. The term Cause shall include (a) the failure of Property Manager to cure any fraud, misrepresentation, misappropriation of funds, furnishing any statement, report, notice, writing or schedule to Owner that Property Manager knows, or reasonably should have known, is untrue or misleading in any material respect on the date as of which the facts set forth therein are stated or certified or the date such statement, report, notice, writing or schedule is furnished to Owner, and such failure continues for a period of ten (10) days after written notice thereof by Owner to Property Manager, (b) the failure of Property Manager to comply with any term or condition of this Agreement (except for breach of the Management Standard) and such failure continues for a period of thirty (30) days after written notice thereof by Owner to Property Manager, provided that if such default is not reasonably susceptible of cure within thirty (30) days, then such reasonable time so long as Property Manager is diligently prosecuting the cure of the default, but in no event longer than ninety (90) days, (c) the bankruptcy or insolvency of, the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of, Property Manager, (d) the sale of all or part of the Property; provided that in the case of a partial sale, termination will only apply to those portions of the Property sold, (e) the failure of Property Manager to cure an intentional or grossly negligent or illegal act committed by Property Manager against Owner and such failure continues for a period of ten (10) days after written notice thereof by Owner to Property Manager, (f) the failure of Property Manager to cure Property Manager's willful and/or reckless misconduct that causes damage to Owner and such failure continues for a period of ten (10) days after written notice thereof by Owner to Property Manager, or (g) upon thirty (30) days written notice from Owner to Property Manager in the event Property Manager fails to perform its duties consistent with the Management Standard as determined by the management committee of Owner. 4.6 Termination by Property Manager. Property Manager, at its option, may terminate this Agreement for the failure of Owner to comply with any term or condition of this Agreement and such failure continues for a period of thirty (30) days after written notice thereof by Owner to Property Manager, provided that if such default is not reasonably susceptible of cure within thirty (30) days, then such reasonable time so long as Owner is diligently prosecuting the cure of the default, but in no event longer than ninety (90) days. 4.7 Obligations Upon Termination. (a) Upon termination of this Agreement, each party shall continue to be fully liable for their respective obligations which have accrued up to and including the termination date and shall promptly pay to the other all amounts due to the other party under the terms of this Agreement. Such payment shall be made as soon after the effective date of termination as such amounts are determinable. Upon such payment, neither party shall have any further claim or right against the other, except as expressly provided herein. (b) In the event of termination of this Agreement, upon the effective date of such termination, Property Manager shall (i) surrender and deliver to Owner all income of the Property, if any, and other monies of Owner then held by Property Manager and/or in any bank account (including, without limitation, the Owner Account and the Property Account) in excess of the reimbursements due and payable to Property Manager up to and including the effective date of such termination, (ii) deliver to Owner as received by Property Manager any monies or other property due Owner under this Agreement but received after such termination, and (iii) deliver to Owner everything then held by Property Manager pertaining to the Property, including, without limitation copies of all books, records, keys and all other materials, property and supplies pertaining to the Property and/or this Agreement. 4.8 Negation of Partnership, Joint Venture or Lease. Nothing in this Agreement shall constitute, or be construed to be or to create, a partnership, joint venture or lease between Owner and Property Manager with respect to the Property. In the performance of this Agreement, Property Manager shall act solely as an independent contractor. Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby shall in any respect be interpreted, deemed or construed as making either party a partner, joint venturer, principal or agent with, or with respect to, the other party or as creating any similar relationship or entity, and each party hereto agrees that it will not make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceedings involving Property Manager and Owner. 4.9 Indemnification. Property Manager shall be liable for and shall indemnify and hold harmless Owner (and each partner, venturer, employee, agent, shareholder, director and officer of Owner) from any loss, damage, liability, cost or expense (including reasonable attorneys' fees) arising out of (i) any actions of Property Manager not within the scope of Property Manager's duties hereunder, (ii) any breach by Property Manager of Property Manager's obligations hereunder or (iii) the gross negligence or willful misconduct of Property Manager. Owner shall indemnify and hold harmless Property Manager (and each employee, agent, director, shareholder are officer of Property Manager) from any loss, damage, liability, cost or expense (including reasonable attorneys' fees) arising out of (x) a breach by Owner of Owner's obligations hereunder, (y) Owner's gross negligence or willful misconduct or (z) actions taken by Property Manager within the scope of Property Manager's responsibilities under this Agreement. 4.10 Owner's Limited Liability. No general or limited partner in or of Owner, whether direct or indirect, or any disclosed or undisclosed officers, shareholders, principals, directors, employees, partners, servants or agents of Owner or any of the foregoing or any investment advisor of Owner (including any assignee or successor of Owner) or other holder of any equity interest in Owner, shall be personally liable for the performance of Owner's obligations under this Agreement. The liability of Owner (including any assignee or successor of Owner) for Owner's obligations hereunder shall be limited to the equity interest of Owner in the Property. 4.11 Property Manager's Limited Liability. No general or limited partner in or of Property Manager, whether direct or indirect, or any disclosed or undisclosed officers, shareholders, principals, directors, employees, partners, servants or agents of Property Manager or any of the foregoing or any investment advisor of Property Manager (including any assignee or successor of Property Manager) or other holder of any equity interest in Property Manager, shall be personally liable for the performance of Property Manager's obligations under this Agreement. ARTICLE V MISCELLANEOUS 5.1 No Assignment by Property Manager Etc. Without the prior written consent of Owner, which consent may be granted or withheld in Owner's sole discretion, Property Manager shall not have the right to assign, transfer or convey any of Property Manager's right, title or interest hereunder, nor shall Property Manager have the right to delegate any of the obligations or duties required to be kept or performed by Property Manager hereunder. 5.2 Notices. All notices, demands, consents, approvals and requests given by either party to the other hereunder shall be in writing and sent via the U.S. Postal Service by registered or certified mail, postage prepaid or via a nationally recognized overnight delivery service (e.g. Federal Express) and addressed to the appropriate party at the respective addresses shown below. All such notices shall be deemed given on the earlier of actual receipt or refusal of receipt by the addressee. The respective addresses and additional notice parties are as follows: If to Owner: Oly Stratus ABC West I Joint Venture c/o Olympus Real Estate Corporation 200 Crescent Court, Suite 1650 Dallas, Texas 75201 Attention: Hal R. Hall and to: Robert C. Feldman Weil, Gotshal & Manges, LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 If to Property Manager: Stratus Management L.L.C. 98 San Jacinto Blvd., Suite 220 Austin, Texas 78701 Attention: Mr. William H. Armstrong, III With a copy to: Kenneth N. Jones Armburst, Brown & Davis, L.L.P. 100 Congress, Suite 1350 Austin, Texas 78701 Any party may at any time change its respective address by sending written notice to the other parties of the change in the manner hereinabove prescribed. 5.3 GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE TERMS AND PROVISIONS HEREOF SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. THIS AGREEMENT IS PERFORMABLE IN, AND THE EXCLUSIVE VENUE FOR ANY ACTION BROUGHT WITH RESPECT HERETO SHALL LIE IN, DALLAS COUNTY, TEXAS. 5.4 Not a Third Party Beneficiary Contract. Neither this Agreement nor any part hereof nor any service, relationship or other matter alluded to herein shall inure to the benefit of any third party (specifically including any lender, tenants or contractors), to any trustee in bankruptcy, to any assignee for the benefit of creditors, to any receiver by reason of insolvency, to any other fiduciary or officer representing a bankruptcy or insolvent estate of either party or to the creditors or claimants of such an estate. In addition, this Agreement shall terminate and be of no further force or effect upon the filing of any bankruptcy petition by or against Property Manager. 5.5 Validity. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 5.6 Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the matters herein contained and any agreement hereafter made shall be ineffective to effect any change or modification, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the change or modification is sought. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors, legal representatives and assigns. 5.7 Attorneys' Fees. If either Owner or Property Manager employs an attorney to enforce or defend its rights hereunder, the prevailing party shall be entitled to recover its reasonable attorneys' fees, costs and expenses incurred in connection with such enforcement or defense. 5.8 INDEMNIFICATION PROVISIONS. THIS AGREEMENT CONTAINS INDEMNIFICATION PROVISIONS SPECIFICALLY DESCRIBED IN SECTIONS 2.5 AND 4.7 HEREOF. 5.9 Subordination. This Agreement and any extension hereof shall be subordinate to any mortgage or similar security instrument now or hereafter affecting the Property, and all renewals, modifications, consolidations, replacements and extensions thereof (a "Mortgage"). Property Manager further agrees to attorn to the holder of any Mortgage or similar security instrument affecting the Property, and any successor or assignee thereof, upon Owner's being dispossessed by such holder of Owner's interest in all or any portion of the Property. The provisions of this Section 5.9 shall be sellf-operative and no further instrument of subordinatiion or attornment shall be required. Property Manager shall execute promptly any certificate or other document that Owner or any mortgagee or other security holder may request as to such subordination and/or attornment, which certificate or document may include such customary and normal provisions as Owner may determine in its sole discretion. In the event that Property Manager fails to execute and deliver such certificate or document on or before five (5) business days after written notice to Property Manager by Owner, then without any further notice and opportunity to cure, such failure by Property Manager shall be deemed to be an event for Cause hereunder. 5.10 Representations, Warranties and Covenants of Property Manager. In order to induce Owner to enter into this Agreement, Property Manager does hereby make the following representations, warranties and covenants: (a) Property Manager represents and warrants to Owner that Property Manager is a Delaware limited liability company, is duly formed and legally existing under the laws of the state of its formation and is duly qualified to do business in the State of Texas. (b) Property Manager represents and warrants to Owner that Property Manager has full power and authority to enter into this Agreement and to carry out the transactions herein contemplated, and that the undersigned officers of Property Manager have all necessary authority to execute and deliver this Agreement on behalf of Property Manager. (c) Property Manager represents and warrants to Owner that this Agreement has been duly executed and delivered by Property Manager and constitutes the legal, valid and binding obligations of Property Manager enforceable in accordance with their terms, subject to laws applicable generally to creditor's rights. (d) Property Manager shall deliver to Owner, upon the effective date hereof (i) a good standing certificate from the State of Texas, and (ii) an incumbency certificate and resolutions of Property Manager authorizing the execution and delivery by Property Manager of this Agreement, certified by an authorized officer of Property Manager as being true, correct and complete. (e) There is no claim, litigation, proceedings or governmental investigation pending, or as far as is known to Property Manager, threatened, against Property Manager or relating to the Property or the transactions contemplated by this Agreement which does, or may reasonably be expected to, affect the ability of Property Manager to enter into this Agreement or to carry out its obligations hereunder, and, to Property Manager's actual knowledge, there is no basis for any such claim, litigation, proceedings or governmental investigation. (f) Neither the consummation of the actions contemplated by this Agreement on the part of Property Manager to be performed, nor the fulfillment of the terms, conditions and provisions of this Agreement, conflicts with or will result in the breach of any of the terms, conditions or provisions of, or constitute a default under, any agreement, indenture, instrument or undertaking to which Property Manager is a party or by which it is bound. (g) Property Manager has and will continue to have during the term of this Agreement qualified personnel to implement Property Manager's obligations hereunder. 5.11 Publicity and Public Relations. Owner shall have the exclusive right to control, manage and monitor all publicity and public relations with respect to the Property or Owner's ownership thereof. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]OWNER: OLY STRATUS ABC WEST I JOINT VENTURE, a Texas joint venture By: Oly ABC West I, L.P., a Texas limited partnership, its general partner By: Oly Texas GP II, LLC, a Texas limited liability company, its sole general partner By:/s/ Hal R. Hall -------------------- Name:Hal R. Hall Title: Vice President By: Stratus ABC West I, L.P., a Texas limited partnership, its general partner By: STRS L.L.C., a Delaware limited liability company, General Partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ----------------------------- William H. Armstrong, III President and CEO PROPERTY MANAGER: STRATUS MANAGEMENT L.L.C., a Delaware limited liability company By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ---------------------------- William H. Armstrong III President and CEO EXHIBIT A LEGAL DESCRIPTION OF THE PROPERTY

Exhibit 10.13 MEZZANINE LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is dated as of September 30, 1998 and is by and between Oly Stratus ABC West I Joint Venture, a Texas joint venture ("Borrower") and Oly Lender Stratus, L.P., a Texas limited partnership ("Lender"). RECITALS A. WHEREAS, Borrower was formed to acquire and develop certain real property in Travis County, Texas commonly known as ABC West I (the "Property") pursuant to that certain Agreement of Sale and Purchase (ABC West Phase 1; 75 Lots) between Stratus Properties Operating Co. and Oly Stratus ABC West I Joint Venture dated of even date herewith (the "Purchase Agreement"). B. WHEREAS, Borrower desires to borrow from Lender, and Lender agrees to loan to Borrower, the amounts described below. NOW THEREFORE, in consideration of the premises and the mutual covenants set forth herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1. Defined Terms. The following capitalized terms generally used in this Agreement shall have the meanings defined or referenced below. Certain other capitalized terms used only in specific sections of this Agreement are defined in such sections. (a) "Affiliated" or "Affiliate" means, with respect to any Person, (i) any other Person directly or indirectly controlling, controlled by, or under common control with such Person, or (ii) any other Person owning or controlling 10% or more of the outstanding voting interests of such Person, or (iii) any officer, director, general partner or managing member of such Person, or (iv) any other Person which is an officer, director, general partner, managing member or holder of 10% or more of the voting interests of any other Person described in clauses (i) through (iii) of this definition. The term "control" as used herein (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, of the power (a) to vote 10% or more of the outstanding voting securities of such person or entity; or (b) to otherwise direct management policies of such person or entity by contract or otherwise. (b) "Agreement" shall mean this Loan Agreement as described in the preamble. (c) "Bankruptcy Code" means Title 11 of the United States Code as amended from time to time, and any state law relating to creditor's rights, reorganization or insolvency generally. (d) "Borrower" shall have the meaning set forth in the preamble hereto. (e) "Borrower Joint Venture Agreement" means that Joint Venture Agreement of Borrower of even date herewith, as the same may be amended from time to time with the prior consent of the Lender. (f) "Business Day" means a day of the week (other than any Saturday or Sunday) on which banks are not authorized or required to close in the State of Texas. Unless specifically referenced in this Agreement as a Business Day, all references to "days" shall be to calendar days. (g) "Business Plan" has the meaning ascribed thereto in the Borrower Joint Venture Agreement. (h) "Claims" shall have the meaning set forth in Section 8.1. (i) "Closing Date" means the Closing Date under the Purchase Agreement. (j) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (k) "Default" has the meaning set forth in Section 7.1. (l) "Lender" shall have the meaning set forth in the preamble. (m) "Loan" shall have the meaning set forth in Section 2.1. (n) "Loan Amount" shall have the meaning set forth in 2.1. (o) "Loan Documents" means the Notes and any documents pertaining to Lender's rights thereunder. (p) "Management Committee" means the Management Committee of Borrower. (q) "Maturity Date" means September 29, 2001. (r) "Notes" shall have the meaning set forth in Section 2.1. (s) "Person" means any individual, partnership, corporation, limited liability company, limited liability partnership, trust or other entity. (t) "Potential Default" means any event, condition, omission or circumstance that, with the giving of notice or the lapse of time, or both, would constitute a "Default" hereunder or under any of the Loan Documents. (u) "Property" means the property purchased pursuant to the Purchase Agreement. (v) "Purchase Agreement" means that certain agreement of purchase and sale as defined in the recitals. ARTICLE II LOANS 2.1. Loans. On the date hereof, Lender shall make a loan (the "Loan") to the Borrower in an amount equal to ONE MILLION ONE HUNDRED FIFTY THREE THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($1,153,250). The Loan shall be evidenced by two Promissory Notes (the "Notes") in the form of that attached hereto as Exhibit A, and each Note shall bear interest at the rate of fifteen percent per annum (15%). The Loan shall be funded by wire transfer to accounts designated by the Management Committee. 2.2. Interest; Payments. Interest on the Loan shall accrue upon the outstanding principal balance thereof at the rate and in the amounts provided therein, and such interest shall be payable as required therein. Interest on the Loan shall be computed on the basis of actual days elapsed in a year of 360 days (including the first day but excluding the last day) occurring in the period for which payable. 2.3. Optional Prepayments. Borrower may at any time pay the full amount or any part of the Loan without the payment of any premium or fee. 2.4. No Revolving Loan. The Loan is not a revolving loan, and amounts repaid from time to time may not be reborrowed. 2.5. Repayment of Principal; Maturity Date. Any principal amount of the Loan outstanding at the Maturity Date shall be repaid on the Maturity Date. On the Maturity Date, the Loan shall mature and all sums due and owing under this Agreement and the other Loan Documents, to the extent the same have not previously become due, shall be payable in full. All payments due to Lender under this Agreement, whether at the Maturity Date or otherwise, shall be paid in immediately available funds. 2.6. Late Payments. If any amount required to be paid to Lender under any Loan Document shall not be paid on the date it is due (taking into account any applicable grace period), Borrower shall pay to Lender, in addition to all other amounts payable hereunder or under the Notes, a late fee equal to four percent (4%) of the delinquent amount. 2.7. Payments on Non-Business Days; Calculations. If any payment to be made under any Loan Document shall be stated to be due on a day which is not a Business Day, then the date for payment thereof shall be extended to the next following Business Day. 2.8. Use of Proceeds. The proceeds of the Loan shall be used solely to pay the cost of Borrower's acquisition of the Property and the other costs of development of the Property. Lender shall have no responsibility with respect to the use of any proceeds of the Loan. ARTICLE III CONDITIONS PRECEDENT TO CLOSING 3.1. Conditions Precedent to Closing. Lender's obligation to make any disbursements or take any other action under the Loan Documents shall be subject at all times to satisfaction or waiver, in Lender's sole and absolute discretion, of each of the following conditions precedent on or prior to the date of any loan hereunder. (a) Acquisition. Borrower shall have acquired the Property pursuant to the terms of the Purchase Agreement. (b) Compliance. Each of the representations and warranties contained in Article 4hereof shall be true and correct on and as of such date, and no Default or Potential Default shall exist. (c) Loan Documents. Borrower shall have delivered to Lender all Loan Documents pertaining to the Loan and all other documents, instruments, and forms of evidence or other materials requested by Lender under the terms of this Agreement or any of the other Loan Documents, in form and substance satisfactory to Lender in its sole and absolute discretion, duly executed by Borrower and each other party thereto (other than Lender). (d) Initial Equity. Lender shall have received evidence satisfactory to it that Borrower has received the initial capital contribution pursuant to Borrower's Joint Venture Agreement. (e) Other Documents. Lender shall have received such other documents, instruments, agreements, certificates, forms of evidence and other materials relating to the transactions contemplated hereby as Lender may reasonably require. ARTICLE IV REPRESENTATIONS AND WARRANTIES As a material inducement to Lender's entry into this Agreement, Borrower represents and warrants to Lender as of the date hereof and continuing thereafter that: 4.1. Organization, Powers and Good Standing. Borrower (i) is duly organized as a joint venture under the laws of the Sate of Texas, (ii) is validly existing in good standing under the laws of the State of Texas and (iii) has all requisite organizational power and authority and the legal right to own and operate its properties, to carry on its business as heretofore conducted and as proposed to be conducted, to enter into the Loan Documents to which it is or may become a party and to carry out the transactions contemplated thereby. Borrower possesses all governmental approvals, in full force and effect, that are necessary for the ownership, maintenance and operation of its properties and conduct of its business as now conducted and proposed to be conducted, and is not in material violation thereof. 4.2. Authorization, Binding Effect. (a) The execution, delivery and performance by Borrower of each Loan Document to which it is or may be a party have been duly authorized by all necessary corporate, limited liability company or other organizational action on the part of Borrower. (b) Each Loan Document to which Borrower is a party has been duly executed and delivered by Borrower. (c) Each Loan Document to which Borrower is a party is the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its terms. 4.3. No Conflict. The execution, delivery and performance by Borrower of each Loan Document to which it is party, and the consummation of the transactions contemplated thereby, do not and will not (i) violate any provision of the charter or other organizational documents of Borrower, (ii) conflict with, result in a breach of or constitute (or, with the giving of notice or lapse of time or both, would constitute) a default under, or except for consents that have been obtained and are in full force and effect, require the approval or consent of any Person pursuant to, any Contractual Obligation of Borrower, (iii) violate any applicable law binding on Borrower or (iv) result in the creation or imposition of any lien upon any asset of Borrower. 4.4. Agreements, Applicable Law. Borrower is not in violation of any applicable law and is not in material default under any contractual obligations to which it is a party or by which its property is bound. 4.5. Indebtedness. Except for indebtedness to Lender hereunder, amounts payable under debt secured by the Property or trade debt and any other indebtedness approved in writing by the Lender, Borrower does not have and will not have any indebtedness of any kind or nature whatsoever. 4.6. No Defaults. No Default or Potential Default has occurred and is continuing. 4.7. Formation and Organizational Documents. Borrower has delivered to Lender all formation and organizational documents of Borrower, and all such formation and organizational documents remain in full force and effect and as of the date hereof have not been amended or modified since they were delivered to Lender. 4.8. No Subordination. Except as provided herein, there is no agreement, indenture, contract or instrument to which Borrower is subject or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations under this Agreement or the Notes to any other obligation of Borrower. 4.9. Permits; Franchises. Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade names, trade name rights, patents, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged without conflict with the rights of others. ARTICLE V COVENANTS OF BORROWER Borrower covenants that until the Loan has been fully discharged: 5.1. Records and Inspection. Borrower shall maintain adequate books, records and accounts as may be required or necessary to permit the preparation of financial statements in accordance with sound business practices. Borrower shall permit such Persons as Lender may designate, at reasonable times and as often as may be reasonably requested, under reasonable circumstances, to (i) visit and inspect the Property, (ii) inspect and copy Borrower's books and records and (iii) discuss with its officers and employees and its independent accountants, its business, assets, liabilities, prospects, results of operation or financial condition; provided, however, that Lender shall make reasonable efforts to avoid disruption of the tenants at the Property during any such inspection. Borrower acknowledges that Lender's inspection of such books, records and accounts once in each sixty (60) day period shall be presumed to be reasonable under the foregoing provision of this Agreement. 5.2. Corporate Existence, Etc.Borrower shall, at all times preserve and keep in full force and effect its company, corporate or partnership existence and all material rights and franchises. 5.3. Payment of Taxes. Borrower shall pay and discharge all taxes imposed upon it or any of its properties or in respect of any of its franchises, business, income or property before any penalty shall be incurred with respect to such Taxes. 5.4. Conduct of Business. Borrower shall conduct its business in compliance in all material respects with all applicable laws and all of its contractual obligations. 5.5. Expenses. Borrower shall immediately pay Lender upon demand all reasonable costs and expenses incurred by Lender in connection with (i) the preparation of this Agreement and all other Loan Documents contemplated hereby, (ii) the administration of this Agreement and the other Loan Documents for the term of the Loan and (iii) the enforcement or satisfaction by Lender of any of Borrower's obligations under this Agreement and the Other Loan Documents. 5.6. Business Plan. Borrower shall, from time to time, submit to Lender a true and correct copy of the Business Plan, including a copy of such operating budgets within ten Business Days following any amendment thereof. 5.7. ERISA Compliance. Borrower shall at all times comply with the provisions of ERISA with respect to any retirement or other employee benefit plan to which it is a party as employer, and as soon as possible after Borrower knows, or has reason to know, that any Reportable Event (as defined in ERISA) with respect to any such plan of Borrower has occurred, it shall furnish to Lender a written statement setting forth details as to such Reportable Event and the action, if any, which Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event furnished to the Pension Benefit Guaranty Corporation. 5.8. Taxes. Borrower shall pay and discharge when due any and all taxes, both real and personal, owed by or relating to Borrower and Borrower's properties (including federal and state income taxes), except such as Borrower may in good faith contest or as to which a bona fide dispute may arise, provided provision is made to the satisfaction of Lender for eventual payment thereof in the event that it is found in a final, non- appealable judgment that the same is an obligation of Borrower. 5.9. Notice. Borrower shall promptly give notice in writing to Lender of (i) any litigation pending or threatened against Borrower or the Property, (ii) the occurrence of any Default, (iii) any change in the name of Borrower and any change in the identity or organizational structure of Borrower, (iv) as soon as it becomes aware, any uninsured or partially uninsured material loss of the Property or any material portion thereof or (v) as soon as it becomes aware, any termination or cancellation of any insurance policy which Borrower is required herein to maintain. 5.10. Single Purpose Entity. Borrower at all times will continue to be a duly formed and existing joint venture and a single-purpose entity. Borrower will continue to comply with the provisions of the Borrower Joint Venture Agreement and the laws of the State of Texas relating to joint ventures. All customary formalities regarding the existence of Borrower as a joint venture will continue to be observed. Borrower will continue to accurately maintain its financial statements, accounting records and other corporate documents separate from those of any Affiliate of Borrower and any other Person. ARTICLE VI NEGATIVE COVENANTS Borrower covenants that until all of the Loan have been fully discharged: 6.1. Debt. Borrower shall not, directly or indirectly, create, incur, assume, guarantee or otherwise become or remain liable with respect to, any material indebtedness other than indebtedness described in Section 4.5 hereof. 6.2. Restriction on Fundamental Changes. Borrower shall not, directly or indirectly, enter into any merger, consolidation, reorganization or recapitalization, liquidate, wind up or dissolution without the written consent of Lender. 6.3. Distributions to Members. Except as provided herein, no distribution shall be made to the partners of Borrower, whether under the Borrower Joint Venture Agreement or otherwise, while any amount remains outstanding under the Notes. 6.4. Amendments of Certain Documents. Borrower shall not amend its formation and organizational documents in any respect without obtaining the prior written consent of each Lender. 6.5. Other Indebtedness; Transfer of Interests. Without the prior written consent of Lender, and except as otherwise expressly permitted by this Agreement or the Borrower Joint Venture Agreement, Borrower shall not create, incur or permit to exist any liabilities resulting from borrowings, loans or advances, whether secured or unsecured, or any other obligation of any kind whatsoever, except (i) the liabilities of Borrower to Lender for money borrowed hereunder and the liabilities of Borrower under the Loan Documents, (ii) debt secured by a first lien on the Property and (iii) unsecured trade payables incurred in the ordinary course of business. Borrower shall not directly or indirectly create, incur, assume or permit to exist any lien, pledge, encumbrance or other security interest or preferential arrangement of any kind or nature with respect to the membership or partnership interests in Borrower. 6.6. Merger, Consolidation, Sale of Assets, Amendments. Borrower shall not merge into or consolidate with any corporation or other entity, or sell, lease, assign, transfer or otherwise dispose of all or substantially all of its assets. Borrower shall not amend or modify any portion of Borrower's Joint Venture Agreement without Lender's prior written consent. 6.7. Guarantees. Without the prior written consent of Lender, Borrower shall not guarantee or become liable in any way as a surety, endorser (other than as endorser of negotiable instruments in the ordinary course of business) or accommodation endorser or otherwise for debt or obligations of any other person or entity. 6.8. No Sale, Transfer, Liens, Etc. Without the prior written consent of Lender and except as otherwise expressly permitted by this Agreement, Borrower's Joint Venture Agreement, the Business Plan or in the ordinary course of business operations of the Borrower's joint venture, Borrower shall not suffer or permit any disposition or encumbrance of, or lien upon, the Property or any portion thereof or any interest therein. 6.9. Assignment. Without the prior written consent of Lender, Borrower shall not assign Borrower's interest under any of the Loan Documents, or in any monies due or to become due thereunder, and any assignment without such consent shall be void. 6.10. Compliance with Laws. Borrower shall comply in all material respects with all laws, ordinances, governmental rules and regulations to which it is subject, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its assets or to the conduct of its business. ARTICLE VII DEFAULTS AND REMEDIES 7.1. Default. The occurrence of any one or more of the following shall constitute an event of default (hereinafter, "Default") under this Agreement and the other Loan Documents: (a) Payment; Performance. (i) Borrower fails to pay as and when due hereunder or under the Notes or (ii) Borrower fails to pay when due any other amount due hereunder, under the Notes or any of the other Loan Documents; provided, however, that Borrower shall not be in Default if Borrower fails to pay when due any payment that is not regularly scheduled until ten (10) days after notice from any Lender of such failure to pay; or (b) Performance of Obligations. Borrower's failure to perform any other obligation under any of the Loan Documents (other than those referred to in Section 7.1(a) above) for a period of ten (10) days after receipt of written notice of such failure (or, if delivery of such notice is stayed or prohibited by applicable law, for a period of ten (10) days after such failure to perform), or, if Borrower is diligently pursuing cure and Lender's is reasonably satisfied that such cure can, with reasonable diligence, be completed in an additional thirty (30) day period, then such initial ten (10) day period shall be extended for such additional time during which Borrower shall be diligently pursuing such cure, not to exceed an additional thirty (30) days; or (c) Representations and Warranties. The failure of any representation or warranty of Borrower in any of the Loan Documents to be true in all material respects on each date made or deemed made; or (d) Voluntary Bankruptcy; Insolvency; Dissolution. (i) The filing of a petition by Borrower for relief under the Bankruptcy Code, or under any other present or future state or federal law regarding bankruptcy, reorganization or other debtor relief law, (ii) the filing of any pleading or an answer by Borrower in any involuntary proceeding under the Bankruptcy Code or other debtor relief law which admits the jurisdiction of the court or the petition's material allegations regarding Borrower's insolvency, (iii) a general assignment by Borrower for the benefit of creditors or (iv) Borrower applying for, or the appointment of, a receiver, trustee, custodian or liquidator of Borrower or any of its assets; or (e) Involuntary Bankruptcy. The failure of Borrower to effect a full dismissal of any involuntary petition under the Bankruptcy Code or under any other debtor relief law that is filed against Borrower or in any way restrains or limits Borrower or Lender regarding the Loan prior to the earlier of (i) the entry of any court order granting relief sought in such involuntary petition or (ii) sixty (60) days after the date of filing of such involuntary petition; or 7.2. Acceleration Upon Default. Upon the occurrence and during the continuance of a Default specified in Section 7.1(d) or (e), all sums owing to Lender under the Loan Documents immediately shall be due and payable. Upon the occurrence and during the continuance of any Default specified in this Article VII (other than those referred to in the immediately preceding sentence) Lender may, at their sole option, declare all sums owing to Lender under the Loan Documents immediately due and payable. 7.3. Disbursements to Third Parties. Upon the occurrence and during the continuance of a Default occasioned by Borrower's failure to pay money to a third party as required by this Agreement, Lender may, but shall not be obligated to, make such payment from the Loan proceeds or other funds of Lender. If such payment is made from proceeds of the Loan, Borrower shall immediately deposit with Lender, upon written demand, an amount equal to such payment. If such payment is made from funds of Lender, Borrower shall immediately repay such funds upon written demand of Lender. In either case, the Default with respect to which any such payment has been made by Lender shall not be deemed cured until such deposit or repayment (as the case may be) has been made by Borrower to Lender. 7.4. Repayment of Funds Advanced. Any funds expended by Lender in the exercise of its rights or remedies under this Agreement and the other Loan Documents shall be payable to Lender upon demand, together with interest at the rate applicable to the principal balance of the Notes from the date the funds were expended. 7.5. Rights Cumulative; No Waiver. All of Lender's rights and remedies provided in this Agreement and the other Loan Documents, together with those granted by law or at equity, are cumulative and may be exercised by Lender at any time. Lender's exercise of any right or remedy shall not constitute a cure of any Default unless all sums then due and payable to Lender under the Loan Documents are repaid and Borrower has cured all other Defaults. No waiver shall be implied from any failure of Lender to take, or any delay by Lender in taking, action concerning any Default or failure of condition under the Loan Documents, or from any previous waiver of any similar or unrelated Default or failure of condition. Any waiver or approval under any of the Loan Documents must be in writing and shall be limited to its specific terms. ARTICLE VIII MISCELLANEOUS PROVISIONS 8.1. Indemnity. Borrower hereby agrees to defend, indemnify and hold harmless Lender, and its directors, officers, employees, agents, successors and assigns from and against any and all losses, damages, liabilities, claims, actions, judgments, costs and reasonable legal or other expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "Claims") such indemnified party may incur as a direct or indirect consequence of (i) the negotiation, documentation or administration of the transactions contemplated hereby, (ii) the transactions contemplated hereby, (iii) the purpose to which Borrower applies the proceeds of the Loan, (iv) the failure of Borrower to perform any obligations as and when required by this Agreement or any of the other Loan Documents, (v) any failure at any time of any of Borrower's representations or warranties to be true and correct or (vi) any act or omission by Borrower, or any constituent shareholders/partners/members in Borrower. Borrower shall immediately pay to Lender upon demand any amounts owing under this indemnity, together with interest from the date the indebtedness arises until paid at the rate of interest applicable to the principal balance of the Notes. BORROWER'S DUTY TO INDEMNIFY LENDER HEREUNDER SHALL SURVIVE THE REPAYMENT OF THE LOAN WITH RESPECT TO CLAIMS ARISING PRIOR TO THE REPAYMENT OF THE LOAN IN FULL. 8.2. Form of Documents. The form and substance of all documents, instruments and forms of evidence to be delivered to Lender under the terms of this Agreement any of the other Loan Documents shall be subject to Lender's approval and shall not be modified, superseded or terminated in any respect without Lender's prior written approval. 8.3. Notices. All notices, demands or other communications under this Agreement and the other Loan Documents shall be in writing and shall be delivered via confirmed facsimile, overnight courier, by hand delivery or by certified mail, return receipt requested, to the appropriate party at the address set forth on the signature page of this Agreement (subject to change from time to time by written notice to all other parties to this Agreement). All communications shall be deemed served upon delivery of, or if mailed, upon the first to occur of receipt or the expiration of three (3) days after the deposit in the United States Postal Service mail, postage prepaid and addressed to the address of Borrower or Lender at the address specified or, if transmitted via facsimile, upon electronic confirmation of receipt; provided, however, that non-receipt of any communication as the result of any change of address or facsimile number of which the sending party was not notified or as the result of a refusal to accept delivery shall be deemed receipt of such communication. 8.4. Relationship of Parties. The relationship of Borrower and Lender under the Loan Documents is, and shall at all times remain, solely that of Borrower and Lender and not that of partners or joint venturers, and Lender does not undertake or assume any responsibility or duty to Borrower or to any third party with respect to the Loan, except as expressly provided in this Agreement and the other Loan Documents. Borrower hereby irrevocably waives and disclaims any right, privilege or defense hereunder or under any of the Loan Documents to the contrary. This Agreement does not constitute a partnership agreement or any other association between Lender and Borrower. 8.5. Attorneys' Fees and Expenses; Enforcement. If any attorney is engaged by Lender to interpret, administer, enforce or defend any provision of this Agreement or any of the other Loan Documents, or as a consequence of any Default under the Loan Documents, with or without the filing of any legal action or proceeding, Borrower shall immediately pay to Lender, upon demand, the amount of all reasonable attorneys' fees and expenses and all costs incurred by Lender in connection therewith, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance of the Notes as specified therein. 8.6. Immediately Available Funds. Unless otherwise expressly provided for in this Agreement, all amounts payable by Borrower to Lender shall be payable only in United States currency, in immediately available funds. 8.7. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and permitted assigns. 8.8. Severability. If any provision or obligation under this Agreement and the other Loan Documents shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that provision shall be deemed severed from the Loan Documents and the validity, legality and enforceability of the remaining provisions or obligations shall remain in full force as though the invalid, illegal or unenforceable provision had never been a part of the Loan Documents; provided, however, that if the rate of interest or any other amount payable under the Notes or this Agreement or any other Loan Document, or the right of collectability therefor, are declared to be or become invalid, illegal or unenforceable, Lender's obligations to make advances under the Loan Documents shall not be enforceable by Borrower. 8.9. No Waiver; Successors. No waiver shall be implied from any failure of Lender to take, or any delay by Lender in taking, action concerning any default or failure of condition, or from any previous wavier of any similar or unrelated Default or failure of condition. Any waiver or approval hereunder must be in writing and shall be limited to its specific terms. No amendment of any provision of this Agreement or any other Loan Document (including a waiver thereof or consent relating thereto) shall be effective unless the same shall be in writing and signed by Borrower and Lender. 8.10. Time. Time is of the essence of each and every term of this Agreement. 8.11. Headings. All article, section or other headings appearing in this Agreement and any of the other Loan Documents are for convenience of reference only and shall be disregarded in construing this Agreement and any of the other Loan Documents. 8.12. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of Texas. Borrower and all persons and entities in any manner obligated to Lender under the Loan Documents consent to the jurisdiction of any Federal or State Court within the State of Texas and also consent to service of proces by any means authorized by Texas or Federal Law. 8.13. Usury Savings. It is the intention of the parties hereto to conform strictly to the usury and other laws relating to interest from time to time in force, and all agreements between Borrower and Lender, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration or maturity or otherwise, shall the amount paid or agreed to be paid to Lender, or collected by Lender for the use, forbearance or detention of the money to be loaned under the Notes, this Agreement or otherwise, or for the payment or performance of any covenant or obligation contained herein or in any of the other Loan Documents, exceed the maximum amount of interest allowable under applicable law (the "Maximum Amount"). If under any circumstances whatsoever fulfillment of any provision hereof or any other Loan Document, at the time performance of such provision shall be due, shall involve transcending the Maximum Amount, then ipso facto, the obligation to be fulfilled shall be reduced to the Maximum Amount. For the purposes of calculating the actual amount of interest paid or agreed to be paid to the holder of the Notes for the use, forbearance or detention of the Loan shall, to the extent permitted by applicable law, be amortized, allocated and spread from the date of disbursement of the proceeds of the Loan until payment in full of the Loan, so that the actual rate of interest on account of the Loan is uniform throughout the term hereof. If under any circumstances Lender shall ever receive an amount deemed interest by applicable law, which would exceed the Maximum Amount, such amount that would be excessive interest under applicable usury laws shall be deemed a payment in reduction of the principal amount owing under the Notes and shall be so applied to principal and not to the payment of interest, or if such excessive interest exceeds the outstanding principal balance of the Loan, such excessive interest shall be deemed to have been a payment made by mistake and shall be refunded to Borrower or to any other person making such payment on Borrower's behalf. 8.14. Revival. To the extent Borrower makes a payment to Lender, which payment or the proceeds of any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party having requisite authority under the Bankruptcy Code or any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligation hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received. 8.15. Notes Freely Transferable. The Notes issued hereunder may be freely transferred by the Lender holding such Notes. LENDER: OLY LENDER STRATUS, L.P., a Texas limited partnership By: Oly Fund II GP Investments, L.P., a Texas limited partnership, its general partner By: Oly Real Estate Partners II, L.P., a Texas limited partnership, its general partner By: Oly REP II, L.P., a Texas limited partnership, its general partner By: Oly Fund II, LLC, a Texas limited liability company, its general partner By:/s/ Hal R. Hall ------------------ Name: Hal R. Hall Title:Vice President BORROWER: OOLY STRATUS ABC WEST I JOINT VENTURE, a Texas joint venture Financial Partner: Oly ABC West I, L.P., a Texas limited partnership By: Oly Texas GP II, LLC, a Texas limited liability company, its sole general partner By:/s/ Hal R. Hall ------------------ Name: Hal R. Hall Title: Vice President Operating Partner: Stratus ABC West I, L.P., a Texas limited partnership By: STRS L.L.C., a Delaware limited liability company, General Partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ----------------------------- William H. Armstrong III, President and CEO EXHIBIT A Form of Promissory Note [ATTACHED]

Exhibit 10.14 OLY WALDEN GENERAL PPARTNERSHIP (A Texas General Partnership) GENERAL PARTNERSHIP AGREEMENT _____________________ Dated as of April 8, 1998 ____________________ TABLE OF CONTENTS Page ARTIC Definitions 1.1 Definitions 1 ARTICLE 2 Organization 2.1 Formation of General Partnership 7 2.2 Name 7 2.3 Character of Business 7 2.4 Registered Office and Agent 7 2.5 Fiscal Year 7 ARTICLE 3 Capital Contributions 3.1 Capital Contributions to the Partnership 7 3.2 Additional Capital Contributions 7 3.3 No Return of Capital Contributions 9 3.4 Interest 9 ARTICLE 4 Rights and Obligations of Partners 4.1 Management of Partnership 10 4.2 Management Committee 10 4.3 Major Decisions 11 4.4 Budgets and Reports 11 4.5 Powers of the Operating Partner 11 4.6 Liability of Partners 12 4.7 Other Activities of Partners 12 ARTICLE 5 Exculpation and Indemnity 5.1 Exculpation 12 5.2 Indemnity 12 ARTICLE 6 Distributions and Allocations 6.1 Distributions 13 6.2 Tax Allocations 13 ARTICLE 7 Admissions, Transfers and Withdrawals 7.1 Admission of New Partners 13 7.2 Transfer of Partnership Interests 14 7.3 Buy/Sell 14 7.4 No Substituted Partners 16 7.5 Withdrawal of Partners 16 ARTICLE 8 General Accounting Provisions and Books 8.1 Books of Account; Tax Returns 16 8.2 Place Kept; Inspection 16 8.3 Tax Matters Partner 16 ARTICLE 9 Amendments and Waivers 9.1 Amendments and Waivers 17 9.2 Certain Other Amendments 17 ARTICLE 10 Dissolution and Termination 10.1 Dissolution 17 10.2 Accounting on Dissolution 18 10.3 Termination 18 10.4 No Negative Capital Account Obligation 19 10.5 No Other Cause of Dissolution 19 10.6 Merger 19 ARTICLE 11 Miscellaneous 11.1 Waiver of Partition 19 11.2 Entire Agreement 19 11.3 Severability 19 11.4 Notices 19 11.5 Governing Laws 19 11.6 Successors and Assigns 20 11.7 Counterparts 20 11.8 Headings 20 11.9 Other Terms 20 11.10 Power of Attorney 20 11.11 Transfer and Other Restrictions 21 OLY WALDEN GENERAL PARTNERSHIP GENERAL PARTNERSHIP AGREEMENT This General Partnership Agreement (this "Agreement") of Oly Walden General Partnership, a Texas general partnership (the "Partnership"), is made effective as of April 8, 1998 (the "Effective Date"), by and between Oly/Houston Walden, L.P., a Texas limited partnership, as the financial partner (the "Financial Partner") and Oly/FM Walden, L.P., a Texas limited partnership, as the operating partner (the "Operating Partner"). (The Financial Partner and the Operating Partner are collectively referred to herein as the "Partners" and individually referred to as a "Partner".) The Operating Partner is additionally referred to as "FM." The Financial Partner is additionally referred to as "Olympus." R E C I T A L S: A. The parties hereto desire to form a general partnership under the Act (as defined below). B. The Partnership is being formed for the purpose of acquiring, owning, developing and reselling that certain property located in Harris County, Texas and known as "Walden on Lake Houston" (the "Property") pursuant to that certain Agreement of Purchase and Sale, as amended, by and between Addison Wilson III, Trustee, as purchaser and BP Walden on Lake Houston, Ltd. as seller dated January 26, 1998, and that certain Contract for Sale of Unimproved Property, as amended, by and between Addison Wilson III, Trustee, as purchaser and Baruch Properties as seller dated March 4, 1998 (collectively, the "Purchase Agreements"). C. The initial Partners hereto desire to enter into this Agreement to establish their respective rights and obligations with respect to the Partnership and to provide for the orderly management of the affairs of the Partnership. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Partners hereby agree as follows: ARTICLE 1 Definitions 1.1 Definitions. As used in this Agreement, the follow-ing terms shall have the following meanings: "Act" shall have the meaning set forth in Section 2.1. "Affiliate" shall mean, when used with reference to a specified Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. As used in this definition of Affiliate, the term "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise. "Business" shall mean all tangible and intangible property of the Partnership as of the date of the Buy/Sell offer and any proceeds therefrom subject to all obligations or liabilities associated therewith. "Business Day" shall mean any day other than a Saturday, Sun-day, or holiday on which national banking associations in the State of Texas are authorized or required to be closed. "Business Plan" shall mean the business plan attached hereto as Exhibit A and incorporated herein, and as may be amended from time to time in accordance with the provisions hereof. "Buy-Sell" shall have the meaning set forth in Section 7.3 . "Buy/Sell Closing Date" shall have the meaning set forth in Section 7.3. "Buy/Sell Election Period" shall have the meaning set forth in Section 7.3. "Buy/Sell Offer" shall have the meaning set forth in Section 7.3. "Buy/Sell Purchaser" shall have the meaning set forth in Section 7.3 . "Buy/Sell Seller" shall have the meaning set forth in Section 7.3. "Capital Account" shall mean a separate account maintained for each Partner in accordance with the provisions of Regulation section 1.704- 1(b)(2)(iv). Each Partner shall have only one Capital Account, regardless of the number of classes of units or other interests in the Partnership owned by such Partner. Initially, the Capital Account of each Partner shall have a positive balance equal to its initial Capital Contribution. Such Capital Account shall thereafter be adjusted in accordance with the following provisions: (a) Additions. The Capital Account shall be increased by the sum of (i) except as otherwise provided in paragraph (f) below in the case of a contribution of a promissory note, the amount of cash and the fair market value (determined as of the date of contribution, without regard to section 7701(g) of the Code, including a constructive contribution resulting from a termination and reconstitution of the Partnership under section 708(b)(1)(B) of the Code) of property contributed, or deemed to have been contributed, to the capital of the Partnership by the Partner, net of any liabilities assumed by the Partnership in connection with such contribution or to which the contributed property is subject under section 752 of the Code; plus (ii) the amount of any net income or other item of income or gain allocated to the Partner pursuant to Article 6 hereof. (b) Subtractions. The Capital Account shall be reduced by the sum of (i) the amount of any net loss or other item of expense, loss or deduction allocated to the Partner pursuant to Article 6 hereof; plus (ii) the Distribution Value (determined without regard to section 7701(g) of the Code) of any cash or other property distributed, or deemed to have been distributed, by the Partnership to the Partner, net of any liabilities assumed by the distributee in connection with the distribution or to which the cash or other distributed property is subject under section 752 of the Code. (c) Other Adjustments. The Capital Account shall otherwise be adjusted by the Financial Partner in accordance with the other capital account maintenance rules of Regulation section 1.704- 1(b)(2)(iv). In connection with the foregoing: (d) Determination of Fair Market Value. In determining the balance of each Partner's Capital Account, and for all other purposes of this Agreement, the fair market value of an asset contributed to or distributed by the Partnership shall be determined in good faith by the Financial Partner (which shall use its reasonable efforts not to overstate or understate the fair market value of any such asset). (e) Capital Account of Transferee. A transferee of all or part of an interest in the capital and profits of the Partnership shall succeed to the Capital Account of the transferor to the extent that such Capital Account relates to the transferred interest. (f) Contribution of Note. Notwithstanding any other provision of this definition of Capital Account, if a Partner has contributed his promissory note to the capital of the Partnership and such note is not readily traded on an established securities market, then the principal of such note shall not be credited to the Partner's Capital Account until and to the extent that either (i) the Partnership makes a taxable disposition of the note or (ii) principal payments are made on the note, all in accordance with Regulation section 1.704-1(b)(2)(iv)(d)(2). "Capital Contribution" shall mean the gross amount of cash or the fair market value of other property contributed or caused to be contributed to the capital of the Partnership by a Partner with respect to such Partner's capital account. "Cash Flow" of the Partnership for any period shall mean any and all cash revenues generated from the ownership, sale of lots, sale of undeveloped parcels, lease and other operation of the Partnership assets and any and all capital transaction proceeds minus the sum of (i) any operating and capital expenses incurred in the operation of the business of the Partnership, including without limitation any payments of interest and principal (other than payments of principal that are refinanced by the Partnership) on Partnership indebtedness (expressly excluding the Mezzanine Financing) required by the lender of such indebtedness during the quarterly period in question, and (ii) a reasonable reserve for necessary or desirable operating and capital expenses of the Partnership that are anticipated to be incurred or to become due and payable within six (6) months as the Management Committee, in the exercise of its reasonable discretion and as is consistent with the Operating Budget and the Business Plan, shall determine. "Code" shall mean the Internal Revenue Code of 1986 and any successor statute, as amended from time to time. "Contribution Percentage" of a Partner shall be based on the actual equity capital contributions of such Partner in relation to the total equity capital contributions of all Partners. "Deadlock" shall mean the failure of the Partners to agree with respect to any Major Decision or other issue with respect to the Partnership which could have a material adverse effect or impact to the Partnership if such issue remains unresolved between the Partners. "Deemed Recipient" shall have the meaning set forth in Section 3.2. "Default Amount" shall have the meaning set forth in Section 3.2. "Defaulting Partner" shall have the meaning set forth in Section 3.2. "Distribution Period" shall mean (i) the period beginning on the Effective Date and ending on June 30, 1998 and (ii) each calendar quarter thereafter. "Distribution Value" shall mean the dollar amount of any cash distribution and the fair market value, as jointly determined in good faith by the Partners (each of which shall use its reasonable efforts not to overstate or understate fair market value), of any non-cash property distribution at the time of the distribution, net of the distributee's share of any liabilities to which the distributed property is subject and net of any liabilities assumed by the distributee. "Effective Date" shall have the meaning set forth in the preamble to this Agreement. "Escrow Agent" shall have the meaning set forth in Section 7.3. "Financial Partner" shall mean Oly/Houston Walden, L.P., together with its successors and assigns. "FM" shall have the meaning set forth in the preamble of this Agreement. "FM Representative" shall have the meaning set forth in Section 4.2. "Indemnified Parties" shall have the meaning set forth in Section 7.3 . "Loan" shall have the meaning set forth in Section 3.1. "Lender" shall have the meaning set forth in Section 3.1. "Major Decision" means any decision with respect to (1) approval of the Business Plan; (2) approval of the annual Operating Budget; (3) approval of the plans and specifications for the Property, and the subsequent approval of all material change orders or amendments given in substitution for such approved plans and specifications; (4) approval of any third party financing or refinancing for the Property, whether secured or unsecured, unless previously approved in the Business Plan or annual Operating Budget; (5) approval of acquisition of any additional property, (6) approval of incurring indebtedness that has recourse for the Partners, (7) approval of any sale, exchange or other disposition of the Property; (8) approval of any amendments to the Agreement; (9) approval of any termination or dissolution of the Partnership; and (10) appointment of a successor manager pursuant to Section 4.1. "Management Committee" shall have the meaning set forth in Section 4.2. "Mandatory Additional Contribution" shall have the meaning set forth in Section 3.2. "Mezzanine Financing" shall mean, the unsecured loan obtained by the Partnership in the original principal amount of $3,400,000.00 from Oly Lender Walden, L.P., a Texas limited partnership, or one or more of its Affiliates, in connection with the capitalization of the Partnership, together with any amendments, modifications, substitutions, replacements or refinancings thereof. "Mezzanine Financing Notes" shall mean those certain Promissory Notes dated as of the date hereof, as governed by the Mezzanine Loan Agreement evidencing the Mezzanine Financing, and executed by the Partnership, as maker, and payable to the order of Oly Lender Walden, L.P., a Texas limited partnership, together with any amendments, modifications, substitutions, replacements or refinancings thereof. "Non-Defaulting Partners" shall have the meaning set forth in Section 3.2. "Offer Amount" shall have the meaning set forth in Section 7.3. "Offer Deposit" shall mean the sum of Five Hundred Thousand and No/100 Dollars ($500,000.00) in cash. "Offeree" shall have the meaning set forth in Section 7.3. "Offeror" shall have the meaning set forth in Section 7.3. "Olympus" shall have the meaning set forth in the preamble of this Agreement. "Olympus Representative" shall have the meaning set forth i Section 4.2. "Operating Budget" shall mean the budget attached hereto as Exhibit B and incorporated herein, as may be amended from time to time in accordance with the provisions hereof. "Operating Partner" shall mean Oly/FM Walden, L.P., together with its successors or assigns. "Partner" shall mean any Person executing this Agreement as of the Effective Date as a partner or hereafter admitted to the Partnership as a partner as provided in this Agreement, but does not include any Person who has ceased to be a Partner of the Partnership. "Partnership" shall have the meaning set forth in the preamble to this Agreement. "Partnership Interest" shall have the meaning set forth in Section 7.3 . "Person" shall mean an individual, partnership, joint venture, limited part-nership, limited liability company, foreign limited liability company, trust, business trust, estate, corporation, custodian, trustee, exec-utor, administrator, nominee, association, cooperative or entity in a representative capacity. "Property" shall have the meaning set forth in the preamble of this Agreement. "Preferred Return" shall mean the following: (a) With respect to the first Distribution Period, the Preferred Return of a Partner shall be the product of (i) the Unreturned Capital of such Partner from time to time during such Distribution Period, times (ii) fifteen percent (15.0%), times (iii) a fraction, the numerator of which is the number of days in such Distribution Period and the denominator of which is three hundred and sixty-five (365). (b) With respect to each Distribution Period following the first Distribution Period, the Preferred Return of a Partner shall be the sum of (i) the excess (if any) of such Partner's Preferred Return determined as of the last day of the Distribution Period immediately preceding the Distribution Period under consideration over any distribution made to such Partner pursuant to Section 6.1 hereof with respect to such immediately preceding Distribution Period, plus (ii) the product of (A) the sum of (1) the excess (if any) of such Partner's Preferred Return determined as of the last day of the Distribution Period immediately preceding the Distribution Period under consideration over any distribution made to such Partner pursuant to Section 6.1 hereof with respect to such immediately preceding Distribution Period, plus (2) the Unreturned Capital (if any) of such Partner from time to time during the Distribution Period under consideration, ttimes (B(B) fifteen percent (15.0%), times (C) a fraction, the numerator of which is the number of days in the Distribution Period under consideration and the denominator of which is three hundred and sixty-five (365). "Receipt Amount" shall have the meaning set forth in Section 7.3. "Regulation" shall mean Treasury Regulations promulgated under Title of 26 the United States Code. "Replacement Loan" shall have the meaning set forth in Section 3.2. "Representative" shall have the meaning set forth in Section 4.2. "Required Capital Contributions" shall have the meaning set forth in Section 3.1. "Required Interest" shall mean both of the General Partners. "Sharing Ratio" shall have the meaning set forth on Schedule I attached hereto. "Tax Matters Partner" shall have the meaning set forth in Section 8.3. "Unreturned Capital" as of a date shall mean the following: (a) In the case of each of the Partners, its Unreturned Capital shall be the excess, if any, of the total Capital Contributions made by such Partner over the total distributions received by such Partner under Section 6.1(ii) hereof prior to the date as of which such Partner's Unreturned Capital is determined. (b) In the case of a transferee of an interest in the Partnership, the transferee's Unreturned Capital shall be the Unreturned Capital as of the date of the transfer of the transferor times a fraction, the numerator of which is the Contribution Percentage attributable to the interest in Partnership capital and profits transferred by the transferor to the transferee, and the denominator of which is the sum of the Contribution Percentages attributable to both the interest in Partnership capital and profits retained by the transferor (if any) and the interest in Partnership capital and profits transferred by the transferor to the transferee. Likewise, the Unreturned Capital of the transferor shall be reduced by the Unreturned Capital of the transferee to whom all or part of the transferor's interest in Partnership capital and profits has been transferred. ARTICLE 2 Organization 2.1 Formation of General Partnership. The Partners have formed a general partnership pursuant to and in accordance with the provisions of the Texas Revised Partnership Act, as from time to time amended ("Act"). 2.2 Name. The name of the Partnership is Oly Walden General Partnership. The Financial Partner may, in its sole discretion, change the name of the Partnership from time to time and shall give prompt written notice thereof to the Operating Partner; provided, however, that such name may not contain any portion of the name or mark of the Operating Partner without the Operating Partner's consent. 2.3 Character of Business. The purpose of the Partnership shall be (i) to acquire, hold, develop, sell, encumber, or otherwise act with respect to investments, direct or indirect, in the Property, and (ii) to engage in such other business as may be conducted by a general partnership organized under the laws of the State of Texas. 2.4 Registered Office and Agent. The name and address of the Partnership's initial registered agent are Olympus Real Estate Corporation, 200 Crescent Court, Suite 1650, Dallas, Texas 75201. The Partnership's initial principal place of business shall be 200 Crescent Court, Suite 1650, Dallas, Texas 75201. The Financial Partner may change such registered agent, registered office, or principal place of business from time to time. The Financial Partner shall give prompt written notice of any such change to the Operating Partner. The Partnership may from time to time have such other place or places of business within or without the State of Texas as may be determined by the Financial Partner. 2.5 Fiscal Year. The fiscal year of the Partnership shall end on December 31 of each calendar year unless, for United States federal income tax purposes, another fiscal year is required. The Partnership shall have the same fiscal year for United States federal income tax purposes and for accounting purposes. ARTICLE 3 Capital Contributions 3.1 Capital Contributions to the Partnership. The Partners shall contribute or be deemed to have contributed capital to the Partnership in the amounts respectively set forth opposite their names on Schedule I to this Agreement on the Effective Date (collectively, the "Required Capital Contributions"). Additionally, the Financial Partner shall obtain the Mezzanine Loan on behalf of the Partnership. Also, in addition to the Required Capital Contributions, the Partners acknowledge that in order to purchase and develop the Property, the Partnership will need to secure from a third party lender (the "Lender") a term loan, which shall be in the amount set forth in the Business Plan and on terms and conditions satisfactory to the Partners and which shall be non-recourse to the Partners (the "Loan"). 3.2 Additional Capital Contributions. (a) After the funding of the Required Capital Contribution set forth above (including any amounts deemed to have been contributed), and to the extent not available from proceeds of the Loan, either (i) the Partners may agree to make additional Capital Contributions to the Partnership as are deemed advisable by the Partners (each exercising their independent discretion), or (ii) if either (A) there has been a default or an event of default under the Loan or (B) additional capital is necessary to complete any capital improvement program approved in the Business Plan, or (C) funds are necessary for continued operation of the Property then the Financial Partner may elect to call or not call for additional Capital Contributions (in each case, the "Mandatory Additional Contribution") to be made to the Partnership to cure any default or event of default under the Loan or to complete such capital improvement program or fund operations. The Mandatory Additional Contribution in question shall be made by the Partners pro rata, based on the Contribution Percentages of the Partners. This Section 3.2 is solely for the benefit of the Partners, and shall not, nor shall it be deemed to, create any rights in, or provide any benefit to, any other person or entity, and the decision to make additional contributions to the Partnership shall be made in the sole and absolute discretion of the Financial Partner. (b) Each Partner shall be required to make its Mandatory Additional Contribution to the Partnership on or before twenty-one (21) days after written notice to such Partner. In the event any Partner fails to make a Mandatory Additional Contribution as required by this Section 3. within the time period set forth herein (such Partner(s), being herein referred to as the "Defaulting Partner"), then, the "Non-Defaulting Partners" (herein so called) shall be entitled, as their sole and exclusive remedy for such failure, by giving written notice to the Defaulting Partner to make a loan (the "Replacement Loan") to the Defaulting Partner in the amount of such Mandatory Additional Contribution, which Replacement Loan (i) shall be applied solely to fund the delinquent Mandatory Additional Contribution, (ii) shall have a term of one hundred twenty (120) days from the date of such loan and (iii) shall bear interest at the lesser of (A) eighteen percent (18%) per annum, compounded quarterly and (B) the maximum rate of interest which may be charged, collected or contracted for under applicable law, with accrued interest due at the maturity of such loan (each such Replacement Loan together with all accrued interest thereon from time to time, the "Default Amount"). Anything contained in this Agreement to the contrary notwithstanding, any Partner who becomes a Defaulting Partner shall immediately and without any further demand, notice or cure period (time being of the essence herein) automatically cease to have a right to vote on all Partnership decisions for any purposes hereunder for the remainder of the life of the Partnership; provided, however, if a Defaulting Partner shall pay the Default Amount in full to the Non- Defaulting Partner who elected to make such loan, on or before the expiration of the 120-day term of the Replacement Loan to such Defaulting Partner, such Defaulting Partner's voting rights hereunder shall be automatically re-instated (effective as of the date such Default Amount is paid in full) for all purposes. If the Default Amount is not paid in full on or before the expiration of the 120-day period, the Defaulting Partner's voting rights shall not be reinstated upon the subsequent payment of the Default Amount. (c) The Partners further agree that if the Default Amount is not repaid to the Non-Defaulting Partner within the 120-day term, then, without demand, notice or cure period (time being of the essence herein), such Default Amount shall for all purposes hereunder be deemed to be a Capital Contribution by the Non-Defaulting Partner to the Partnership effective as of the expiration of such 120-day term of such Replacement Loan, which deemed Capital Contribution shall be credited as an amount equal to the product of 200% times the Default Amount, and the Capital Account of the Defaulting Partner shall for all purposes be appropriately reduced to reflect such treatment; provided, however, with respect to any Default Amount attributable to a Replacement Loan made more than one hundred twenty (120) days after the initial Replacement Loan (which is not repaid during its 120-day term) is made by a Non-Defaulting Partner, the deemed Capital Contribution shall be credited as an amount equal to the product of 300% times the Default Amount, and in each case the distribution percentages of the Defaulting Partner (i.e., the pro rata share of the particular distribution which such Partner would otherwise receive under such sections) shall be reduced by, and the distribution percentages of the Non- Defaulting Partner who makes its pro rata share of such loan shall be increased by an amount equal to the quotient of (i) 200% (or 300%, as the case may be) times the Default Amount, divided by (ii) the aggregate Capital Contributions made by the Partners to the Partnership prior to the date of calculation (including the Mandatory Additional Contributions of the Non-Defaulting Partner but excluding the Default Amount then in question). (d) The new distribution percentages computed in accordance with this Section 3.2 shall remain in effect under this Agreement unless and until there is a subsequent adjustment to the distribution percentages. Notwithstanding the foregoing, no Partner's distribution percentage shall be reduced under any circumstance to less than zero, nor shall any Partner's distribution percentage be increased under any circumstance to more than 100%. Mandatory Additional Contributions shall be made pro rata, based on the relative Contribution Percentages of the Partners. (e) Each Partner which becomes a Defaulting Partner hereby irrevocably grants to the other Partner a continuing, first priority, perfected security interest in the Partnership Interest of such Defaulting Partner to secure the prompt payment of each Replacement Loan made to such Defaulting Partner until such time, if ever, as the Default Amount with respect to the Replacement Loan under consideration has been converted to a deemed Capital Contribution pursuant to Section 3.2(c). On or before 15 days after any written request of the Non-Defaulting Partner, the Defaulting Partner shall execute and deliver a UCC-1 financing statement in form and substance acceptable to the Non-Defaulting Partner to evidence such security interest, the failure of which shall constitute a default under the Replacement Loan. Prior to a default or maturity of a Replacement Loan, and without limiting the remedies of the Non-Defaulting Partner, at the election of the Non-Defaulting Partner all distributions payable to the Defaulting Partner under this Agreement shall be payable directly to the Non-Defaulting Partner (pro rata based on the relative amount of the Replacement Loan made by the Non-Defaulting Partner) until the Replacement Loan(s) of the Defaulting Partner are paid in full (or converted to a deemed Capital Contribution), shall be paid directly to the Non-Defaulting Partner until the entire amount of the Replacement Loan is paid in full. Any amounts paid directly to the Non-Defaulting Partner pursuant to the terms of the preceding sentence shall be treated as paid to the person (the "Deemed Recipient") entitled to receive the amount of the distribution in the absence of the requirements of the preceding sentence (thereby discharging the Partnership's obligation to make the payment in question to the Deemed Recipient) and then as applied by the Deemed Recipient on behalf of the Defaulting Partner to the repayment of the Defaulting Partner's loan. (f) EXCEPT AS SET FORTH IN SECTION 3.1 OR THIS SECTION 3.2, NO ADDITIONAL CAPITAL CONTRIBUTIONS SHALL BE REQUIRED BY ANY PARTNER UNLESS AN EXPRESS WRITTEN CALL FOR A CAPITAL CONTRIBUTION IS MADE BY THE FINANCIAL PARTNER TO EACH OF THE PARTNERS. 3.3 No Return of Capital Contributions. No Partner is entitled to a return of its Capital Contribution, but shall look solely to distributions from the Partnership as provided for in Article 6 of this Agreement. 3.4 Interest. No Partner shall be entitled to interest on its Capital Contribution or its Capital Account, provided that each Partner's Capital Contribution shall accrue the Preferred Return (which shall not be deemed to be interest) as set forth herein. Any interest actually received by reason of temporary investment of any part of the Partnership's funds shall be included in the Partnership's funds. ARTICLE 4 Rights and Obligations of Partners 4.1 Management of Partnership. The management, control, and direction of the Partnership and its operations, business, and affairs shall be vested exclusively in the Financial Partner, which shall have the right, power, and authority, acting solely by itself and without the necessity of approval by any Partner or any other person, to carry out any and all of the purposes of the Partnership and to perform or refrain from performing any and all acts that the Financial Partner may deem necessary, desirable, appropriate, or incidental thereto, except as otherwise provided in this Agreement; provided, however, that the Operating Partner shall manage the Partnership and its operations, business, and affairs solely as described in Section 4.5. The Management Committee may replace the Operating Partner at any time in the event the Management Committee determines in its good faith discretion that either (i) the Operating Partner has acted negligently or with willful misconduct in performing its duties or (ii) the monthly financial reports of the Partnership reveal a material adverse deviation from the Business Plan more than three (3) times within any twelve (12) month period. 4.2 Management Committee. (a) The "Management Committee" (herein so called) shall consist of three (3) representatives, one (1) of which shall be designated by FM (collectively, the "FM Representative") and two (2) of which shall be designated by Olympus (jointly, the "Olympus Representative") (individually, a "Representative" and collectively, the "Representatives"); The initial Representatives designated by Olympus and FM are set forth opposite such Partner's name below: Partner Initial Representative Olympus Hal Hall Olympus Greg Adair FM Tim Smith Olympus and FM may appoint alternates for the Representatives appointed by it, which alternates shall have all the powers of the Representatives in their absence or inability to serve. Olympus and FM may change its designated Representatives effective upon written notice from Olympus or FM designating such Representative to the other Partners. One of the Olympus Representatives shall serve as Chairman of the Management Committee and shall set the agenda for such meetings. (b) The Representatives shall meet quarterly (or more often, as the Financial Partner may reasonably determine) in the offices of the Partnership or by telephone conference, unless the Representatives jointly agree that the meeting is unnecessary or that a different schedule or location for the meeting is appropriate, to discuss current material management issues (but not day-to-day operations matters which are in accordance with the operation parameters set forth in the Business Plan, Operating Budget or otherwise set forth in writing) or Major Decisions. At each meeting the Representatives shall each receive one (1) vote. All action taken by the Management Committee shall require the approval or consent of at least two (2) Representatives. Representatives may bring to any meeting such employees, agents, professionals and advisors as they deem necessary or appropriate to assist them at such meeting. A quorum shall consist of at least one FM Representative and one Olympus Representative unless the FM Representative has declined to attend two (2) consecutive meetings which are scheduled with at least seventy-two (72) hours prior notice for each meeting at the offices of the Partnership, in which event the quorum may be two Olympus Representatives. (c) The Financial Partner shall be authorized and empowered to (i) make all day-to-day management decisions (provided that such decisions are consistent with the operation parameters set forth in the Business Plan, Operating Budget or otherwise in writing) except for Major Decisions on behalf of the Management Committee, (ii) direct the Operating Partner, (iii) perform all acts and enter into and perform all contracts and other undertakings that the Financial Partner may, in the exercise of its reasonable discretion, deem necessary, advisable, appropriate or incidental thereto and (iv) terminate Stratus or a successor property manager in the event of a default in the Management Standard (as that term is defined in the Management Agreement), provided, if Stratus is terminated as property manager, then the Partnership (as a Major Decision) shall designate a successor manager. 4.3 Major Decisions. All Major Decisions shall be made by both the Financial Partner and the Operating Partner. Accordingly, neither FM nor Olympus, on behalf of the Management Committee, shall have the right or the power to make any binding commitment on behalf of the Partnership in respect of a Major Decision unless and until all of the Representatives have authorized the same in writing. 4.4 Budgets and Reports. (a) By January 31st of each calendar year hereafter during the term hereof, the Operating Partner shall prepare a revised Operating Budget and the Business Plan for the operation of the Partnership. The Management Committee shall have thirty (30) days after receipt thereof to either approve the submitted Business Plan and Operating Budget or respond with required changes to same. (b) The Operating Partner agrees to use diligence and to employ all reasonable efforts to ensure that the actual costs of operating the Partnership shall not exceed the Operating Budget, either in total or for any one accounting category. The Operating Partner shall secure the written approval of the Management Committee for any expenditure that (i) exceeds fifteen percent (15%) of the annual budgeted amount for the Partnership in any one line item on such Operating Budget or (ii) exceeds ten percent (10%) of the annual budgeted amount for the Partnership in all accounting categories of the Operating Budget. During each applicable calendar year, the Operating Partner agrees to immediately inform the Management Committee of any major increases in costs and expenses that were not foreseen during the budget preparation period and thus were not reflected in the Operating Budget. (c) The Operating Partner shall also submit any additional financial or operational reports as the Financial Partner may from time to time reasonably request. 4.5 Powers of the Operating Partner. Subject to Section 4.3 the Operating Partner shall have the duties, rights and obligations to implement the operations of the Partnership as described in the Business Plan, Operating Budget or approved in writing by the Management Committee. The Operating Partner may initially delegate its duties to manage the Property to Stratus Management, L.L.C. ("Stratus") in accordance with the terms and conditions of that certain Management Agreement dated of even date herewith (the "Management Agreement") by and between Oly/FM Walden, L.P. and Stratus. The Management Agreement will terminate upon (among other things) the exercise of Stratus' option rights (the "Option") under that certain Option Agreement dated of even date herewith by and between Oly/FM Walden, L.P. and Stratus unless ratified by the Management Committee as of the closing of the Option. Without limiting the generality of Section 4.1 but subject to Section 4.3, the Operating Partner, acting on behalf of the Partnership, shall oversee the activities of Stratus or, if the Management Agreement is terminated, perform the duties, rights and obligations of Stratus; provided, however, neither the Operating Partner nor Stratus shall take any action that has a material economic affect on the Partnership without the prior approval of the Management Committee, including, without limitation, approving the form and substance of all contracts, loan documents or other documents necessary to operate the business of the Partnership. 4.6 Liability of Partners. The Partners shall be personally liable for the debts and obligations of the Partnership if (but solely to the extent) required by applicable law; provided, however, that all such debts and obligations shall be paid or discharged first with the property of the Partnership (including insurance proceeds) before the Partners shall be obligated to pay or discharge any such debt or obligation with its personal assets. Notwithstanding the preceding sentence, the Partners shall not be personally liable for any debts or obligations which are nonrecourse or which, under the terms thereof, do not create or impose such liability. 4.7 Other Activities of Partners. Except as otherwise agreed in writing, each Partner (i) may carry on and conduct in any way or in any capacity, including, but not limited to, for such Partner's own right and for such Partner's own personal account, as a partner in any other partnership, as a venturer in any joint venture, as a member or manager in any limited liability company, as an employee, officer, director or stockbroker of any corporation, or as a participant in any syndicate, pool, trust, association or other business organization, a business that competes, directly or indirectly, with the business of the Partnership, (ii) will be free in any capacity to conduct business activities the same or similar as conducted by the Partnership and (iii) may make investments in any kind of property. The Partnership will have absolutely no claim or right to any such business or assets thereof. Further, the Partnership will have claim to and will own only those assets contributed to the Partnership or acquired with Partnership funds or credit. Neither this Agreement nor any principle of law or equity shall preclude or limit, in any respect, the right of any Partner or any affiliate thereof to engage in or derive profit or compensation from any activities or investments, nor give any other Partner any right to participate or share in such activities or investments or any profit or compensation derived therefrom. ARTICLE 5 Exculpation and Indemnity 5.1 Exculpation. Neither the Partners nor any affiliate of the Partners, nor any officer, director, manager, member, employee, agent, stockholder, or partner of the Partners or any of its affiliates, shall be liable, responsible, or accountable in damages or otherwise to the Partnership or any Partner by reason of, or arising from or relating to the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Partnership, except to the extent that any of the foregoing is determined, by a final, nonappealable order of a court of competent jurisdiction, to have been primarily caused by the gross negligence, willful misconduct, or bad faith of the person claiming exculpation. 5.2 Indemnity. The Partnership shall indemnify the Partners, each affiliate of the Partners, and each officer, director, stockholder, manager, member, and partner of the Partners or any of its affiliates, and if so determined by the Partners, each employee or agent of the Partners or any of its affiliates, against any claim, loss, damage, liability, or expense (including reasonable attorneys' fees, court costs, and costs of investigation and appeal) suffered or incurred by any such indemnitee by reason of, or arising from or relating to the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Partnership, except to the extent any of the foregoing (i) is determined by final, nonappealable order of a court of competent jurisdiction to have been primarily caused by the gross negligence, willful misconduct, or bad faith of the person claiming indemnification or (ii) is suffered or incurred as a result of any claim (other than a claim for indemnification under this Agreement) asserted by the indemnitee as plaintiff against the Partnership. Unless a determination has been made (by final, nonappealable order of a court of competent jurisdiction) that indemnification is not required, the Partnership shall, upon the request of any indemnitee, advance or promptly reimburse such indemnitee's reasonable costs of investigation, litigation, or appeal, including reasonable attorneys' fees; provided, however, that the affected indemnitee shall, as a condition of such indemnitee's right to receive such advances and reimbursements, undertake in writing to repay promptly the Partnership for all such advancements or reimbursements if a court of competent jurisdiction determines that such indemnitee is not then entitled to indemnification under this Section 5.2. No Partner shall be required to contribute capital in respect of any indemnification claim under this Section 5.2 unless otherwise provided in any other written agreement to which such Partner is a party. ARTICLE 6 Distributions and Allocations 6.1 Distributions. No later than thirty (30) days after the end of each Distribution Period during which the Partnership has Cash Flow, such Cash Flow shall be distributed as set forth below and in the order of priority as set forth below. The Partnership shall receive 78.4314% of all Cash Flow until the special distribution interest to be paid to Richard A. Gray, Jr. pursuant to that certain Profits Participation letter agreement dated April 9, 1998 has been paid in full. The Partnership shall then receive 98.0392% of all Cash Flow. (i) First, to the payment of the Mezzanine Financing pursuant to the terms of the Mezzanine Loan Agreement; then (ii) Second, to the payment of the Preferred Return on the Unreturned Capital of each Partner in proportion to each Partner's Capital Contribution; then (iii) Third, to the return, pari passu of Capital Contributions to each Partner; then (iv) Fourth, to each Partner in proportion to the Sharing Ratios. 6.2 Tax Allocations. For United States federal income tax purposes, allocations of items of income, gain, loss, deduction, expense, and credit for each fiscal year of the Partnership shall be in accordance with each Partner's economic interest in the respective item, as determined by the Financial Partner pursuant to Section 704(b) of the Code, and the regulations promulgated thereunder and subject to the requirements of Section 704(c) of the Code and the regulations promulgated thereunder. Unless the Financial determines otherwise, allocations shall be made to each Partner in the same manner as such Partner (i) would be required to contribute to the Partnership or (ii) would receive as distributions if the Partnership were to liquidate the assets of the Partnership at their book value and distribute the proceeds in accordance with Section 6.1; provided, however, that if any such allocation is not permitted by applicable law, the Partnership's subsequent income, gain, loss, deduction, expense and credit shall be allocated among the Partners so as to reflect as nearly as possible the allocation used in computing capital accounts. ARTICLE 7 Admissions, Transfers and Withdrawals 7.1 Admission of New Partners. After the Effective Date, new Partners may be admitted to the Partnership only with the written consent of, and upon such terms and conditions as are approved by the Financial Partner. No admission of any new Partner shall cause the Partner's interest in Partnership allocations, distributions and capital to be less than one percent (1%), and no Partner's Sharing Ratio in the Partnership shall be reduced or diluted unless approved in writing by such Partner or unless otherwise provided in any other written agreement to which such Partner is a party. 7.2 Transfer of Partnership Interests. No Partner may transfer or encumber all or any portion of such Partner's interest in the Partnership without the prior written consent of the Partners; provided, however, that Olympus may transfer all or any portion of its interest in the Partnership to an Affiliate of Olympus Real Estate Corporation without the consent of FM. Additionally, any interest in the Partnership held by Olympus or its Affiliates may be transferred in the exercise of rights of the limited partners of Olympus Real Estate Fund II, L.P. ("Fund II") to remove the general partner under the limited partnership agreement of Fund II. 7.3 Buy/Sell Option. (a) In the event of a Deadlock at any time during the term of the Partnership, either Partner may exercise a "buy-sell" right (the "Buy- Sell") as follows: either Partner (the "Offeror") exercising such Buy-Sell (A) shall deliver to the other Partner (the "Offeree") a written notice (the "Buy/Sell Offer") stating the Offeror's exercise of such right and setting forth the Buy/Sell Offer and a description of any negotiations or discussions with third parties that Offeror may have had with respect to the sale of the Partnership Interest and the Business, which Buy/Sell Offer shall represent the dollar amount (without reduction for any deemed or imputed expenses of sale) that the Offeror would be willing to pay to the Partnership in cash for the Business (the "Offer Amount") and (B) simultaneously with the delivery of the Buy/Sell Offer, shall deliver into escrow with a title insurance company located in Dallas, Texas selected by the Offeror (the "Escrow Agent"), a good faith deposit in the amount of the Offer Deposit. The Offeror hereby instructs the Escrow Agent that the Escrow Agent shall either (i) in the event the Offeree elects to sell its interest in the Partnership (the "Partnership Interest") in accordance with the terms hereof, apply such Offer Deposit to the purchase price as of the Buy/Sell Closing Date (as hereinafter defined) or if the Offeror fails to timely purchase the Offeree's Partnership Interest in accordance with the terms hereof, disburse such Offer Deposit in accordance with Section 7.3(g), or (ii) in the event the Offeree elects to purchase the Offeror's Partnership Interest, disburse such Offer Deposit in accordance with Section 7.3(e). (b) The notice transmitting the Buy/Sell Offer shall be deemed to constitute an offer by the Offeror to purchase the Offeree's Partnership Interest for a price equal to the Receipt Amount. "Receipt Amount" shall mean the aggregate amount which the Partner whose Partnership Interest is to be transferred, whether Offeror or Offeree, would receive as a Partnership distribution if (i) the Business were sold for cash for the Offer Amount, (ii) all debts and liabilities of the Partnership but without taking into account any deemed or imputed expenses which would occur for the sale to third parties (e.g. imputed brokerage fees, etc.) were paid in full from such proceeds and (iii) prorations were made with respect to all current assets and current liabilities of the Partnership. (c) The Offeree shall have forty-five (45) days from the date of the Buy/Sell Offer to elect, by written notice to the Offeror signed by the Partner constituting the Offeree, whether to sell such Offeree's Partnership Interest to the Offeror or whether to purchase (or cause its designee to purchase) the Offeror's Partnership Interest in the Partnership (the "Buy/Sell Election Period "). (d) If the Offeree fails to make an election within such forty-five (45) day period, or fails to comply with subsection (e) below, such Offeree shall be conclusively deemed to have elected to sell its Partnership Interest in the Partnership to the Offeror according to the terms of this Section 7.3. (e) If the Offeree makes an election to purchase within such forty-five (45) day period by sending written notice to the Offeror as required by subsection (c), and by delivering into escrow with the Escrow Agent a good faith deposit in the amount of the Offer Deposit, then, the original Offeror shall be conclusively deemed to have elected to sell its Partnership Interest in the Partnership to the Offeree for a price equal to the applicable Receipt Amount. In the event the Offeree timely makes an election to purchase, the Offeree hereby instructs the Escrow Agent that the Escrow Agent shall (i) return the Offeror's Offer Deposit to the Offeror and (ii) hold the Offeree's Offer Deposit and shall either apply such Offeree's Offer Deposit to the purchase price or disburse such Offeree's Offer Deposit in accordance with Section 7.3(g). (f) The Partner (the "Buy/Sell Purchaser") that is obligated to purchase the Partnership Interest in the Partnership of the other Partner (the "Buy/Sell Seller") pursuant to this Section 7.3 shall fix a closing date (the " Buy/Sell Closing Date") for such purchase that is not a Business Day that is not later than forty-five (45) days after the expiration of the Buy/Sell Election Period, by written notice to the Buy/Sell Seller at least fifteen (15) days in advance of Buy/Sell Closing Date. The closing of such purchase shall take place on the Buy/Sell Closing Date at the address of the Escrow Agent. At such closing, the Partner constituting the Buy/Sell Seller shall execute and deliver to the Buy/Sell Purchaser (or its designee) such instruments of assignment, bills of sale, amendments to this Agreement and other instruments and documents as the Buy/Sell Purchaser and the Buy/Sell Seller (or such designee) may reasonably require for the conveyance to such Buy/Sell Purchaser (or such designee) of all of the Buy/Sell Seller's right, title and interest in and to the Buy/Sell Seller's Partnership Interest in the Partnership against receipt by the Buy/Sell Seller of a wire transfer of immediately available funds in an amount equal to the applicable Receipt Amount; and the Buy/Sell Seller hereby irrevocably constitutes and appoints the Buy/Sell Purchaser as its attorney-in-fact to execute, acknowledge and deliver any of such instruments or documents. Each of the Buy/Sell Seller and Buy/Sell Purchaser shall each bear their respective closing costs and expenses (including, but not limited to, all attorney's fees and costs and all applicable transfer and income taxes) incurred in the purchase or sale of the Buy/Sell Seller's Partnership Interest in the Partnership hereunder. Such sale of such Partnership Interest shall be made without representation, warranty or recourse, except for representations and warranties in form and substance reasonably acceptable to the Buy/Sell Purchaser and the Buy/Sell Seller with respect to existence, good standing, title, no encumbrance, authority, authorization, no conflicts, and such other customary matters as may be reasonably requested by the Buy/Sell Purchaser. If the Buy/Sell Offer or the closing of the purchase contemplated thereby causes the maturity of any Partnership indebtedness to be accelerated, the Buy/Sell Seller shall be released from liability resulting from such accelerated indebtedness and the Buy/Sell Purchaser shall pay such indebtedness in full (including without limitation, any accrued but unpaid interest and any prepayment premiums or penalties) at Buy/Sell Purchaser's sole cost and expense and shall indemnify and hold Buy/Sell Seller harmless from and against any losses, damages, costs or expenses (including attorneys' fees) incurred by Buy/Sell Seller, or the Buy/Sell Seller's Affiliates, employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns and Affiliates of the foregoing (the "Indemnified Parties"), as a direct or indirect result thereof, other than any losses, damages, costs or expenses (including attorneys' fees) incurred by any of the Indemnified Parties as a direct result of such Indemnified Party's bad conduct. The Buy/Sell Seller shall be released from liability from any indebtedness of the Partnership. Anything contained in this Agreement to the contrary notwithstanding, in the event the sale of the Partnership Interest is not consummated because of a default on the part of Buy/Sell Seller or if a condition precedent cannot be fulfilled because Buy/Sell Seller frustrated such fulfillment, Buy/Sell Purchaser may, at its election, pursue an action for specific performance and/or costs and expenses. (g) In the event that the Buy/Sell Purchaser defaults in its obligation to purchase the Partnership Interest of the Buy/Sell Seller in the Partnership on the Buy/Sell Closing Date, the Buy/Sell Seller shall have the right to (i) solicit third party offers on behalf of the Partnership for the purchase of the Business, to accept the best such offer, as determined by the Buy/Sell Seller in its sole and absolute discretion, and to consummate the sale of the Business to such third party pursuant to such offer, (ii) purchase the Partnership Interest of the Buy/Sell Purchaser for a purchase price equal to ninety percent (90%) of the aggregate Partnership distributions that the Buy/Sell Purchaser would be entitled to receive under this Agreement if the Business were sold for cash for the Offer Amount and all debts and liabilities of the Partnership (excluding imputed sale expenses) were paid in full from such proceeds and proration were made with respect to all current assets and current liabilities of the Partnership, (iii) specifically enforce the Buy/Sell Purchaser's obligation to purchase the Partnership interest of the Buy/Sell Seller, and (iv) notify the Escrow Agent holding the Offer Deposit of the Buy/Sell Purchaser immediately to deliver such Offer Deposit to the Buy/Sell Seller as liquidated damages for the breach by such Buy/Sell Purchaser (and the Buy/Sell Purchaser covenants and agrees to cause, and hereby instructs, the Escrow Agent to deliver such Offer Deposit to the Buy/Sell Seller). The delivery of the Offer Deposit to the Buy/Sell Seller shall not constitute a return of capital. The Buy/Sell Purchaser hereby constitutes and appoints the Buy/Sell Seller as its attorney-in-fact to execute and deliver on behalf of the Buy/Sell Purchaser all documents as may be reasonably required in connection with the delivery by the Escrow Agent of the Offer Deposit to the Buy/Sell Seller. 7.4 No Substituted Partners. Except as permitted by Section 7.1, no transferee of any partnership interest in the Partnership may become a substituted Partner. Rather, any transferee of any Partnership interest of a Partner shall be entitled solely to rights as assignee of the rights to receive all or part of the share of the income, gains, losses, deductions, expenses, credits, distributions, or returns of capital to which his or its transferor would otherwise be entitled with respect to the Partnership interest so transferred. 7.5 Withdrawal of Partners. Except as permitted by Section 7.2 hereof, no Partner shall have any right to withdraw or resign from the Partnership without the consent of the Financial Partner. ARTICLE 8 General Accounting Provisions and Books 8.1 Books of Account; Tax Returns. The Financial Partner shall prepare and file, or shall cause to be prepared and filed, all United States federal, state, and local income and other tax returns required to be filed by the Partnership and shall keep or cause to be kept complete and appropriate records and books of account in which shall be entered all such transactions and other matters relative to the Partnership's operations, business and affairs as are usually entered into records and books of account that are maintained by persons engaged in business of like character or are required by the Act. Except as otherwise expressly provided herein, such books and records shall be maintained in accordance with the basis utilized in preparing the Partnership's United States federal income tax returns, which returns, if allowed by applicable law, may upon the approval of the Management Committee be prepared on an accrual basis. 8.2 Place Kept; Inspection. The books and records shall be maintained at the principal place of business of the Partnership, and all such books and records shall be available for inspection and copying at the reasonable request, and at the expense, of any Partner during the ordinary business hours of the Partnership. 8.3 Tax Matters Partner. The Financial Partner shall be the tax matters partner of the Partnership and, in such capacity, shall exercise all rights conferred, and perform all duties imposed, upon a tax matters partner under Sections 6221 through 6233 of the Code and the regulations promulgated thereunder; provided, however, that the Operating Partner shall have the right to review and approve any actions taken by the Financial Partner in its capacity as the tax matters partner. Notwithstanding the foregoing, the Financial Partner shall have the right to select the methodology to be used pursuant to Section 704(c) of the Code subject to the Operating Partner's consent, which consent shall not be unreasonably withheld. ARTICLE 9 Amendments and Waivers 9.1 Amendments and Waivers. Except as expressly provided in Section 9.3 of this Agreement, the Financial Partner may amend or waive any provision of this Agreement which merely (i) corrects an error or clarifies an ambiguity in this Agreement, (ii) does not adversely affect the Operating Partner in any material respect or (iii) changes Schedule I to this Agreement to reflect the Sharing Ratios or Partnership Interests of the Partners as from time to time amended in accordance with this Agreement. The Financial Partner shall amend Schedule I to this Agreement to reflect any additional Capital Contributions. The Partners agree to look to the books and records of the Partnership for determination of the actual amount of Capital Contributions made to the Partnership, as provided in Section 3.1 of this Agreement. 9.2 Certain Other Amendments. Notwithstanding any provision to the contrary contained herein, no amendment to or waiver of any provision of this Agreement shall be effective against a given Partner without the consent or vote of such Partner if such amendment or waiver would (i) cause the Partnership to fail to be treated as a general partnership under the Act, (ii) change Section 3.1 of this Agreement to increase a Partner's obligation to contribute to the capital of the Partnership, (iii) change Section 5.1 or 5.2 of this Agreement to affect adversely any Partner's rights to exculpation or indemnification, (iv) change Section 6.1 or 6.2 of this Agreement to affect adversely the participation of such Partner in the income, gains, losses, deductions, expenses, credits, capital or distributions of the Partnership (including any amendments to admit one or more new Partners), (v) change Section 7.1 of this Agreement to affect adversely the anti-dilution rights of such Partner, (vi) change the percentage of Partners necessary for any consent or vote required hereunder to the taking of any action or (vii) amend Section 9.2 of this Agreement. ARTICLE 10 Dissolution and Termination 10.1 Dissolution. The Partnership shall be dissolved upon the first to occur of the following events: (i) the election of the both Partners to dissolve the Partnership; (ii) the election of the Financial Partner to dissolve the Partnership if all or substantially all Partnership assets shall have been sold or disposed of or shall consist of cash; (iii) both the Partners shall have withdrawn from the Partnership within the meaning of the Act, or any other dissolution event specified in the Act shall have occurred; (iv) the Financial Partner shall have (A) made a general assignment for the benefit of creditors, (B) filed a voluntary petition in bankruptcy, (C) filed a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any bankruptcy or debtor relief law, (D) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any bankruptcy or insolvency proceeding brought against it or (E) sought, consented to, or acquiesced in the appointment of a trustee, receiver or liquidator of the Financial Partner or of all or any substantial part of its property; (v) if within sixty (60) days after the commencement of any proceeding against the Financial Partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any bankruptcy or debtor relief law, the proceeding shall not have been dismissed; or (vi) if within sixty (60) days after the appointment (without the Financial Partner's consent or acquiescence) of a trustee, receiver or liquidator of the Financial Partner or of all or any substantial part of its property, the appointment shall not have been vacated or stayed if within sixty (60) days after the expiration of any such stay, the appointment shall not have been vacated. Notwithstanding the foregoing, the Partnership shall not be dissolved upon the occurrence of an event specified in (iii) through (vi) of this Section 10.1 if within ninety (90) days after such occurrence a majority in interest (under applicable federal income tax principles) of the Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor Financial Partner. 10.2 Accounting on Dissolution. Following the dissolution of the Partnership pursuant to Section 10.1 of this Agreement, the books of the Partnership shall be closed, and a proper accounting of the Partnership's assets, liabilities and operations shall be made by the Financial Partner, all as of the most recent practicable date. The Financial Partner shall serve as the liquidator of the Partnership unless it has been removed or unless it otherwise fails or refuses to serve. If the Financial Partner does not serve as the liquidator, one or more other persons or entities may be selected to serve by the Operating Partner. The expenses incurred by the liquidator in connection with the dissolution, liquidation and termination of the Partnership shall be borne by the Partnership. 10.3 Termination. As expeditiously as practicable, but in no event later than one year (except as may be necessary to realize upon any material amount of property that may be illiquid), after the dissolution of the Partnership pursuant to Section 10.1 of this Agreement, the liquidator shall cause the Partnership to pay the current liabilities of the Partnership and (i) establish a reserve fund (which may be in the form of cash or other property, as the liquidator shall determine) for any and all other liabilities, including contingent liabilities, of the Partnership in a reasonable amount determined by the liquidator to be appropriate for such purposes or (ii) otherwise make adequate provision for such other liabilities. To the extent that cash required for the foregoing purposes is not otherwise available, the liquidator may sell property, if any, of the Partnership for cash. Thereafter, all remaining cash or other property, if any, of the Partnership shall be distributed to the Partners in accordance with the provisions of Section 6.1 of this Agreement. The Partners must agree on the value and distributee for all in-kind distributions or else all property must be sold and the proceeds distributed in accordance herewith. At the time final distributions are made in accordance with Section 6.1 of this Agreement, a certificate of cancellation shall be filed in accordance with the Act, and the legal existence of the Partnership shall terminate, but if at any time thereafter any reserved cash or property is released because in the judgment of the liquidator the need for such reserve has ended, then such cash or property shall be distributed in accordance with Section 6.1 of this Agreement. 10.4 No Negative Capital Account Obligation. Notwithstanding any other provision of this Agreement to the contrary, in no event shall any Partner who has a negative capital account upon final distribution of all cash and other property of the Partnership be required to restore such negative account to zero. 10.5 No Other Cause of Dissolution. The Partnership shall not be dissolved, or its legal existence terminated, for any reason whatsoever except as expressly provided in this Article 10. 10.6 Merger. Subject to the rights of the Partners pursuant to Section 9.2, the Partnership may, with the written consent of the Financial Partner acting with the unanimous approval of the Management Committee, adopt a plan of merger and engage in any merger permitted by applicable law. ARTICLE 11 Miscellaneous 11.1 Waiver of Partition. Each Partner hereby irrevocably waives any and all rights that he or it may have to maintain an action for partition of any of the Partnership's property. 11.2 Entire Agreement. This Agreement constitutes the entire agreement among the Partners with respect to the subject matter hereof and supersedes any prior agreement or understanding among them with respect to such subject matter. 11.3 Severability. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement or the application of such provision to other persons or circumstances or in other jurisdictions shall not be affected thereby. Also, if any provision of this Agreement is invalid or unenforceable under any applicable law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. 11.4 Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if sent by overnight courier, hand delivered, mailed (first class registered mail or certified mail, postage prepaid), or sent by telex or telecopy if to the Partners, at the addresses or telex or facsimile numbers set forth on Schedule I hereto, and if to the Partnership, at the address of its principal place of business at 200 Crescent Court, Suite 1650, Dallas, Texas 75201 (fax 214/740-7340), or to such other address as the Partnership or any Partner shall have last designated by notice to the Partnership and all other parties hereto in accordance with this Section 11.4. Notices sent by hand delivery shall be deemed to have been given when received; notices mailed in accordance with the foregoing shall be deemed to have been given three days following the date so mailed; notices sent by telex or telecopy shall be deemed to have been given when electronically confirmed; and notices sent by overnight courier shall be deemed to have been given on the next business day following the date so sent. 11.5 Governing Laws. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas (without regard to principles of conflicts of laws). 11.6 Successors and Assigns. Except as otherwise specifically provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their respective successors and permitted assigns. 11.7 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall constitute one and the same instrument. 11.8 Headings. The section and article 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 provision hereof. 11.9 Other Terms. All references to "Articles" and "Sections" contained in this Agreement are, unless specifically indicated otherwise, references to articles, sections, subsections, and paragraphs of this Agreement. Whenever in this Agreement the singular number is used, the same shall include the plural where appropriate (and vice versa), and words of any gender shall include each other gender where appropriate. As used in this Agreement, the following words or phrases shall have the meanings indicated: (i) "or" shall mean "and/or"; (ii) "day" shall mean a calendar day; (iii) "including" or "include" shall mean "including without limitation"; and (iv) "law" or "laws" shall mean statutes, regulations, rules, judicial orders, and other legal pronouncements having the effect of law. Whenever any provision of this Agreement requires or permits a Partner to take or omit to take any action, or make or omit to make any decision, unless the context clearly requires otherwise, such provision shall be interpreted to authorize an action taken or omitted, or a decision made or omitted, by the Partner acting alone and in good faith. 11.10 Power of Attorney. By execution of this Agreement, the Operating Partner hereby makes, constitutes and appoints the Financial Partner, with full power of substitution and re-substitution in the Financial Partner (in its sole discretion), the Operating Partner's true and lawful attorney-in-fact (the "Attorney") for and in the Operating Partner's name, place and stead and for its use and benefit, to prepare, execute, certify, acknowledge, swear to, file, deliver or record any or all of the following, authorized pursuant to the terms of this Agreement: (i) the Partnership's certificate of general partnership or any other agreement, certificate, report, consent, instrument, filing or writing made by or relating to the Partnership that the Attorney deems necessary, desirable, or appropriate for any lawful purpose, including (A) organizing the Partnership under the Act, (B) admitting Partners with respect to the Partnership, (C) pursuing or effecting any rights or remedies available under this Agreement or otherwise with respect to a defaulting Partner, (D) qualifying the Partnership to do business in any jurisdiction and (E) complying with any law, agreement or obligation applicable to the Partnership; (ii) any agreement, certificate, report, consent, instrument, filing or writing made by or relating to the Partnership that the Attorney deems necessary, desirable or appropriate to effectuate the business purposes of, or the dissolution, termination or liquidation of, the Partnership pursuant to applicable law or the respective terms of this Agreement; and (iii) any amendment to or modification or restatement of this Agreement, the Partnership's certificate of general partnership, or any other agreement, certificate, report, consent, instrument, filing or writing of any type described in subsection (i) or (ii) of this Section 11.10, provided that any amendment of or modification to this Agreement shall first have been adopted in accordance with Article 9 of this Agreement. 11.11 Transfer and Other Restrictions. INTERESTS IN THE PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD UNLESS SUCH INTERESTS HAVE BEEN REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. INTERESTS IN THE PARTNERSHIP ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, VOTING AND OTHER TERMS AND CONDITIONS SET FORTH IN (1) ARTICLE 7 AND (2) VARIOUS INVESTMENT AGREEMENTS BETWEEN OR AMONG CERTAIN PARTNERS. COPIES OF SUCH AGREEMENTS MAY BE OBTAINED FROM THE PARTNERSHIP OR THE FINANCIAL PARTNER AT THEIR PRINCIPAL EXECUTIVE OFFICES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]. IN WITNESS WHEREOF, the undersigned have executed this instrument effective as of the Effective Date. FINANCIAL PARTNER: Oly/Houston Walden, L.P., a Texas limited partnership By: Oly Fund II GP Investments, L.P., a Texas limited partnership, its general partner By: Oly Real Estate Partners II, L.P., a Texas limited partnership, its general partner By: Oly REP II, L.P., a Texas limited partnership, its general partner By: Oly Fund II, LLC, a Texas limited liability company, its general partner By:/s/ Hal R. Hall ------------------ Name: Hal R. Hall Title: Vice President OPERATING PARTNER: Oly/FM Walden, L.P., a Texas limited partnership By: Oly Fund II GP Investments, L.P., a Texas limited partnership, its general partner By: Oly Real Estate Partners II, L.P., a Texas limited partnership, its general partner By: Oly REP II, L.P., a Texas limited partnership, its general partner By: Oly Fund II, LLC, a Texas limited liability company, its general partner By:/s/ Hal R. Hall --------------- Name:Hal R. Hall Title:Vice President EXHIBIT A Business Plan The Partners shall finalize the Business Plan on or before June 8, 1998 and upon completion shall attach it to this Agreement. EXHIBIT B Operating Budget The Partners shall finalize the Operating Budget on or before June 8, 1998 and upon completion shall attach it to this Agreement. SCHEDULE I Partnership Capital Contributions and Sharing Ratios Initial Partner and Address Capital Sharing Contributions Ratios Financial Partner: Oly/Houston Walden, L.P. $300,600.00 50.10% 200 Crescent Court,Suite 1650 Dallas, Texas 75201 Fax: (214) 740-7355 Operating Partner: Oly/FM Walden, L.P. $299,400.00 49.90% 200 Crescent Court,Suite 1650 Dallas, Texas 75201 FAX: (214) 740-7355 ____________________________ Total All Partners $600,000.00 100.00%

FIRST AMENDMENT TO GENERAL PARTNERSHIP AGREEMENT OF OLY WALDEN GENERAL PARTNERSHIP THIS FIRST AMENDMENT TO GENERAL PARTNERSHIP AGREEMENT OF OLY WALDEN GENERAL PARTNERSHIP (this "Amendment") is entered into this 30th day of September, 1998 by and among Oly/Houston Walden, L.P., a Texas limited partner ("Olympus"), Oly/FM Walden, L.P., a Texas limited partnership ("FM") and Stratus Ventures I Walden, L.P., a Texas limited partnership ("Stratus"). W I T N E S S E T H WHEREAS, Oly Walden General Partnership, a Texas general partnership (the "Partnership") was formed on April 8, 1998, pursuant to that certain General Partnership Agreement of Oly Walden General Partnership (the "Partnership Agreement"), with Olympus as the initial Financial Partner and FM as the initial Operating Partner. WHEREAS, pursuant to that certain Assignment of Partnership Interest dated of even date herewith, FM assigned its partnership interest in the Partnership to Stratus. WHEREAS, Olympus, FM and Stratus desire to amend the Partnership Agreement in certain respects. NOW, THEREFORE, Olympus, FM and Stratus hereby agree as follows: 1. Consent. Olympus hereby consents to (i) the assignment by FM to Stratus of FM's interests in the Partnership, and acknowledges the withdrawal of FM from the Partnership. Olympus hereby acknowledges and agrees that from and after the date hereof, Stratus shall be deemed to be a partner of the Partnership. In connection therewith, Stratus hereby assumes all of the obligations of FM under the Partnership Agreement and is hereby entitled to all of the rights and benefits of FM under the Partnership Agreement. Effective from the date hereof, (i) all references in the Partnership Agreement to "FM" shall become "Stratus" and (ii) all references to "Partner" or "Partners" in the Partnership Agreement shall be deemed to include Stratus instead of FM. 2. Definitions. The following terms hereby replace or are hereby inserted as definitions in Section 1.1 of the Partnership Agreement: "Development Loan Agreement" shall mean that certain Development Loan Agreement dated September 30, 1998, by and between Oly Walden General Partnership and Bank One, Texas, National Association. "Escrow Deposit" shall have the meaning set forth in the Development Loan Agreement. "Operating Partner" shall mean Stratus Ventures I Walden, L.P., a Texas limited partnership, together with its successors or assigns. 3. Escrow Deposit. The following is hereby inserted as the new Section 3.3 of the Partnership Agreement and the current Section 3.3 and 3.4 are renumbered Section 3.4 and 3.5, respectively: 3.3 Escrow Deposit. Pursuant to the Development Loan Agreement, the Escrow Deposit was delivered by an affiliate of the Operating Partner (the "Guarantor") on behalf of the Partnership to Bank One, Texas. In consideration of the payment of the Escrow Deposit by the Guarantor, the Partnership agrees to pay to the Guarantor an amount equal to twelve percent (12%) per annum, minus the interest accruing on the outstanding portion of the Escrow Deposit compounded at the rate of return on the Escrow Deposit held by Bank One, Texas (the "Interest Spread"), until the Escrow Deposit has been released or applied to the loan evidenced by the Development Loan Agreement. In the event the Escrow Deposit is applied to the loan evidenced in part by the Development Loan Agreement, the Financial Partner shall elect to call a Mandatory Additional Contribution in an amount necessary to reimburse the Guarantor for the portion of the Escrow Deposit and the Interest Spread which has not been paid by the Partnership to the Guarantor. 4. Distributions. Section 6.1 of the Partnership Agreement is hereby deleted in its entirety and the following is inserted in its place: 6.1 Distributions. No later than thirty (30) days after the end of each Distribution Period during which the Partnership has Cash Flow, such Cash Flow shall be distributed as set forth below and in the order of priority as set forth below. (i) First, to the payment of debt pursuant to the terms of the Development Loan Agreement; then (ii) Second, to the payment of the Escrow Deposit and the Interest Spread. Then, the Partnership shall receive 78.4314% of all Cash Flow until the special distribution interest to be paid to Richard A. Gray, Jr. pursuant to that certain Profits Participation letter agreement dated April 9, 1998 has been paid in full, at which time the Partnership shall receive 98.0392% of all Cash Flow, to be distributed as set forth below and in the order of priority as set forth below. (iii) Third, to the payment of the Mezzanine Financing pursuant to the terms of the Mezzanine Loan Agreement; then (iv) Fourth, to the payment of the Preferred Return on the Unreturned Capital of each Partner in proportion to each Partner's Capital Contribution; then (v) Fifth, to the return, pari passu of the Capital Contributions to each Partner; then (vi) Sixth, to each Partner in proportion to the Sharing Ratios. Notwithstanding anything to the contrary contained in this Section 6.1, the extent there is available Cash Flow, the Partners agree to make distributions to the Financial Partner in the amount of its federal income tax liability; provided, however, before any future distributions of Cas h Flow are made for items (iii) through (vi) above, the Operating Partner shall receive a proportionate distribution based on the Sharing Ratio. 5. Release from Liability Under the Buy/Sell. The following is hereby inserted to the end of Section 7.3(f) of the Partnership Agreement: Notwithstanding anything to contrary contained in this Agreement, in the event the closing of the Buy/Sell transaction occurs, at such closing the Escrow Deposit shall be paid in full by the Partnership. 6. Confirmation of the Partnership Agreement. Except as modified by this Amendment, the Partnership Agreement is hereby confirmed. 7. Counterparts. This Amendment may be executed in several counterparts, all of which, when taken together, shall constitute one and the same agreement. An executed copy of this Amendment transmitted by telecopy shall be sufficient as an original for all purposes. 8. Captions. The captions preceding the various provisions of this Amendment have been inserted solely for convenience of reference and shall not be used in construing this Amendment. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Olympus and FM have executed this Amendment the day and year first set forth above. OLYMPUS: OLY/HOUSTON WALDEN, L.P., a Texas limited partnership By: Oly PF Village GP, LLC, a Texas limited liability company, its sole general partner By:/s/ Hal R. Hall --------------- Name:Hal R. Hall Title:Vice President FM: OLY/FM WALDEN, L.P., a Texas limited partnership By: Oly Fund II GP Investments, L.P., a Texas limited partnership, its general partner By: Oly Real Estate Partners II, L.P., a Texas limited partnership, its general partner By: Oly REP II, L.P., a Texas limited partnership, its general partner By: Oly Fund II, LLC, a Texas limited liability company, its general partner By:/s/ Hal R. Hall ------------------ Name:Hal R. Hall Title:Vice President STRATUS: : STRATUS VENTURES I WALDEN, L.P., a Texas limited partnership By: STRS L.L.C., a Delaware limited liability company, its general partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ------------------------------- William H. Armstrong, III President and CEO

Exhibit 10.16 DEVELOPMENT LOAN AGREEMENT PREAMBLE THIS DEVELOPMENT LOAN AGREEMENT is made and entered into effective as of September 30, 1998, by and between OLY WALDEN GENERAL PARTNERSHIP, a Texas general partnership (herein called the "Borrower"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association (herein called the "Lender"). The Borrower has applied to the Lender for a loan to refinance a portion of the acquisition costs of certain real property and to finance the construction of certain improvements to real property and certain other expenses incurred or to be incurred by the Borrower, and the Lender is willing to make such loan upon the terms and conditions herein set forth. In consideration of the mutual covenants and agreements herein contained, the Lender and the Borrower agree as follows: ARTICLE I DEFINITIONS AND TERMS GENERALLY Section 1.1 Definitions. As used in this Agreement, the following terms shall have the respective meanings indicated: Agreement shall mean this Development Loan Agreement, as it may be amended or supplemented from time to time in writing. Appraisal shall mean a written appraisal of the Premises by an appraiser (who may be an employee of the Lender or of a related entity) satisfactory to the Lender in all respects and reflecting a fair market value of the Premises of not less than $13,193,000 (the Developed Lots shall have a fair market value of not less than $12,263,000, and the Undeveloped Land shall have a fair market value of not less than $930,000). The values for the Developed Lots and the Premises have been revised from the amounts set forth in the Appraisal to reflect the sale of 29 Developed Lots since the date of the Appraisal. Approved Budget shall mean a schedule prepared by the Borrower and approved by the Lender, and any and all amendments or supplements thereto approved in writing by the Lender, reflecting the cost of each item of work or material required to complete the Improvements and the Off-Site Improvements, together with all other related costs and expenses, including interest, commitment fees, professional fees, and other costs. The initial Approved Budget is attached as Exhibit A hereto. Business Day shall mean any day other than a Saturday, Sunday or other day on which the Lender's main banking offices in Dallas, Texas are not open for regular commercial banking business. Certificates of Good Standing shall mean original certificates issued by appropriate Governmental Authority reflecting that a corporation, limited liability company or limited partnership (or other similar entity) exists in the state of its organization and is in good standing in the State of Texas and that (as to corporations and limited liability companies) all franchise taxes are currently paid. With respect to a corporation, limited liability company or limited partnership organized in a state other than the State of Texas, such term shall include a copy of the certificate of authority to do business in the State of Texas for such corporation, limited liability company or limited partnership certified to a current date by the Secretary of State of the State of Texas. Completion shall mean the performance of all work required to fully construct the Improvements and the Off-Site Improvements in accordance with all Development Requirements. Completion Date shall mean the date on which the Evidence of Completion has been duly furnished to the Lender. Construction Contracts shall mean each construction contract which the Borrower will enter into with each Contractor for construction of all or any part of the Improvements and the Off-Site Improvements, as the same may be amended in accordance with this Agreement. Consulting Architect/Engineer shall mean an architectural or engineering firm(s) or other Person (and if there is more than one, all such firms and other Persons) who or which shall be retained by the Lender at the Borrower's expense for the purpose of performing certain functions for the Lender if the Lender reasonably elects, including: approving any Plans and Specifications and Construction Contracts; verifying the Approved Budget, performing inspections as construction progresses so that the Improvements are completed in a manner satisfactory to the Lender and in accordance with the approved Plans and Specifications; certifying that each draw request is not in excess of the work completed less prior advances and required Retainage; and certifying that the Loan proceeds remaining undisbursed are sufficient to complete the Improvements and the Off-Site Improvements; and performing such other consulting tasks as the Lender shall reasonably direct from time to time. Contractor shall mean each "original contractor" (as defined in Section 53.001(7) of the Texas Property Code) selected by the Borrower and satisfactory to and approved by the Lender to construct all or any portion of the Improvements. Contractor/Lender Agreement shall mean a written agreement duly executed by a Contractor (or if there is more than one Contractor, a separate written agreement duly executed by each Contractor) in favor of the Lender by which such Contractor (i) acknowledges that the Borrower has granted the Lender a security interest in all of the Borrower's right, title and interest in, under and to the Construction Contract executed by or otherwise binding upon such Contractor; (ii) subordinates all of such Contractor's existing and future liens, claims and security interests against the Premises to all liens and security interests securing the Debt; and (iii) agrees to continue performance under such Construction Contract if the Borrower defaults under this Agreement or such Construction Contract and such continuation is requested by the Lender or by a purchaser of the Premises at judicial or nonjudicial foreclosure (or by deed in lieu of foreclosure) or by the successors or assigns of either the Lender or such purchaser. Debt shall mean all indebtedness to the Lender incurred under or evidenced by the Loan Documents, including without limitation all indebtedness owing to Lender under any interest rate agreements, interest rate swap agreements, interest rate caps or similar agreements. Deed of Trust shall mean that certain Deed of Trust, Security Agreement and Assignment of Rents and Leases dated on or about the date of this Agreement to Christopher T. Klimko, Trustee for the benefit of the Lender, and in favor of the Lender, upon and covering the Premises, duly executed by the Borrower and such other Persons (if any) as shall be required to vest in the Lender a perfected first priority lien and security interest in all of the Premises and the other collateral described therein to secure payment of the Note and all of the Debt, together with all supplements and amendments thereto. Default shall have the meaning provided in the definition of Event of Default below. Developed Lots shall mean and include each of the 731 existing single-family residential lots constructed upon the Land, which includes the Lake Lots. Development Agreements shall mean and include each Off-Site Agreement, each Sales Contract and any Utility Agreements applicable to the Land. Development Plan shall mean an outline prepared in reasonable detail of the proposed timing, order of development, expenses and sources of funds associated with the development and sale of the Premises. If requested by Lender, the Borrower shall provide the Lender with revised outlines as to such matters as the Premises is developed and sold. Each such outline shall be subject to the approval of the Lender and the latest such outline approved by the Lender shall be the Development Plan then in effect hereunder. Development-Related Entities shall mean and include each purchaser under each Sales Contract, each Utility Developer and each party to an Off-Site Agreement. Development Requirements shall mean the contractually and legally established requirements by all Sales Contracts, all Utility Agreements, all Legal Requirements and all Off-Site Agreements. District shall mean each municipal utility district now or hereafter organized under the laws of the State of Texas which has jurisdiction over all or any portion of the Premises and shall include, without limitation, Harris County Municipal Utility District No. 153. Engineering Reports shall mean all soil analysis, construction, structural and mechanical feasibility reports; all field notes and maps of surveys; all construction plans and specifications; all topographic, drainage and contour maps and all other reports, maps, studies and surveys of engineers, architects and others regarding the Improvements, the Off-Site Improvements and the Land as shall be required by the Lender, including without limitation, all Engineering Reports necessary to determine the load-bearing capacity of the Land, the types of soil contained in the Land and the amount and type of filling or other remedial work, if any, that will be necessary to render the Land suitable for the Premises. Escrow Deposit shall mean the $3,000,000 cash to be deposited by Guarantor with Lender and securing the Guaranty in the event the Borrower does not obtain the Letter of Credit. Event of Default shall mean any of the events specified in Section 6.1 hereof provided that there has been satisfied or met any requirement or condition specified in this Agreement for the giving notice, or the lapse of time, or the happening of any other or further condition, event or act in respect of such specified event, and Default shall mean any of the events specified in such Section, whether or not any other requirement or condition has been satisfied or met. Evidence of Completion shall mean all of the following: (a) Engineering drawings and plans required by Harris County, Texas and any other applicable Governmental Authority, shall have been delivered to the Lender showing the location of the Improvements and the Off-Site Improvements; (b) An affidavit of bills paid executed by each Contractor and, if requested by Lender, such other subcontractors, laborers and suppliers as the Lender may require to satisfy itself that the construction of Improvements (and all other improvements to the Land completed through the date of any such affidavit) have been completed lien-free; (c) There being no outstanding and unpaid conditional sales contracts (excluding bona fide contracts to sell developed land to builders, developers, investors or users) or indebtedness secured by security agreements and financing statements (except only those securing the Debt) upon the Improvements or any of the personal property covered by the Deed of Trust or any of the other Loan Documents; (d) Evidence that the Improvements, the Off-Site Improvements and their use comply fully with any and all applicable zoning (if any), subdivision, building, and environmental requirements and other Legal Requirements, such evidence to include the recorded plat of the Land approved by all required Governmental Authorities and material to establish subdivision approval is based on no requirement or condition involving any real property, or rights appurtenant thereto, other than the Land; (e) Evidence that the Premises has the sewage capacity required by the Sales Contracts and all Development Agreements and copies of all sewage permits and commitments from the District establishing the same, if any; (f) Copies of all other Governmental Permits, licenses and rights-of-way in any manner pertaining to the Premises; and (g) All other evidence required to satisfy the Lender that the Premises are fully developed in accordance with the Development Requirements and ready for sale to builders and users for construction of residences and related improvements. Financing Statements shall mean and include all such Uniform Commercial Code financing statements and continuation statements as the Lender shall require, duly executed by the Borrower and by such other Persons (if any) as, in the Lender's judgment, shall be necessary to give notice of and to perfect, or continue perfection of, the Lender's security interest in all personal property and fixtures constituting a part of the Premises or other security for the Debt. Good Accounting Practice shall mean such accounting practice as, in the opinion of independent accountants of recognized national standing regularly retained by the Borrower or other Person (as the case may be) and acceptable to and approved by the Lender, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles mean those principles and practices which are (a) recognized as such by the Financial Accounting Standards Board, (b) applied after the date of the Borrower's or other Person's (as the case may be) most recently audited financial statements furnished to the Lender in a manner consistent with the manner in which such principles and practices were applied to such statements, and (c) consistently applied for all periods after the date of such most recent audited financial statements so as to reflect properly the financial condition, and results of operations and changes in the financial position, of such Person. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board in order for such principle or practice to continue as a generally accepted accounting principle, all reports and financial statements required hereunder may be prepared in accordance with such change only after written notice of such change is given to the Lender. Governmental Authority shall mean the United States, the State of Texas, the County of Harris, the City of Houston, each District, the Texas Natural Resource Conservation Commission, the Department of Housing and Urban Development, the Environmental Protection Agency, any political subdivision of any of the foregoing and any agency, department, commission, board, bureau, court or instrumentality of any of them which now or hereafter has jurisdiction over the Lender, the Borrower or any part of the Premises or construction on the Premises. Governmental Permits shall mean all certificates, licenses, zoning variances, permits and "no action" letters from each Governmental Authority required to evidence full compliance by the Borrower and conformance of the planned Improvements and the Off-Site Improvements, with all Legal Requirements applicable to the Premises, complete construction of the Improvements and the Off-Site Improvements and development of the Land as a residential subdivision as contemplated hereby and by the Development Plan. Guaranty shall mean the Guaranty to be executed by STRS Guaranty Company, L.L.C., a Delaware limited liability company ("Guarantor") in favor of Lender, which Guaranty is to be secured by the pledge of the Letter of Credit and/or the Escrow Deposit provided for in this Agreement. Highest Lawful Rate shall mean the maximum nonusurious rate of interest permitted by whichever of applicable federal or Texas law from time to time permits the higher maximum nonusurious interest rate. On each day, if any, that applicable Texas law establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "weekly ceiling" (as defined in S303 of the Texas Finance Code and Chapter 1D of Title 79, Texas Revised Civil Statutes, 1925, as amended) for that day. Improvements shall mean all improvements constructed on the Land or contemplated in the Plans and Specifications, if any, including all streets, curbs, gutters, drainage facilities, sanitary collection facilities, water storage and treatment facilities, water supply and distribution systems, paving, landscaping, street lighting and utilities and all other improvements necessary or appropriate (in the reasonable judgment of the Lender) or as shall be required by any Development Agreement to prepare the Premises for the construction and use of residential homes and related improvements by builders and users thereof. Indebtedness shall mean and include (1) all items which in accordance with Good Accounting Practice would be included on the liability side of a balance sheet on the date as of which Indebtedness is to be determined (excluding capital stock, surplus, surplus reserves and deferred credits), (2) guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, or any obligations to purchase or otherwise acquire any such Indebtedness of others, and (3) Indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned subject to or burdened by such mortgage, pledge, security interest or lien whether or not the Indebtedness secured thereby shall have been assumed; provided, however, that such term shall not mean or include any Indebtedness monies sufficient to fully pay and discharge which (either on its stated final maturity date or on such earlier date as such Indebtedness may be duly called for redemption and payment) are on deposit with a depositary, agency or trustee in trust for the payment of such Indebtedness. Insurance Policies shall mean and include each and every insurance policy, insurance certificate and other evidence of insurance which is required by the Deed of Trust. Lake Lots means the 65 single-family Developed Lots with frontage on Lake Houston and which are not presently subject to any Sales Contract. Land shall mean the land described on Exhibit B hereto. Legal Requirements shall mean any law, ordinance, order, rule or regulation of a Governmental Authority and any requirements, terms or conditions contained in any restrictions or restrictive covenants affecting the Premises. Letter of Credit shall mean that unconditional and irrevocable letter of credit obtained by Borrower in the face amount of $2,500,000, issued by a financial institution acceptable to Lender and naming Lender as the beneficiary thereof, and having a term of at least 12 months (i.e., the expiry date shall be at least 12 months after the date of issuance) or such other expiry date reasonably acceptable to Lender; provided that in any event, if Guarantor provides a Letter of Credit to Lender that has an expiry date which is before the maturity date of the Note, then Borrower shall provide a replacement Letter of Credit (or an Escrow Deposit complying with the terms of this Agreement) at least thirty (30) days prior to the expiry date of the Letter of Credit, failing which Lender shall have the right to present the Letter of Credit and hold the proceeds thereof as an Escrow Deposit under this Agreement in which event Guarantor shall execute a Pledge Agreement with respect to such deposit if required by Lender in the same form as previously executed by Guarantor in favor of Lender. Loan shall mean the loans contemplated by this Agreement. Loan Documents shall include this Agreement, the Note (including all renewals, extensions and rearrangements thereof), the Deed of Trust, the Pledge Agreement, the Guaranty, each Request for Advance, each Application and Certificate for Payment, and all other instruments executed (i) pursuant hereto or in connection with the Debt or (ii) as security for either or both payment of the Debt of performance of the Borrower's obligations under this Agreement and under all other Loan Documents. Net Sales Proceeds shall mean, with respect to each Developed Lot, the gross sales proceeds received by or payable to Borrower in connection with the sale of such Developed Lot pursuant to a Sales Contract, minus normal and customary closing costs, provided that the Net Sales Proceeds for each Developed Lot shall in no event be less than the greater of (i) ninety-three percent (93%) of the gross sales price of such Developed Lot under the applicable Sales Contract or (ii) 125% of the Par Lot Amount. Note shall mean the promissory note in the principal amount of $8,160,000.00, executed by Borrower and payable to the order of Lender, and all renewals, extensions and rearrangements thereof provided for in this Agreement or otherwise permitted by the Lender. Obligors shall mean the Borrower, the Guarantor and the Partners. Officer's Certificate shall mean a certificate signed in the name of the Borrower by either (a) any individual Partner of the Borrower, (b) by the president, a vice president, the treasurer, the secretary or an assistant treasurer or assistant secretary of a corporate Partner of the Borrower, or (c) an individual general partner or joint venturer of any Partner of the Borrower. Off-Site Agreement shall mean each instrument relating to the ownership of right of the Borrower to use any Off-Site Improvements or related improvements including but not limited to any deed, easement, license, permit, contract, joint venture agreement or partnership agreement, together with the consent of each landowner on whose property the Off-Site Improvements are to be located and all rights-of-way and easements, necessary to allow such use. Off-Site Improvements shall mean that portion of the Improvements not intended to be located on the Land and shall also include all other improvements which are not intended to be located on the Land but which are necessary or appropriate to the proper development and marketing of the Premises for sale to builders and users for the construction and use of residential housing. At the time of execution of this Agreement, it is not anticipated that there will be any Off-Site Improvements. Opinion of Borrower's Counsel shall mean an opinion rendered to the Lender by Borrower's counsel in a form acceptable to the Lender and its counsel. Organizational Agreement shall mean (a) in respect of a corporation, the Articles of Incorporation certified to a current date by the Secretary of State in which such corporation is incorporated and the Bylaws of a corporation certified to a current date as true and correct by the secretary or assistant secretary of a corporation; (b) in respect of a general partnership, a partnership agreement; (c) in respect of a joint venture, a joint venture agreement; (d) in respect of a limited partnership, a partnership agreement and the certificate of limited partnership certified to a current date by an appropriate Governmental Authority of the state in which the limited partnership is organized; (e) in respect of a trust, a trust agreement; and (f) in respect of a limited liability company, the Articles of Organization certified to a current date by the Secretary of State in which such limited liability company is organized and the Operating Agreement of the limited liability company certified to a current date as true and correct by the manager of the limited liability company. Par Lot Amount shall mean $11,163, which is the amount of the Loan divided by the number of Developed Lots. Partners shall mean all current general partners of the Borrower and shall include all additional and substitute general partners, if any, admitted to such general partnership pursuant to such Organizational Agreement as it may be amended or supplemented in accordance with this Agreement. Past Due Rate shall mean the per annum rate provided in the Note for interest on past due principal and interest. Without notice to the Borrower or any other Person, the Past Due Rate shall automatically fluctuate upward and downward as and in the amount by which such rate provided in the Note shall fluctuate. Person shall mean and include a natural person, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization, a government and any department or agency thereof. Plans and Specifications shall mean all plans and specifications for the construction of the Improvements and the Off-Site Improvements and approved by Lender. Pledge Agreement shall mean the Pledge Agreement executed by Guarantor in favor of Lender (in the event Guarantor does not deliver the Letter of Credit to Lender), granting a first and prior security interest to Lender in and to the Escrow Deposit held by Lender in a deposit account with Lender. Premises shall mean the Land, the Improvements, the Off-Site Improvements now or hereafter owned by the Borrower, all fixtures, equipment, leases, rentals, accounts, general intangibles and other personal property of any kind or character now or hereafter related to, situated on or used or acquired for use, on or in connection with the Land or any Improvements now or hereafter constructed thereon and all related parts, accessions and accessories thereto and all replacements or substitutions therefor, as well as all other improvements, benefits and appurtenances now or hereafter placed thereon or accruing thereto. Request for Advance shall mean a written request for an advance under this Agreement or any of the other Loan Documents in the form of Exhibit C hereto, true and correct in all respects, completed in all material respects and signed by the Borrower. Each Request for Advance shall be accompanied by copies of billing statements, vouchers and invoices relating to the costs of the items to be paid from the advance requested and upon request of the Lender, shall also be accompanied by such affidavits of the Contractor and such other Persons as the Lender shall reasonably require to satisfy itself that all bills for labor and materials and other goods and services required to complete the Improvements are being currently paid, if applicable. In those instances where a Request for Advance covers amounts to be paid to a Contractor, such Request for Advance shall also be accompanied by an Application and Certificate for Payment (herein so called) in the form of Exhibit D hereto, true and correct in all respects, completed in all material respects, accompanied by all supporting documents required thereby. Sales Contracts shall mean each lot sale contract, earnest money contract, option contract and other agreement now existing or hereafter executed between the Borrower and any other Person which contemplates a sale, exchange or other conveyance of all or any part of the Land, and each other document or instrument executed in connection therewith, together with each modification thereof or amendment thereto approved by the Lender in writing, including without limitation, that (i) Earnest Money Contract between Borrower and Ashton Houston Residential, L.L.C., a Texas limited liability company, (ii) Earnest Money Contract between Borrower and BTH, Inc., a Texas corporation, d/b/a Brighton Homes, (iii) Earnest Money Contract between Borrower and Dover Homes, Inc., (iv) Earnest Money Contract between Borrower and Holigan Homes Texas, Ltd., a Texas limited partnership and (v) Earnest Money Contract between Borrower and Perry Homes, a Texas joint venture, and all rights, title and interest of Borrower thereunder, including without limitation, all earnest money deposits thereunder. All sales contracts enumerated in clauses (i) through (v) of this subparagraph have been approved by the Lender. Scheduled Completion Date shall mean December 31, 1999. Subordination Agreements shall mean agreements executed by each Contractor, subcontractor and any other Person who has supplied or furnished (or will supply or furnish) labor, materials or both in connection with the construction of any Improvements on the Premises, pursuant to which such Person, for himself, his heirs, legal representatives, successors and assigns, waives and releases any and all then-present liens, rights, claims, security interests and other interests owned, claimed or held in the Premises and any Improvements then or thereafter placed thereon, or any part thereof, and subordinates any and all present and future liens against all or any part of the Premises and Improvements thereon to all liens and security interests securing the Debt. Title Company shall mean Chicago Title Insurance Company and shall also include its agent, Heritage Title Company of Austin, Inc. Title Instruments shall mean true and correct copies of all instruments of record in the Office of the County Clerk of Harris County, Texas or of any other Governmental Authority affecting title to all or any part of the Premises, including but not limited to those (if any) which impose restrictive covenants, easements, rights-of-way or other encumbrances on all or any part of the Premises. Title Insurance Policy shall mean a mortgagee policy of title insurance in the form promulgated by the State Board of Insurance of the State of Texas, in the face amount of $8,160,000.00 issued by the Title Company to the Lender insuring that the fee simple absolute title to the Land is vested in the Borrower and that the Deed of Trust is a valid first lien on the Land, subject only to such exceptions, if any, as may be acceptable to and approved in writing by the Lender. Schedule A of the Title Insurance Policy shall contain a complete and accurate description of the Deed of Trust, shall specify the recording and filing information applicable to the Deed of Trust and shall describe the Land identically to the description thereof in the Deed of Trust. Title Status Certificate shall mean a certificate issued by the Title Company to the Lender reflecting all changes (if any) in title to the Land that have occurred since the date of issuance of the Title Insurance Policy. Undeveloped Land shall mean that portion of the Land which is not a part of the Developed Lots, and which consists of (i) a tract of land containing approximately 7.28 acres and (ii) a tract of land containing approximately 71 acres. The Undeveloped Land is not subject to any of the Sales Contracts and thus will not be available for partial releases as provided in Article 9 of this Agreement except pursuant to a purchase and sales agreement acceptable to Lender in Lender's reasonable discretion (provided that in any event, the gross sales price of the Undeveloped Land being sold shall be acceptable to Lender in Lender's sole discretion, and shall be payable in cash at the closing of such sale). Utility Agreement shall mean each agreement between each Utility Developer and the Borrower, if any, providing for the planning and construction of all or a portion of the utility Improvements or the utility Off-Site Improvements, and the sharing and payment of the costs thereof, and all other similar agreements with any Governmental Authority or other Person pertaining to the Land. Utility Developer shall mean all of the parties to each Utility Agreement, including the Borrower and the District. Section 1.2 Terms Generally. Each definition contained in this or any other Article of this Agreement shall apply equally to both the singular and plural form of the term defined. Each pronoun shall include the masculine, the feminine and neuter form, whichever is appropriate to the context. The words "included", "includes" and "including" shall each be deemed to be followed by the phrase "without limitation". The words "herein", "hereby", "hereof" and "hereunder" shall each be deemed to refer to this entire Agreement and not to any particular Article or Section hereof. The defined term "Lender" shall be deemed to refer to this entire Agreement and not to any particular Article or Section hereof. The defined term "Lender" shall be deemed to include all authorized agents of the Lender and its successors and assigns. The defined term "Borrower" shall be deemed to include its heirs, legal representatives, successors and assigns. The following terms shall have the respective meanings ascribed to them in the Uniform Commercial Code as enacted and in force in the State of Texas: accessions, continuation statement, equipment, inventory, financing statement, fixtures, general intangibles, personal property, proceeds, security interest and security agreement. Unless the context otherwise requires or unless otherwise provided, the terms defined in Section 1.1 which mean or refer to a particular agreement, instrument, or document shall also mean, refer to and include all amendments, renewals, extensions, substitutions, and modifications of such agreement, instrument or document, provided that nothing contained in this Section 1.2 shall be construed to authorize the execution or entering into by any Person of any such renewal, extension, substitution, or modification, except as may be permitted by other provisions of this Agreement. ARTICLE II AGREEMENT TO MAKE SECURED AND GUARANTEED LOAN; PROCEDURES AND REQUIREMENTS FOR FUNDING AND USE OF LOAN ADVANCES Section 2.1 The Loan. Lender shall advance such amounts against the Note as the Borrower may request up to but not more than the amount of the Note, such sums all to be applied in payment of items set forth in the Approved Budget. Payment of the Note shall be secured by the Deed of Trust, and the liens, security interests and collateral assignments created or evidenced by the other Loan Documents. Section 2.2 The Note and Security. The Borrower shall execute and deliver to the Lender the Note to evidence the Loan. Advances of Loan proceeds made under this Agreement shall be conclusively deemed and considered to have been made against the Note. The Lender shall make an appropriate notation on its records reflecting each amount advanced against the Note and the date of the advance. Interest on the amounts of Loan proceeds advanced hereunder shall be computed on the amount of each advance and from the date of each advance. Section 2.3 Purpose. Funds shall be advanced by the Lender under the provisions of this Agreement for the purpose of paying the costs of the items set forth in the Approved Budget. In no event shall the Lender be required to make (but in its discretion, the Lender may make) any advance for payment of any item in excess of the amount budgeted for such item in the Approved Budget or for payment of any item not included in the Approved Budget; provided, however, that any such excess may, at the Lender's option, be paid from the "contingency" item set forth in the Approved Budget. In addition to the foregoing, Borrower may submit a Request for Advance for an advance from the "other" contingency line item in the Approved Budget to pay income taxes due by Borrower or its partner in connection with the Premises. To the extent that Borrower achieves any cost savings in any Capital Expenditure or Operating Expense line item which is verified by Lender in Lender's sole discretion, such cost savings may be reallocated to the "other" contingency line item and thereafter used by Borrower to pay for costs or expenses associated with the Premises as provided in this Agreement, including the purposes set forth in the preceding sentence. Section 2.4 Request for Advance. Each time the Borrower desires to receive an advance of Loan proceeds, the Borrower shall deliver to the Lender a Request for Advance in respect thereto. Each item to be paid from such advance shall be fully described, itemized and categorized on the continuation page or pages of such Request for Advance. Within five (5) Business Days after receipt of a proper Request for Advance and the satisfaction of all other terms and conditions of this Agreement, the Lender shall advance the amount set forth in such Request for Advance. Section 2.5 Advances to Pay Contractors. Each time a Request for Advance includes amounts to be paid to a Contractor, the amount to be advanced by the Lender to pay such Contractor shall not exceed a sum equal to the aggregate amount of the "current payment due" as shown in the Application and Certificate for Payment executed by such Contractor and submitted with the Request for Advance. Section 2.6 Direct and Indirect Advances. All sums advanced to pay a Contractor shall be advanced directly to the Borrower (or, at the option of the Lender after the occurrence of a Default, to such Contractor), as part of the Loan proceeds. All advances made pursuant to a Request for Advance for payment of any other items set forth in the Approved Budget shall be advanced to or for the account of the Borrower. Section 2.7 Application of Sums Advanced. Each time the Borrower receives Loan proceeds or other sums pursuant to this Agreement or any of the other Loan Documents, the Borrower shall promptly apply the same toward the payment of the items covered by the applicable Request for Advance submitted to the Lender and promptly thereafter shall furnish evidence reasonably satisfactory to the Lender that all such items have been paid. Without the prior written consent of the Lender, the Borrower shall not apply or permit application of any sums advanced hereunder in payment of any item not included in the Approved Budget. Section 2.8 Funding Frequency. The Lender shall in no event be obligated to fund advances more than once each calendar month, but may do so at its election. Section 2.9 Debt Absolutely Due at Maturity. The Borrower will pay the Debt or cause it to be paid to the Lender on a date not later than the maturity of the Note, whether such maturity occurs on account of lapse of time until its stated final maturity or by acceleration. The Borrower's obligation to pay the Debt in accordance with the Note and the other Loan Documents is absolute and unconditional. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: Section 3.1 Due Organization, Existence and Authority of the Borrower. The Borrower is a duly organized, validly existing Texas general partnership and has the power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Agreement, the Note, the Deed of Trust and the other Loan Documents to which the Borrower is a party. Section 3.2 Due Organization, Existence and Authority of Partners. Each of the Partners of Borrower are duly organized and valid existing Texas limited partnerships in good standing under the laws of the State of Texas and have the power and authority to carry on their business as presently conducted, to be a Partner and to enter into and perform, and bind the Borrower, to perform, their respective obligations under this Agreement, the Note, the Deed of Trust and the other Loan Documents to which the Partners and the Borrower, respectively, are parties in the capacities therein stated. Section 3.3 Loan Documents Authorized. The execution and delivery by the Borrower and the Partners of this Agreement, the Note, the Deed of Trust, and the other Loan Documents to which the Borrower and the Partners are parties in the capacities therein stated and the full and timely performance of all obligations thereunder have been duly authorized by all necessary action under the Borrower's Organizational Agreement and under the Organizational Agreements of its Partners and otherwise. Section 3.4 Loan Documents Valid, Binding and Enforceable. This Agreement, the Note, the Deed of Trust and the other Loan Documents to which the Borrower is a party have been duly and validly executed, issued and delivered by the Borrower and constitute the valid and legally binding obligations of the Borrower and the Partners, enforceable in accordance with their respective terms in all material respects. Section 3.5 Other Agreements Not Violated by the Borrower. Compliance by the Borrower and the Partners with this Agreement, the Note, the Deed of Trust and the other Loan Documents to which the Borrower and the Partners are parties in the capacities therein stated will not violate any law, the Borrower's Organizational Agreement or the Organizational Agreement of any Partner, any Construction Contract, any Development Agreement or any other instrument or agreement binding upon the Borrower or any Partner. Section 3.6 Loan Documents Signed by Other Persons. To the best of the Borrower's knowledge, each Loan Document, each Development Agreement or other written instrument contemplated in or required by this Agreement executed or to be executed by any Person other than the Borrower has been or will be duly authorized by all necessary action and constitutes, or when executed and delivered to the Lender will constitute, the valid and legally binding obligation of such Person, enforceable against such Person in accordance with its terms. Section 3.7 Permits Effective. The Borrower has obtained (or has verified the timely availability of and will obtain when required) all Governmental Permits necessary for the construction of the Improvements and the Off-Site Improvements and all Governmental Permits necessary for the development of the Premises as a residential subdivision and all such Governmental Permits are or will timely be in full force and effect. Section 3.8 Taxes Paid. The Borrower and each Obligor has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, except for taxes being contested in good faith and for which such taxpayer has provided adequate reserves for the payment thereof. Section 3.9 Suits. There are no actions, suits or proceedings pending, or to the knowledge of the Borrower threatened, against or affecting the Borrower, any Obligor, or the Premises, or involving the validity or enforceability of the Loan Documents or the priority of the liens, security interests and collateral assignments created or evidenced thereby, at law or in equity, or before or by any Governmental Authority, except actions, suits and proceedings which have been fully disclosed to the Lender in writing. Section 3.10 Financial Statements Complete and Accurate. All information supplied and statements made to the Lender by or on behalf of the Borrower or any Obligor in any financial statement furnished or application for credit made prior to, contemporaneously with or subsequent to the execution of this Agreement are and shall be true, correct, complete, valid and genuine in all material respects; such financial statements and applications for credit have been prepared in accordance with Good Accounting Practice and fully and accurately present the financial condition of the subject thereof as of the date thereof and no material adverse change has occurred in the financial condition reflected therein since the respective dates thereof; and no additional borrowings have been made by the Borrower or any Obligor since the respective dates thereof other than the borrowing contemplated hereby or other borrowings of which the Lender has been notified in writing. Section 3.11 No Other Defaults (Governmental Order). Neither the Borrower nor any Obligor is in default with respect to any order, writ, injunction, decree or demand of any court or any Governmental Authority. Section 3.12 Utilities, Road Access and Drainage. The Land, other than the Undeveloped Land, has adequate rights of access to public streets and roads and there is constructed on the Land adequate rights of access to all water, sanitary sewer and storm facilities necessary for the intended use of the Developed Lots, and all roads necessary for the intended use of the Developed Lots have been completed in accordance with the Plans and Specifications therefor and all Development Requirements. Section 3.13 Tests and Studies. The Borrower has conducted such tests and studies as are necessary to determine the flow of surface and storm waters and the drainage thereof, upon, across, and from the Land and has prepared appropriate reports showing what grading, sloping, channeling or construction of artificial drains or retention ponds is necessary to provide adequate drainage and to prevent accumulation of such waters on the Land at all times during its development and after Completion. Section 3.14 Flood Plain. No portion of the Land will be located in any area designated by the Secretary of Housing and Urban Development or any other Governmental Authority as being in the 100-year flood plain or as having special flood or mud slide hazards, except as disclosed by FEMA Maps or other engineering documentation provided to Lender. Section 3.15 Legal Requirements Met. No violation of any Legal Requirement exists with respect to the Premises; the anticipated use thereof complies with all Legal Requirements and all Legal Requirements as of the date hereof have been satisfied. Section 3.16 No Mechanics' Lien Inception. As of the date hereof, no construction has commenced and is in progress on the Land, nor has any material been delivered to the Land, nor has the Borrower made any verbal or written contract or arrangement of any kind, the occurrence, performance or recordation of which would give rise to a lien on the Premises having priority equal to or greater than the liens and security interests of the Deed of Trust. Section 3.17 Ownership. As of the date hereof, the Borrower owns all of the Premises. Section 3.18 Approved Budget Correct. The Approved Budget is true, correct, complete, valid and genuine and reflects the Borrower's best good faith estimate of all of the direct and indirect costs of completing the Improvements and the Off-Site Improvements in accordance with the Plans and Specifications, all Development Requirements and the Loan Documents. Section 3.19 No Default. No Default under this Agreement or the other Loan Documents has occurred and is continuing. Section 3.20 No Other Default. Neither the Borrower nor any Obligor is in default under any instrument evidencing any indebtedness or any agreement thereto or any indenture, mortgage, deed of trust, security agreement, lease, franchise or other agreement or other instrument to which such Person is a party or by which it or he is bound. Section 3.21 Securities Act of 1933. Neither the Borrower nor any agent acting for it has offered the Note or any similar obligation of the Borrower for sale to or solicited any offers to buy the Note or any similar obligation of the Borrower from any Person other than the Lender, and neither the Borrower nor any agent acting for it will take any action which would subject the sale of the Note to the provisions of Section 5 of the Securities Act of 1933, as amended. Section 3.22 Regulations U and T. The Borrower does not own any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. None of the proceeds of the Loan will be used for the purpose of purchasing or carrying any such margin stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any such margin stock or which would constitute this transaction a "purpose credit" within the meaning of such Regulation U, as now in effect or as it may hereafter be in effect. None of the proceeds of the Loan will be used for the purpose of extending or arranging for the extension of credit secured directly or indirectly, in whole or in part, by collateral that includes any such margin stock. The Borrower and its Partners will not take or permit any action which would involve the Lender in a violation of Regulation U, Regulation T or any regulation of the Board of Governors of the Federal Reserve System or violation of the Securities and Exchange Act of 1934, in each case as now in effect or as the same may hereafter be in effect. Section 3.23 Representations Not Misleading. No representation or statement made to the Lender by or on behalf of the Borrower or any Obligor in connection with the transactions contemplated by this Agreement or made in any of the other Loan Documents is (or shall be) false or misleading or fails (or will fail) to state any matter necessary to make such statements not misleading. Section 3.24 No Known Material Adverse Fact. The Borrower knows of no fact which materially and adversely affects the business, operations, prospects or condition, financial or otherwise, of the Borrower or of any Obligor. Section 3.25 Borrower's Place of Business. The principal place of business of the Borrower is c/o Stratus Management, L.L.C., 98 San Jacinto Boulevard, Suite 220, Austin, Texas 78701. Section 3.26 Survival of Representations and Warranties. All representations and warranties made by or on behalf of the Borrower or any Obligor herein shall survive the delivery of the Note and the making of the Loan and any investigation at any time made by or on behalf of the Lender shall not diminish its rights to rely thereon. Section 3.27 Business Loans. All loans evidenced by the Note are and shall be "business loans" as such term is used in the Depository Institutions Deregulation and Monetary Control Act of 1980, as amended, and such loans are for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter 1D of the Texas Finance Code. Section 3.28 Guaranty. The Guaranty and the Pledge Agreement have each been duly and validly executed, issued and delivered by Guarantor and constitute the valid and legally binding obligation of the Guarantor, enforceable in accordance with their respective terms. Compliance by the Guarantor with the Guaranty and the Pledge Agreement will not violate any law or any other instrument or agreement binding upon the Guarantor. ARTICLE IV BORROWER'S COVENANTS AND AGREEMENTS The Borrower covenants and agrees with the Lender as follows: Section 4.1 Prosecution of Construction. The Borrower will prosecute the construction of the Improvements in accordance with all Development Requirements and this Agreement with reasonable diligence and dispatch, and in any event will complete the construction of the Improvements on or before the Scheduled Completion Date. Section 4.2 Completion Evidence. As soon as reasonably possible after Borrower is of the opinion that Completion has occurred, the Borrower shall deliver the Evidence of Completion to the Lender. Section 4.3 Off-Site Improvements. The Borrower shall promptly commence and complete, or cause to be commenced and completed, any and all Off-Site Improvements as and when required for the construction and operation of the Improvements and by all Development Requirements. The Borrower shall notify the Lender in writing of the commencement and keep the Lender fully advised of the progress of all negotiations relating to the use by the Borrower of any Off-Site Improvements or of any rights to use the property of third Persons which may be necessary or desirable in connection with the construction by the Borrower of any such Off-Site Improvements. Immediately upon receipt, the Borrower shall furnish the Lender with copies of required approvals and Governmental Permits for all such Off-Site Improvements. Section 4.4 Encroachments. Except as disclosed to the Lender in writing, all Improvements necessary to prepare the Premises for the construction of residential housing are or shall be entirely within the boundary lines of the Land and do not and will not encroach upon any set-back line, easement, right-of-way or adjoining property or breach or violate any covenant, condition or restriction affecting the Land or any Legal Requirement. Section 4.5 Correcting Defects. The Borrower will, upon demand of the Lender, correct or cause to be corrected: (a) any structural defect in the Improvements or the Off-Site Improvements; (b) any material departure from the Plans and Specifications not approved by Lender and any applicable Development-Related Entity; (c) any encroachment by any part of the Improvements, the Off-Site Improvements or any other structures or improvements over or on any set-back line, easement, adjoining property or other restricted area; and (d) any encroachment of any adjoining structure upon the Land which any inspection reflects. The advance of Loan proceeds or other sums hereunder shall not constitute a waiver of the right of the Lender to require compliance with this covenant with respect to any such defects, departures, encroachments or violations. Section 4.6 Other Information. The Borrower will furnish to the Lender such other information concerning the progress of the construction of the Improvements and the Off-Site Improvements and the development of the Land as the Lender may from time to time reasonably request. Section 4.7 Proof of Payment. The Borrower will deliver and cause to be delivered to the Lender from time to time as required by the Lender, all such statements, receipts and other data and information as the Lender may reasonably require reflecting payment of costs and expenses incurred in connection with the construction of the Improvements, the Off-Site Improvements or operation of the Premises. Section 4.8 Free Access. The Borrower shall permit the Lender and its duly authorized agents free access to the Premises and shall make available for audit and inspection, at any reasonable time by Lender or its duly authorized agents, all property, equipment, books, contracts, records and other papers relating to the Premises and construction of the Improvements, the Off-Site Improvements and the Development Agreements. Section 4.9 Changes and Change Orders. No material change will be made in any Plans and Specifications (including but not limited to the execution of change orders) or in the Construction Contracts without the prior written consent of the Lender. For purposes of this Section, a change shall not be considered a material change unless: (a) such change alone increases or decreases the contract price for or other costs in respect of construction of the Improvements or the Off-Site Improvements by more than $10,000.00, or together with all prior changes on a "net" basis increases the contract price for or other costs in respect of construction of the Improvements or the Off-Site Improvements by more than $50,000.00; (b) such change alone or together with all prior changes extends the time to complete the Improvements or the Off-Site Improvements beyond the Scheduled Completion Date; or (c) such change alone or together with all prior changes constitutes a change which would require the prior approval of any Development-Related Entity so as not to affect or impair its obligations under the applicable Development Agreement. The Borrower shall deliver to the Lender true and correct copies of all changes, amendments or supplements to the Plans and Specifications and the Construction Contracts (whether material or not) within five (5) Business Days after execution thereof or agreement thereto by the respective parties to such changes. Section 4.10 Title Status Certificates and Title Policies Required. Until Completion, upon the request of the Lender, the Borrower will furnish a Title Status Certificate to the Lender within twenty (20) Business Days of the date which the request is made. After Completion, the Borrower will furnish a Title Status Certificate to the Lender within twenty (20) Business Days of the date after written request therefor made by the Lender. Upon written request of the Lender, the Borrower shall forthwith deliver to the Lender such endorsements to the Title Insurance Policy as shall be legally available and as the Lender shall reasonably request from time to time. Section 4.11 Insurance Policies Required. Until the Debt is paid in full, the Borrower shall furnish the Insurance Policies and comply with all terms thereof. Section 4.12 Casualty Damage. In case of any damage to or loss of any of the Premises by fire, storm or other casualty whatever prior to the payment of the Debt in full, the Borrower will promptly cause the damage to be repaired and the Improvements and the Off-Site Improvements to be restored all in accordance with this Agreement, the Plans and Specifications and the Development Requirements. In such event, the Borrower will cause all insurance proceeds to be delivered to Lender, and Lender shall apply the insurance proceeds in the manner set forth in the Deed of Trust. Section 4.13 Approval of Contracts and Plans Segments. The Borrower will not execute any contract or directly become a party to any arrangement for the furnishing of labor, equipment, supplies or materials for the Premises for more than $50,000.00 except with Persons approved by the Lender; provided however, the Lender's approval shall not be unreasonably withheld or delayed. No work shall be commenced with respect to construction of any particular segment of the Improvements or the Off-Site Improvements until the Plans and Specifications for such segment shall have been submitted to and approved by the Contractor and the Lender, which approval will not be unreasonably withheld or delayed. All construction contracts shall provide by their terms that all liens to which the Contractor is entitled are subordinate in all respects to the lien of the Deed of Trust. Section 4.14 Safe Storage. The Borrower will cause all equipment, supplies and materials acquired or furnished in connection with the construction of the Improvements but not affixed to or incorporated into the Premises to be stored on the Land or at other locations approved by the Lender in writing, in each case under adequate safeguards to minimize the possibility of loss, theft, damage or commingling with other property. Upon the reasonable request of the Lender, the Borrower will furnish an inventory of all such equipment, supplies and materials stored off of the Land, specifying the location thereof. Section 4.15 Plans and Specifications Required. The Borrower will furnish the Plans and Specifications to the Lender before commencement of construction of the Improvements and the Off-Site Improvements. The Lender shall have the right at all times to use, examine and copy the Plans and Specifications. The Borrower assumes full responsibility for compliance of the Plans and Specifications with all Legal Requirements and with sound engineering practice and notwithstanding any approval by the Lender of the Plans and Specifications, the Lender shall have no liability or responsibility for such compliance or for any other defect or deficiency in the Plans and Specifications, the Improvements or the Off-Site Improvements. Section 4.16 Separate Bank Accounts. The Borrower agrees to maintain an account with the Lender into which all proceeds of the Loan shall be deposited and against which checks shall be drawn only to pay the items set forth in the Approved Budget. Section 4.17 Sales Contract Approval and Copies Required. No Sales Contract covering any part of the Land shall be executed by the Borrower with any purchaser, unless by its terms it is conditional upon approval by the Lender, which approval will not be unreasonably withheld or delayed (provided that in any event, the gross sales price of the Land being sold shall be acceptable to Lender in Lender's sole discretion, and shall be payable in cash at closing) or unless prior to its execution the Lender has approved it in writing. In either case, within five (5) Business Days following the execution of any Sales Contract, the Borrower shall deliver to the Lender a copy of the executed counterpart of such Sales Contract. Section 4.18 Seller's Obligations. The Borrower shall faithfully perform the seller's obligations under the Sales Contracts in all material respects and in any event will not allow a default by seller to occur thereunder, the Borrower shall not materially modify any of the Sales Contracts and shall not terminate any of the Sales Contracts, or any obligations of any Person thereunder, or take (or omit to take) any other action, the effect of which may diminish or impair the value of any of the Sales Contracts. Section 4.19 Approval of All Development Agreements and Copies deliver to the Lender for its review and approval the proposed form of such Development Agreement. No Development Agreement pertaining to the Premises shall be executed by the Borrower unless approved by the Lender in writing, which approval shall not be unreasonably withheld or delayed. Within five (5) Business Days of the execution of any Development Agreement, the Borrower shall deliver to the Lender an original executed counterpart of such Development Agreement. Section 4.20 Security Interest in Development Agreements. Concurrently with the execution of any Development Agreement, at the request of the Lender, the Borrower shall execute and deliver to the Lender an instrument or instruments, in form and substance reasonably satisfactory to the Lender, creating in favor of the Lender a first priority lien upon and security interest in, and/or assigning to the Lender, all of the Borrower's rights in any such instrument together with, such related financing statements and other instruments necessary to give notice of or perfect such lien, security interest or assignment as the Lender may then require. Section 4.21 Lender's Sign. The Borrower shall permit the Lender to place and maintain signs on the Premises at mutually agreeable locations containing such information regarding the financing of the Premises as the Lender may deem appropriate so long as the same comply with all Legal Requirements. Section 4.22 Lender May Fund. If the Borrower fails to satisfy any covenant or condition set forth in any of the Loan Documents within fifteen (15) days after written notice thereof from Lender, the Lender shall have the right without waiving the Default to timely advance Loan proceeds to satisfy same. Any Loan proceeds so advanced shall be evidenced by the Note or at the option of the Lender (notwithstanding any contrary provision of Article II of this Agreement) shall constitute indebtedness of the Borrower to the Lender payable on demand, bearing interest at the Past Due Rate from the date advanced by the Lender. All such demand indebtedness shall constitute a part of the Debt and shall be secured by the liens and security interests of the Loan Documents. Section 4.23 Call for Funds. If the Lender reasonably determines at any time in Lender's good faith judgment that the unadvanced Loan proceeds will be insufficient to pay for (a) Completion of the Improvements or the Off-Site Improvements in accordance with the Plans and Specifications and the Development Requirements and (b) all other items set forth in the Approved Budget, including but not limited to interest which the Lender reasonably estimates may accrue on the Debt prior to its maturity, the Borrower shall make arrangements satisfactory to the Lender to provide sufficient funds to complete the Improvements and the Off-Site Improvements in accordance with the Plans and Specifications and the Development Requirements and to pay for all other items set forth in the Approved Budget. The obligations of the Borrower under this Section 4.23 are in addition to the Borrower's obligation to provide the Additional Equity (as defined in Section 5.1(e) hereof) for the payment of the construction costs incurred for the Improvements as budgeted in the Approved Budget. Section 4.24 Call for Funds to Pay Overruns. If the amount budgeted for any particular category of costs set forth in the Approved Budget (taking into account the "contingency" line item in the Approved Budget) is or will be insufficient to pay the actual or projected cost of such category, at the Lender's reasonable election, the Borrower shall make arrangements satisfactory to the Lender (which may include reallocation of savings manifestly realized on other portions of the Improvements to other Approved Budget categories) to provide sufficient funds to pay the difference between such actual or projected costs and the amount budgeted for such category in the Approved Budget. The obligations of the Borrower under this Section 4.24 are in addition to the Borrower's obligation to provide the Additional Equity as budgeted in the Approved Budget. Section 4.25 Expenses of and Claims Against Lender. The Borrower will pay on demand all expenses incurred by Lender in connection with the transactions contemplated in the Loan Documents, including but not limited to charges and disbursements of legal counsel for the Lender, taxes, recording expenses, closing costs, fees and commissions due to brokers, the Consulting Architect/Engineer and others, and the costs and expenses of the Title Insurance Policy. THE BORROWER WILL INDEMNIFY THE LENDER FROM CLAIMS ARISING IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED IN THE LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, LOSSES, COSTS OR EXPENSES INCURRED BY LENDER ON ACCOUNT OF BORROWER'S FAILURE TO COMPLY WITH THE PROVISIONS OF THIS AGREEMENT AND ANY CLAIMS RESULTING FROM THE ALLEGED NEGLIGENCE OF LENDER, BUT NOT INCLUDING CLAIMS RESULTING FROM THE LENDER'S WILLFUL MISCONDUCT OR GROSS NEGLIGENCE. Section 4.26 Additional Instruments. The Borrower will execute such additional instruments as may be requested by the Lender in order to carry out the intent of the Loan Documents and to perfect or give further assurances of any of the rights granted or provided for in any of the Loan Documents. Section 4.27 Notices from Development-Related Entities. The Borrower will, upon the receipt or giving thereof, promptly furnish to the Lender a copy of all notices and reports received by the Borrower from or sent by the Borrower to each Development-Related Entity alleging a breach or default or the possibility of the occurrence of a breach or default under any Development Agreement. Section 4.28 Documents to Comply with Law. All forms of Sales Contracts for sale of all or any part of the Premises and any and all other printed documents necessary to fulfill the Borrower's obligations hereunder shall comply with all Legal Requirements. Section 4.29 Collection of Development Agreement Proceeds. The Borrower shall use its best efforts to collect the proceeds of each Development Agreement as, when, and if they become due and payable and shall take such steps as may be necessary or appropriate to enforce the prompt payment and collection thereof. Section 4.30 Maintenance Standards. The Borrower will keep and maintain the Premises in good, orderly, clean, safe and sanitary repair and condition and otherwise in accordance with the standards of property management customary to developers of comparable subdivisions for residential housing in the Houston, Texas area. Section 4.31 Repairs. The Borrower shall cause to be performed and completed all repairs and restoration of the Premises on a timely basis after any and all loss and damage thereto. Section 4.32 Legal Compliance. The Borrower shall operate the Premises in full compliance with all Legal Requirements. Section 4.33 Employees. The Borrower shall require the Borrower's development manager for itself to, employ, supervise, direct, discharge and compensate (including payment of any and all payroll taxes) such employees as are necessary for the proper development, maintenance and operation of the Premises and comply with all Development Requirements regarding the employment and payment of Persons employed to develop, manage or operate all or any part of the Improvements or the Off-Site Improvements. Section 4.34 Operational Standards. The Borrower shall do and perform any and all other acts and things relating to the development, management, upkeep and operation of the Premises as are customarily performed by developers of comparable subdivisions in the Houston, Texas area. Section 4.35 Indebtedness to be Paid. The Borrower and each Obligor will pay punctually and discharge when due, or renew or extend, any Indebtedness incurred by it when due, and will discharge, perform and observe the covenants, provisions and conditions to be performed, discharged and observed on the part of the Borrower or any Obligor in connection therewith, or in connection with any agreement or other instrument relating thereto or in connection with any mortgage, pledge or lien existing at any time upon any of the property or assets of the Borrower; provided, however, that nothing contained in this Section shall require the Borrower or any Obligor to pay, discharge, renew or extend any such Indebtedness or to discharge, perform or observe any such covenants, provisions and conditions so long as the Borrower in good faith shall be actively contesting any claims which may be asserted against it or them with respect to any such Indebtedness or any such covenants, provisions and conditions and shall set aside on its books reserves with respect thereto deemed adequate by the Lender. Section 4.36 Notice of Material Adverse Change. Promptly upon the obtaining by the Borrower of knowledge or advice of any material adverse change in the business or financial condition of the Borrower, any Development-Related Entity or any Obligor, the Borrower shall notify the Lender thereof. Section 4.37 Notice of Other Liens. The Borrower shall notify the Lender in writing within five (5) days of the time that the Borrower becomes aware of the filing of any mortgage or lien or other security device whatsoever against the Premises. Section 4.38 Bonding Off Other Liens. The Borrower shall bond off under the provisions of all Legal Requirements and to the satisfaction of the Lender any lien or claim of lien filed for record within fifteen (15) Business Days of the date of the Borrower's receipt of the notice of filing of said lien or claim. Section 4.39 Suitability of Soil. The conformation of the ground and general and local conditions are suited to the nature of the work to be performed in connection with the Premises. Section 4.40 Promotional Standards. The Borrower shall advertise and promote the project in the manner (expending such amounts) of developers of other comparable residential developments in the Harris County, Texas area. Section 4.41 Reimbursement. Immediately upon receipt by the Borrower of any money, property or other thing of value from any Development-Related Entity pursuant to any Development Agreement, the Borrower will pay or transfer to the Lender such portion of such money, property or thing as is received by it on account of Loan proceeds financed under this Agreement, for application by the Lender against the Debt. Section 4.42 Construction Contract. The Borrower shall fully observe and perform the requirements of each Construction Contract, shall maintain them in full force and effect and shall not cause, suffer or permit any modification or termination thereof without the prior written consent of the Lender. Section 4.43 Zoning; Platting. The portion of the Land consisting of the Developed Lots is properly zoned for residential development (to the extent any zoning is applicable). A plat or plats of the subdivision or subdivisions of that portion of the Land consisting of the Developed Lots has been filed of record showing the location of all lots, blocks, streets, alleys, parks or other portions of the subdivision or subdivisions dedicated to public use, or for the use of purchasers or owners of tracts or lots in the subdivision. The Borrower shall submit any preliminary or final plat or plats to the Lender for approval which shall not be unreasonably withheld or delayed. Upon approval by the Lender of any preliminary plat, final plat or revision thereof, the Borrower shall prepare final subdivision plat or plats in the form required by all Development Requirements. The Borrower shall use its best efforts to obtain the approval by all appropriate Government Authorities of the final subdivision plat or plats promptly after the Lender's approval thereof. Section 4.44 Adjacent Properties. The Borrower shall take proper means to protect the adjacent or adjoining property or properties in any way encountered, which might be injured or adversely affected by any process of construction to be undertaken under this Agreement, from any damage or injury by reason of the construction; and it shall protect the Lender from any and all claims for such damage on account of its failure to fully protect all adjoining property. Section 4.45 Sewer Capacity. If the Lender reasonably determines at any time that inadequate sewer capacity has been allocated to the Land, the Borrower shall make arrangements reasonably satisfactory to Lender to obtain such sewage capacity for the Land as is necessary in the opinion of Lender for the development of the Land in accordance with its intended use as a single-family residential subdivision. Section 4.46 Financial Statements of the Borrower. The Borrower shall furnish to the Lender the following, within the times indicated: (a) As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Borrower, a copy of the annual unaudited consolidated financial statements of the Borrower, which shall include a consolidated balance sheet of the Borrower as of the close of such financial year, a consolidated statement of income and a consolidated statement of changes in the financial position of the Borrower for such fiscal year, all setting forth in comparative form the corresponding figures as at the end of the previous fiscal year, all prepared in conformity with Good Accounting Practice and certified by a Partner of the Borrower. (b) As soon as available and in any event within fifty-five (55) days after the end of each calendar quarter, a copy of the unaudited consolidated financial statements of the Borrower, consisting of at least a consolidated balance sheet as at the close of such quarter, a consolidated statement of income and consolidated statement of changes in the financial position of the Borrower for such quarter and for the period ending with such quarter, all setting forth in comparative form the corresponding figures for the corresponding period of the previous fiscal year, all prepared in conformity with Good Accounting Practice and certified by a joint venturer of the Borrower. (c) As soon as available and in any event within thirty (30) calendar days after the end of each calendar quarter, a report detailing sales of the Premises to purchasers under the Sales Contracts for such quarter, comparing the requirements of each Sales Contract to each purchaser's actual performance during such period, and certified by a Partner of the Borrower. Section 4.47 Letter of Credit; Escrow Deposit. In connection with the closing of the Loan, Borrower shall cause Guarantor to have either (i) delivered the Letter of Credit to Lender or (ii) executed and delivered to Lender the Guaranty and Pledge Agreement, and to secure its obligations under the Guaranty by depositing the Escrow Deposit into a restricted account with Lender. In the event Guarantor elects not to deliver the Letter of Credit to Lender, then Guarantor shall execute and deliver to Lender the Guaranty and Pledge Agreement, and shall deliver to Lender the Escrow Deposit. The Letter of Credit or the Escrow Deposit shall be in effect at all times during the term of the Loan; provided, however, that Guarantor may qualify for reductions in the amount of the Letter of Credit or the Escrow Deposit at the end of each calendar quarter as provided in Section 9.3 of this Agreement. Guarantor may from time to time, replace the Escrow Deposit with a Letter of Credit, or replace a Letter of Credit with the Escrow Deposit, as the case may be, provided that Lender shall at all times during the term of the Loan have in its possession either a valid Letter of Credit or the Escrow Deposit, and in the event the Guarantor delivers the Escrow Deposit to Lender, the Guarantor shall have executed and delivered to Lender the Guaranty and Pledge Agreement as set forth above. In addition to the foregoing, Guarantor may deliver to Lender a combination of both a Letter of Credit and an Escrow Deposit (with the Guaranty and Pledge Agreement) so long as the total of the face amount of the Letter of Credit and the Escrow Deposit equals or exceeds the Required Deposit (as defined in Section 9.3 hereof). ARTICLE V REQUIREMENTS FOR ADVANCES Section 5.1 Conditions. The Lender shall not be obligated to make any advance of Loan proceeds or other sums under this Agreement or the other Loan Documents unless all of the following conditions shall be satisfied at the time of such advance: (a) no Default or Event of Default shall have occurred under this Agreement which has not been waived by the Lender or cured to the satisfaction of the Lender. (b) the Premises shall not have been injured or damaged by fire or other casualty; or if so damaged, provisions currently and reasonably satisfactory to the Lender shall have been made to effect necessary repair and restoration in accordance with the Loan Documents. (c) the Deed of Trust shall have been recorded in the Real Property Records of Harris County, Texas with all filing fees and taxes therefor paid, all prior to the commencement of any construction on any part of the Premises or the placing of any equipment, supplies or material on the Premises. (d) the Lender shall have received proof of due filing of the Financing Statements and shall have received such other items and instruments as are necessary and appropriate in the opinion of the Lender to perfect a first priority security interest in all property covered by the Deed of Trust and all of the other Loan Documents. (e) with respect to any advance requested by Borrower to pay for construction costs of the Improvements or Off-Site Improvements, there shall have been delivered to the Lender evidence satisfactory to the Lender that (i) after the date of this Agreement, the Borrower has expended not less than an additional $500,000 of its own funds to pay for the construction of such Improvements or Off-Site Improvements (the "Additional Equity"), and (ii) the unadvanced Loan proceeds will be sufficient to pay for completion of all of the Improvements and the Off-Site Improvements in accordance with all Development Requirements; or if such proceeds are not adequate, arrangements currently satisfactory to the Lender shall have been made to provide sufficient funds to complete the Improvements and the Off-Site Improvements in accordance with all Development Requirements. (f) if requested by the Lender, the Borrower shall have furnished to the Lender one or more Officer's Certificates, dated the date of such advance and/or such other evidence as the Lender shall reasonably require, that no Default or Event of Default has occurred which has not been waived by the Lender or cured to the satisfaction of the Lender. (g) if requested by the Lender, the Sales Contract Schedule and a current Development Plan. (h) the Lender shall have approved each Development Agreement currently in existence and shall have received a security interest in each Development Agreement currently in existence. (i) the Lender shall have received the Required Deposit in accordance with the terms and provisions of this Agreement, and Guarantor shall have executed and delivered to Lender the Guaranty and the Pledge Agreement. Section 5.2 Initial Advance. The Lender shall not be obligated to make the initial advance (the "Initial Advance") in an amount not to exceed $6,000,000.00 or any subsequent advance under this Agreement or the other Loan Documents unless: (a) the Lender shall have received all of the original Loan Documents, including but not limited to the following: a counterpart of this Agreement executed by the Borrower; a Request for Advance; the Note; the Deed of Trust; the Financing Statements; the Letter of Credit or, in the alternative, the Escrow Deposit, Guaranty and the Pledge Agreement; a current Development Plan; and (b) the Lender shall have received the following additional instruments and evidence: the Approved Budget; the Appraisal; the Organizational Agreement of the Borrower and each of its Partners, and the Organizational Agreements for each general partner of the Partners and their general partners; the Commitment for the Title Insurance Policy in form and substance acceptable to Lender; the Title Instruments; the Plans and Specifications; the Governmental Permits, if any; all Engineering Reports, then available; the Builder's Consents executed by the applicable purchaser with respect to each of the Sales Contract; and the Opinion of Borrower's Counsel. Section 5.3 Subsequent Advances. The Lender shall not be obligated to make any advance under this Agreement or the other Loan Documents after the Initial Advance unless: (a) the Lender shall have received the following additional original Loan Documents: a Request for Advance; with respect to any Request for Advance to pay for the construction costs of any Improvements or Off-Site Improvements, a Contractor/Lender Agreement from each Contractor then engaged to furnish labor or materials for the Premises and who has not theretofore executed such an agreement with the Lender; (b) the Lender shall have received the following additional instruments, to the extent not previously provided to Lender: the Title Insurance Policy; the Plans and Specifications then existing; Builder Consent agreements in form and substance reasonably satisfactory to the Lender with each Development-Related Entity that is at that time a party to a Sales Contract; a current Title Status Certificate; all Construction Contracts then existing; all Governmental Permits; all Insurance Policies then required by the Deed of Trust; all Sales Contracts then in existence; a current Sales Contract Schedule; all other Development Agreements then in existence; and all remaining Engineering Reports available. Section 5.4 Off-Site Improvements. The Lender shall not be obligated to make any advance under this Agreement in payment of the costs of the Off-Site Improvements, unless, in addition to satisfaction of all matters set forth in Sections 5.1, 5.2 and 5.3 above the following conditions shall have been satisfied in a manner acceptable to the Lender: (a) the Plans and Specifications for such Off-Site Improvements; (b) a Construction Contract providing for the construction of such Off-Site Improvements; (c) the Off-Site Agreement pertaining to the construction of the Off-Site Improvements; and (d) an assignment duly executed by the Borrower assigning to the Lender all of the Borrower's right, title and interest in and to the Off-Site Improvements together with the consent of all Persons reasonably required by the Lender to such assignment. Section 5.5 Equipment, etc. Stored Off-Site. The Lender shall not be obligated to make any advance under this Agreement to be applied in payment of costs of equipment, supplies and materials stored off the Land unless, in addition to the satisfaction of all matters set forth in Sections 5.2 and 5.3 above, the following conditions shall have been satisfied in a manner acceptable to the Lender: (a) the aggregate amount of all advances in respect of such costs shall not exceed at any time $25,000.00 at any time (which amount shall include the aggregate total of all previous advances hereunder for payment of such costs to the extent that such equipment, supplies and materials continue to be stored off the Land); (b) title to such equipment, supplies and materials shall be vested in the Borrower, as evidenced by documentation satisfactory to the Lender, provided that the possession thereof may be in a Contractor or his or its subcontractors under an agreement of bailment satisfactory to the Lender so long as such Contractor or subcontractors shall cause to be recorded an informational financing statement in form satisfactory to the Lender, evidencing the security interests of the Lender; (c) if requested by the Lender, the Borrower shall execute and deliver to the Lender a separate security agreement and financing statement covering such equipment, supplies and materials, in form and substance reasonably satisfactory to the Lender; (d) the Borrower shall keep the Lender apprised in writing of each location where any such equipment, supplies and materials are stored off the Land and the value thereof at each location; and (e) representatives of the Lender shall have the right to make inspections of the storage area at any time. ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 Events of Default. The occurrence (including the passage of time if any is specified therefor) of any one or more of the following shall constitute an Event of Default hereunder: (a) failure of the Borrower to pay when due any accrued interest on or principal of the Note or any other part of the Debt; (b) failure of the Borrower to perform, observe or comply with any of the terms, covenants, conditions or provisions contained in this Agreement, the Note, the Deed of Trust or any of the other Loan Documents. (c) failure of the Guarantor to perform, observe or comply with any of the terms, covenants, conditions or provisions of the Guaranty or the Pledge Agreement. (d) failure of the Borrower or any Contractor to perform, observe or comply with any of the terms, covenants, conditions or provisions of any Construction Contracts in all material respects (but in any event Borrower shall not allow a default by Borrower to occur thereunder). (e) any representation or warranty made by the Borrower or other Obligor in this Agreement, any Application and Certificate for Payment or any Request for Advance or in any of the other Loan Documents or otherwise proves to have been untrue or misleading in any material respect as of the date made. (f) any representation or warranty made by the Guarantor in the Guaranty or the Pledge Agreement proves to have been untrue or misleading in any material respect as of the date made. (g) any substantial damage to or destruction of the Premises shall occur and insurance proceeds, together with sums provided by the Borrower shall not, in the opinion of the Lender, be sufficient to repair and restore the Premises. (h) the Deed of Trust shall not, in the reasonable opinion of counsel for Lender, constitute a perfected first and prior lien on and security interest in the Premises securing payment of the Debt. (i) a survey shall show that any Improvement (other than an Off-Site Improvements) to the Land is not entirely within the boundary lines of the Land or encroaches upon any set-back line, easement, right-of-way, street or any adjoining property, or that any Legal Requirement has been breached or that any adjoining structure encroaches upon the Land. (j) the Improvements shall not have been completed (for any reason whatever) in accordance with the Plans and Specifications and the Development Requirements by the Scheduled Completion Date. (k) the Off-Site Improvements shall not have been completed (for any reason whatever) in accordance with the Plans and Specifications and the Development Requirements by the Scheduled Completion Date. (l) the Consulting Architect/Engineer shall at any time certify to the Lender in writing that the Improvements or the Off-Site Improvements are not at the date of such certificate being constructed in substantial accordance with the Plans and Specifications and the Development Requirements by the Scheduled Completion Date. (m) any Governmental Authority shall commence proceedings to condemn all or any material part of the Premises. (n) any present or future Legal Requirement shall prohibit or impair the Borrower's intended use of any of the Premises as represented to the Lender as a material inducement to make the Loan. (o) any Person shall commence any action, suit or proceeding against or affecting the Borrower, any Obligor or the Premises or involving the validity or enforceability of the Loan Documents or the priority of the liens created thereby, at law or in equity, or before any Governmental Authority, which in the judgment of the Lender, impairs or would impair its interest in the Premises, the enforceability of the Loan Documents, or its ability to collect the Debt when due. (p) the Borrower or any Guarantor shall be prevented or relieved by any Governmental Authority from performing or observing any material term, covenant or condition of any of the Loan Documents, any Utility Agreement or any Sales Contract. (q) the Borrower or any Obligor shall: (1) voluntarily suspend transaction of business. (2) become insolvent or unable to pay its or his debts as they mature. (3) file a voluntary petition in bankruptcy or a voluntary petition seeking reorganization or to effect a plan or other arrangement with creditors. (4) make an assignment for the benefit of creditors. (5) apply for or consent to the appointment of any receiver or trustee for any such Person or of all or any substantial portion of the property of any such Person. (6) make an assignment to an agent authorized to liquidate any substantial part of its or his assets. (r) In respect of the Borrower or any Obligor: (1) an involuntary petition shall be filed with any court or other authority seeking reorganization or a creditors' arrangement of any such Person or the adjudication of any such Person as bankrupt or insolvent, (2) an order of any court or other authority shall be entered appointing any receiver or trustee for any such Person or for all or any substantial portion of the property of any such Person, or (3) a writ or warrant of attachment or any similar petition shall be issued by any court or other authority against all or any substantial portion of the property of any such Person and such petition seeking reorganization, a creditor's arrangement or adjudication or such order appointing a receiver or trustee is not vacated or stayed, or such writ, warrant of attachment or similar process is not vacated, released or bonded within sixty (60) days after its entry or levy. (s) the Premises are at any time not operated or maintained in good, orderly, clean, safe and sanitary repair and condition and otherwise in accordance with the standards required by this Agreement and in accordance with the highest standards of residential management in the Harris County, Texas area. (t) default shall occur under the terms of any of the Loan Documents which is not cured within any applicable grace or cure period. (u) failure of the Borrower or any Guarantor to pay principal or interest on any valid Indebtedness or obligation in excess of $25,000.00 incurred in connection with or arising out of the development of the Premises, when due (or within any applicable period of grace or cure) other than Indebtedness to the Lender or if the holder of such other obligation declares, such obligation due prior to its stated maturity because of such party's default thereunder. (v) any Utility Agreement shall be held to be void, voidable or an ultra vires act of any Person executing the same, or any Person shall assert that any Utility Agreement is not binding upon it for any reason and no alternative arrangements satisfactory to the Lender can be made. (w) the Borrower shall withdraw, terminate or modify any approved Development Agreement without the written consent of the Lender; however, Borrower may enter into non-material amendments to the Sales Contracts from time to time without the consent of Lender, provided that in any event, such amendments shall not reduce the number of lots to be sold, reduce the sales price or materially increase the time for performance by the purchaser thereunder without the prior written consent of Lender. (x) a default by the Borrower or any Development-Related Entity (other than Holigan Homes Texas, Ltd.) under any Development Agreement which is not cured within any applicable grace or cure period. (y) failure of the Borrower, within ten (10) days after receipt thereof, to apply any proceeds received by the Borrower from any Development Agreement (other than proceeds representing payments or reimbursements of amounts under Utility Agreements) towards repayment of the Debt in accordance with the terms of this Agreement. (z) a default by Guarantor under the Guaranty or the Pledge Agreement, if the Guarantor has delivered the Escrow Deposit to Lender in lieu of the Letter of Credit. (aa) if Borrower has delivered a Letter of Credit to Lender, the Letter of Credit expires and Borrower fails to deliver to Lender on or before the date of expiration a replacement Letter of Credit or Escrow Deposit to replace such Letter of Credit, in accordance with the terms and conditions set forth in this Agreement. (bb) in addition, except as specifically provided for in the Loan Documents or unless the Lender shall otherwise give its prior written consent, if the Borrower does any of the following, then (without limiting any other provisions of this Agreement) it will constitute an Event of Default under this Agreement: (1) except as provided in any approved Utility Agreement or in any approved Off-Site Agreement, convey, transfer, lease or encumber any of the Premises or any right to manage any of the Premises or to receive any rents, profits, sales proceeds or any insurance thereof; (2) demolish any part of the Premises (except only to the extent, if any, necessary to correct defective work); (3) liquidate, terminate, consolidate, merge or dissolve; (4) except to the extent permitted by the Deed of Trust, convey, transfer, assign or pledge or permit a conveyance, transfer, assignment or pledge of, a majority or otherwise controlling interest in the Borrower or a Partner of the Borrower in a single transaction or a series of transactions; (5) cause or permit any Hazardous Substances (as defined in the Environmental Indemnity Agreement between Borrower and Lender) to be placed, held, used, located or disposed of on, under or at any of the Premises or any part thereof by any Person, in violation of any applicable Legal Requirements or cause or permit any part of any of the Premises to be used as a manufacturing, storage or dump site for Hazardous Substances, or cause or suffer any liens to be recorded against any of the Premises as a consequence of, or in any way related to, the presence, remediation or disposal of Hazardous Substances in or about any of the Premises, including any so-called state, federal or local "Superfund" lien relating to such matters; (6) incur any Indebtedness in excess of $50,000.00 that is not contemplated to be paid with Loan proceeds in accordance with the Approved Budget; (7) create or suffer to be created any lien, encumbrance, easement, use or charge affecting any of the Premises except for liens, encumbrances or easements approved in writing by the Lender; (8) modify or amend its Organizational Agreement; (9) modify or amend the Development Plan in any material respect; or (10) the Borrower shall conceal, remove, or permit to be concealed or removed, any part of Borrower's property, with intent to hinder, delay or defraud any of Borrower's creditors, or make or suffer a transfer of any of Borrower's property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall make any transfer of Borrower's property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall suffer or permit, while insolvent, any creditor to obtain a lien upon any of Borrower's property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof. Notwithstanding anything to the contrary contained in this Section 6.1, with regard to non-monetary Defaults only (i.e., Defaults which cannot be cured by payment of a liquidated sum of money to the Lender) where no other cure period has been specified herein, if the Borrower shall fail to cure any such non-monetary Default to the Lender's satisfaction within thirty (30) days after written notice of such non-monetary Default from the Lender or its agent to the Borrower, then such non-monetary Default shall constitute an Event of Default under this Agreement. Section 6.2 Substitute Contractor. Notwithstanding anything to the contrary as set forth in Section 6.1 of this Agreement, the Lender shall not accelerate the Debt or foreclose its liens solely by reason of the occurrence of any event described therein with respect to a Contractor so long as the Borrower substitutes an alternative Contractor reasonably satisfactory to the Lender within forty-five (45) days after the occurrence of the Default. Section 6.3 Remedies for Default. At any time after the occurrence of any Event of Default which has not been waived by the Lender in writing or cured to the Lender's satisfaction, the Lender shall have the right, at its option: (a) to declare the unpaid balance of the Debt (including all principal on the Note and all interest then accrued thereon) immediately due and payable and thereupon the Debt (and all amounts outstanding under the Note) shall be immediately due and payable without notice (including but not limited to notice of acceleration and notice of intent to accelerate), protest or demand or presentment for payment, all of which are hereby expressly waived by the Borrower; (b) to enter the Premises and take over the construction of the Improvements and the Off-site Improvements, and manage the Premises; (c) to exercise any rights which the Borrower may have under each and every Construction Contract, Development Agreement and any other contract or agreement under which the Borrower has rights which are, or are intended to be, the subject of a security interest in favor of the Lender to secure the Debt; (d) to enforce or avail itself of any and all remedies provided in any of the Loan Documents, including but not limited to foreclosure of all the liens and security interests securing the Debt; and (e) present the Letter of Credit for payment and apply the proceeds thereof to the Debt outstanding under the Loan Documents or, in the alternative, offset the funds in the Escrow Account to the Debt then outstanding under the Loan Documents. Section 6.4 Commitments Lapse. In addition to the rights and remedies of the Lender set forth in this Agreement, upon the occurrence of any Default, the commitment of the Lender (if then outstanding) to make advances against the Note or otherwise, shall cease until the Lender shall declare that all such Defaults have been cured to the satisfaction of the Lender, or until the Lender shall have waived same; but the Lender may, at its option, continue or at any time commence making one or more advances and in any case all advances by the Lender shall be deemed to have been made pursuant to commitment (as such term is used and defined in the Uniform Commercial Code as enacted and in force in the State of Texas) and pursuant to this Agreement. Section 6.5 Lender's Options Regarding Contractors. If the Lender shall exercise the option to take over the construction of the Improvements, the Lender shall be authorized, at its option, to discontinue the services of any Contractor and to employ one or more contractors of its choice to perform the necessary work, and the Lender shall have no liability or responsibility to the Borrower or any other Person with respect thereto so long as the Lender exercises good faith in the selection of such contractor or contractors. Section 6.6 Lender's Options Regarding Developers and Managers. If the Lender shall exercise its option to take over management of the Premises, the Lender shall be authorized, at its option, to discontinue the services of any developer, manager or other Person employed with respect to the Improvements and to employ one or more independent managers, developers or both to manage and/or develop the Premises and the Lender shall have no liability or responsibility to the Borrower or any other Person with respect to its or their management of the Premises so long as the Lender exercises good faith in the selection of such independent developer or developers, manager or managers. Section 6.7 Costs Paid are Sums Lent. All costs and expenses incurred by the Lender in taking over construction of the Improvements, managing the Premises and/or developing the Premises shall, as paid, be deemed to be an advance of Loan proceeds against the Note or at the option of the Lender (notwithstanding any contrary provision of Section 2.1 or 2.2 of this Agreement), shall constitute indebtedness of the Borrower to the Lender payable on demand, bearing interest at the Past Due Rate from the date paid by the Lender. All such demand indebtedness shall constitute a part of the Debt and shall be secured by all liens and security interests of the Loan Documents. Section 6.8 Rights and Remedies Cumulative. All powers, rights and remedies of the Lender set forth in this Article VI shall be cumulative and not exclusive of any other power, right or remedy available to the Lender under this Agreement, the other Loan Documents or law to enforce the performance or observance of the covenants and agreements contained in this Agreement and the other Loan Documents, and no delay or omission of the Lender to exercise any power, right or remedy accruing to the Lender shall impair any such power, right or remedy, or shall be construed to be a waiver of the right to exercise any such power, right or remedy. Every power, right and remedy of the Lender set forth in this Agreement, the other Loan Documents or afforded by law may be exercised from time to time, and as often as may be deemed expedient, by the Lender. Section 6.9 Termination of this Loan Agreement. This Agreement shall not terminate until payment of the Debt in full and full performance of the Borrower's obligations hereunder. ARTICLE VII MISCELLANEOUS Section 7.1 Documentation Requirements; Sufficiency of Consents and Approvals. Each written instrument and Loan Document required by this Agreement or any of the other Loan Documents to be furnished to the Lender shall be duly executed by the Person or Persons specified (or where no particular Person is specified, by such Person as the Lender shall require), duly acknowledged where required by the Lender and, in the case of affidavits and similar sworn instruments, duly sworn to and subscribed before a notary public duly authorized to act in the premises by Governmental Authority; shall be furnished to the Lender in one or more copies as required by the Lender; and shall in all respects be in form and substance satisfactory to the Lender and to its legal counsel. All title policies, surveys, appraisals, maps, development plans and other evidence, information or documentation required by the Lender shall be in form and substance satisfactory to the Lender and its legal counsel in all respects. Section 7.2 Usury Savings Clause. Notwithstanding any provision to the contrary contained in this Agreement or in any of the other Loan Documents, it is expressly provided that in no case or event shall the aggregate of (i) all interest on the unpaid balance of the Note, accrued or paid from the date hereof and (ii) the aggregate of any other amounts accrued or paid pursuant to the Note, the Deed of Trust or any of the other Loan Documents, which under applicable laws are or may be deemed to constitute interest upon the Debt from the date hereof, ever exceed the maximum rate of interest which could lawfully be contracted for, charged or received on the unpaid principal balance of the Debt. In this connection, it is expressly stipulated and agreed that it is the intent of the Borrower and the Lender to contract in strict compliance with the applicable usury laws of the State of Texas and of the United States (whichever permit the higher rate of interest) from time to time in effect. In furtherance thereof, none of the terms of this Agreement, the Note, the Deed of Trust or any of the other Loan Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Highest Lawful Rate. The Borrower or other Persons now or hereafter becoming liable for payment of the Debt shall never be liable for interest in excess of the Highest Lawful Rate. If under any circumstances the aggregate amounts paid on the Debt include amounts which by law are deemed interest which would exceed the Highest Lawful Rate, the Borrower stipulates that such amounts will be deemed to have been paid as a result of an error on the part of both the Borrower and the Lender and the Person receiving such excess payment shall promptly, upon discovery of such error or upon notice thereof from the Person making such payment, refund the amount of such excess or at the Lender's option, credit such excess against the unpaid principal balance of the Debt. In addition, all sums paid or agreed to be paid to the holder or holders of the Debt for the use, forbearance, or detention of the Debt shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Debt. The provisions of this Section shall control all agreements, whether now or hereafter existing and whether written or oral, between the Borrower and the Lender. Section 7.3 Rights and Remedies Cumulative; Loan Agreement Controls. The benefits, rights and remedies of the Lender and the security contained herein or provided for in any of the other Loan Documents are cumulative; provided, however, that to the extent of any conflict between any provision of this Agreement and any provision contained in any of the other Loan Documents, the provisions of this Agreement shall control. Section 7.4 Unlawful Provisions. If any one or more of the provisions of this Agreement or any of the other Loan Documents is declared or adjudged by any Governmental Authority to be unenforceable or unlawful, then each such unenforceable or unlawful provision shall be deemed excised herefrom or therefrom and the remainder of the Loan Document so affected, together with all rights and remedies granted thereby, shall continue and remain in full force and effect. Section 7.5 Survival, Republication and Binding Effect of Covenants, Representations and Warranties. All covenants, agreements, representations and warranties made by the Borrower or any Guarantor in this Agreement, the Note, the Deed of Trust and the other Loan Documents, and in any certificates or other documents or instruments delivered pursuant to this Agreement or any of the other Loan Documents shall survive the execution and delivery of this Agreement and the other Loan Documents and any advances of Loan proceeds made by the Lender pursuant to this Agreement or any of the other Loan Documents, and shall continue in full force and effect until the Debt is paid in full. Further, each Request for Advance shall constitute an affirmation that the representations and warranties contained in this Agreement are true and correct as of the date such Request for Advance is submitted to the Lender. All such covenants, agreements, representations and warranties shall be binding upon any successors and assigns of the Borrower. Section 7.6 Notices. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by hand delivery or by depositing the same in the United States Mail, postage prepaid, certified or registered mail, addressed to the respective parties as follows: If to the Borrower: Oly Walden General Partnership c/o Stratus Management, L.L.C. 98 San Jacinto Boulevard, Suite 220 Austin, Texas 78701 Attention: William H. Armstrong, III With required copy to: Ken Jones, Esq. Armbrust, Brown & Davis 100 Congress Avenue Suite 1350 Austin, Texas 78701 Oly/Houston Walden, L.P. 100 Crescent Court Suite 1625 Dallas, Texas 75201 Attention: Timothy Smith If to the Lender: Bank One, Texas, National Association 1700 Pacific Avenue, Suite 2100 Dallas, Texas 75201 Attention: Dale Renner or such other address as such party shall direct in writing sent in accordance herewith and actually received by the other party hereto at least thirty (30) days in advance of the date upon which such change of address is to become effective. All notices and other communications shall be deemed to have been effectively given when either delivered to such address or on the date deposited in the United States Mail. Section 7.7 Changes Requirement. This Agreement shall not be changed orally but shall be changed only by agreement in writing signed by all parties hereto. Section 7.8 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts shall together constitute one and the same instrument. Section 7.9 Venue. Dallas County, Texas shall be a proper place of venue to enforce payment or performance of this Agreement, the Note, the Deed of Trust and the other Loan Documents, unless the Lender shall give its prior written consent to a different venue. Moreover, the Borrower hereby irrevocably agrees that any legal proceeding against the Lender arising out of or in connection with this Agreement or the other Loan Documents shall be brought in the district courts of Dallas County, Texas, or the United States District Court for the Northern District of Texas, Dallas Division. Section 7.10 No Third Party Beneficiaries. It is expressly understood and agreed that this Agreement and the other Loan Documents are made and entered into for the sole protection and benefit of the Lender and the Borrower and their respective successors and assigns (but in the case of assigns of the Borrower, only with the prior express written consent of the Lender) and, without the prior express written consent of the parties hereto, no Person shall have any right to action hereon or rights to the Loan proceeds at any time; the Loan proceeds do not constitute trust funds for the benefit of any third party; and that no such third party shall under any circumstances have or be entitled to a lien, equitable or otherwise, or the impression of any trust on any undisbursed Loan proceeds. Section 7.11 Number, Order and Captions Immaterial. The numbering, order and captions or headings of the several articles, sections and paragraphs of this Agreement, the Note, the Deed of Trust and the other Loan Documents are for convenience of reference only and shall not be considered in construing such instruments. Section 7.12 Successors and Assigns. This Agreement and the rights, obligations and benefits hereunder shall be binding upon and inure to the parties hereto, their respective heirs, personal representatives, successors and assigns; provided, however, notwithstanding anything contained herein to the contrary, (i) the Borrower shall not be entitled to assign its rights hereunder without the prior express written consent of the Lender and (ii) Borrower shall not be required to pay any costs or expenses of Lender in connection with any assignment by Lender of any of its interest in the Loan or this Agreement. Section 7.13 Choice of Law. This Agreement, the Note, the Deed of Trust and the other Loan Documents have been negotiated, executed and delivered in the State of Texas and shall be governed by the laws of the State of Texas, including all applicable federal law, from time to time in force in Texas. Section 7.14 No Partnership or Agency Intended. Nothing in this Agreement or the other Loan Documents is intended or shall in any way be construed so as to create any form of partnership or agency relationship between the Borrower and the Lender, the parties hereto having expressly disclaimed any intention of any kind to create any partnership or agency relationship between them. Section 7.15 No Waiver. No failure to exercise and no delay on the part of the Lender in exercising any power or right in connection herewith or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No course of dealing between the Lender and the Borrower, any Development-Related Entity or any other Person shall operate as a waiver of any right of the Lender. No modification or waiver of any provision of this Agreement or any other Loan Documents nor any consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by the person against whom enforcement thereof is to be sought, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 7.16 Entire Agreement. This Agreement embodies the entire agreement and understanding between the Borrower and the Lender relating to the subject matter hereof and supersedes all prior proposals, negotiations, agreements and understandings relating to such subject matter. The Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in this Agreement and the other Loan Documents of even date herewith. All written or oral representations made by the Borrower to the Lender respecting the subject matter hereof shall survive the execution of this Agreement. Section 7.17 Set-Off. The Borrower hereby gives and confirms to the Lender, after the occurrence of any Event of Default, a right of set-off of all moneys, securities and other property of the Borrower (whether special, general or limited) and the proceeds thereof, now or hereafter delivered to remain with or in transit in any manner to the Lender, its correspondents or its agents from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession of the Lender in any way, and also, any balance of any deposit accounts and credits of the Borrower with, and any and all claims of security for the payment of the Note and of all other liabilities and obligations now or hereafter owed by the Borrower to the Lender, contracted with or acquired by the Lender, whether joint, several, absolute, contingent, secured, unsecured, matured or unmatured, hereby authorizing the Lender at any time or times, after the occurrence of an Event of Default, to apply such balances, credits of claims or any part thereof, to such liabilities in such amounts as it may select, whether contingent, unmatured or otherwise, and whether any collateral security therefor is deemed adequate or not. The rights described herein shall be in addition to any collateral security described in any separate agreement executed by the Borrower. This provision shall not imply any obligation of the Borrower to maintain any deposit balances with the Lender. Section 7.18 Sale or Assignment. The Lender reserves the right, in its sole discretion, without notice to the Borrower, to sell participations or assign its interest, or both, in all or any part of any Loan, the Notes or any commitment evidenced by this Agreement or the other Loan Documents; provided that Borrower shall not be required to pay any costs or expenses of Lender in connection with any such assignment or participation. Section 7.19 Commitment. The Lender has no commitment to lend sums to the Borrower other than as specifically set forth herein. Section 7.20 JURY WAIVER. THE BORROWER AND LENDER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ALL RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE PARTIES HERETO ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS OR ANY RELATIONSHIP BETWEEN BORROWER AND LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE LOAN DESCRIBED HEREIN OR IN THE OTHER LOAN DOCUMENTS. Section 7.21 Arbitration. Lender and Borrower agree that upon the written demand of either party. whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims, and controversies between them, whether individual, joint, or class in nature, arising from this Agreement, any other Loan Document, or otherwise, including, without limitation, contract disputes and tort claims, shall be resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration Association (the "AAA"). Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral, whether real or personal, covered by the Deed of Trust or any other Loan Document ("Collateral") shall constitute a waiver of this arbitration provision or be prohibited by this arbitration provision. This arbitration provision shall not limit the right of either party during any dispute, claim, or controversy to seek, use, and employ ancillary or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon, or proceeding under forcible entry and detainer for possession of, any real or personal property (including the Collateral) and any such action shall not be deemed an election of remedies. Such remedies include, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under the Deed of Trust or any other deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including exercising the right of set-off, or taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims or controversies concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to such Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to such Collateral, shall also be arbitrated; provided, however, that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by an arbitrator may be entered in any court having jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. Section 7.22 Limitation of Liability. Reference is herein made to Paragraph 21 of the Note limiting the liability of the Lower Tier Borrower Parties (as defined in the Note), which provision is incorporated herein for all purposes. ARTICLE VIII YEAR 2000 PROVISIONS Section 8.1 Representations and Warranties Regarding Year 2000 Compliance. Borrower represents and warrants to Lender that as of the date of this Agreement and any request for an Advance under this Agreement: (a) All devices, systems, machinery, information technology, computer software and hardware, and other data sensitive technology (jointly and severally, the "Systems" necessary for Borrower to carry on its business as presently conducted and as contemplated to be conducted in the future are Year 2000 Compliant or will be Year 2000 Compliant within a period of time calculated to result in no material disruption of any of Borrower's business operations. For purposes of this Agreement, "Year 2000 Compliant" means that such Systems are designed to be used prior to, during and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. (b) In the event Borrower is not yet Year 2000 compliant, Borrower has developed a detailed plan and time line for becoming Year 2000 Compliant on a timely basis. Section 8.2 Covenants Regarding Year 2000 Compliance. Borrower covenants and agrees with Lender that, while any portion of the Loan is outstanding, Borrower will: (a) Furnish such information, statements and other reports with respect to Borrower's activities, course of action and progress towards becoming Year 2000 Compliant as Lender may reasonably request from time to time. (b) In the event of any change in circumstances that causes or will likely cause any of Borrower's representations and warranties with respect to its being or becoming Year 2000 Compliant to no longer be true (hereinafter, referred to as a "Change in Circumstances"), then Borrower shall promptly, and in any event within ten (10) days of receipt of information regarding a Change in Circumstances, provide Lender with written notice (the "Notice") that describes in reasonable detail the Change in Circumstances and how such Change in Circumstances caused or will likely cause Borrower's representations and warranties with respect to being or becoming Year 2000 Compliant to no longer be true. Borrower shall, within ten (10) days of a request, also provide Lender with any additional information Lender reasonably requests of Borrower in connection with the Notice and/or a Change in Circumstances. (c) give any representative of Lender access during all business hours to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower and relating to its affairs, and to inspect any of the properties and Systems of Borrower, and to project test the Systems to determine if they are Year 2000 Compliant in an integrated environment, all at the sole cost and expense of Lender. ARTICLE IX PARTIAL RELEASES Section 9.1 Partial Releases. Borrower shall be entitled to obtain partial releases of the Developed Lots (but not the Undeveloped Land) from the lien and security interest of the Deed of Trust upon and subject to the following terms and conditions: (1) No Event of Default or event which, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall have occurred which has not been waived by Lender or cured to the satisfaction of Lender; (2) The Developed Lot which is the subject of the partial release shall be sold pursuant to a Sales Contract approved by Lender, and Lender shall have received a payment equal to the Net Sales Proceeds received by or payable to Borrower from such sale of the Developed Lot. (3) Lender shall have received all such endorsements to the Title Insurance Policy which Lender deems reasonably necessary or appropriate as a result of such partial release, including without limitation, a partial release endorsement; and (4) Lender shall have been furnished with a legal description of the Developed Lot to be released, together with a survey or recorded plat covering the Developed Lot and delineating the portion of the Land to be released, in form and substance reasonably satisfactory to Lender. (5) Borrower shall be permitted to obtain releases of up to a total of five (5) Lake Lots during the term of the Loan without the payment of any release price to Lender as provided in subsection (b) above, subject, however, to the satisfaction of all other conditions set forth in this Section 9.1, and provided that such partial release is in connection with the sale by Borrower of the Lake Lot in questiion to a home builder for the construction of a single family residence thereon (provided, further, that Borrower shall nott be required to obtain Lender's consent to the terms of any sales contract with such home builder). Borrower shall pay all costs and expenses of preparation and recordation of each such partial release, as well as the cost of each endorsement to the Title Insurance Policy which Lender deems necessary or appropriate as a result of any such partial release, all of such expenses to be included in the computation of Net Sales Proceeds. Section 9.2 Minimum Semi-annual Amortization. From and after the date of this Agreement, Borrower shall make total payments to Lender from the sale of Developed Lots or other sources of not less than $1,250,000 (the "Minimum Semi-annual Amortization") during each six month period ending on September 30 and March 31 during the term of the Loan (each such six month period is herein called a "Semi-annual Period"), which payments shall be applied by Lender against the principal outstanding under the Note. In the event that the Net Sales Proceeds paid to Lender for any Semi-annual Period are less than the Minimum Semi-annual Amortization, Borrower shall pay to Lender as a prepayment of principal under the Note such amount as is necessary so that Borrower has paid to Lender the Minimum Semi-annual Amortization for such Semi-annual Period. The first Minimum Semi-annual Amortization shall occur no later than March 31, 1999, and the Minimum Semi-annual Amortization shall occur by each September 30 and March 31 thereafter until such time as the Debt is repaid in full. In the event the total principal payments made to Lender during any Semi-annual Period exceed the Minimum Semi-annual Amortization for such Semi-annual Period (the amount of such excess principal being herein called the "Excess Principal Amortization") then such Excess of such Principal Amortization shall be applied to the next Semi-annual Period and any subsequent Semi-annual Periods until Borrower has received full credit for the Excess Principal Amortization (i.e., Borrower shall receive credit for the Excess Principal Amortization against the Minimum Semi-annual Amortization required for the next Semi-annual Period). Section 9.3 Reductions of Letter of Credit or Escrow Deposit. Guarantor may qualify for reductions in the amount of the Letter of Credit or the Escrow Deposit, as the case may be at the end of each calendar month as hereinafter provided. At the end of each calendar month, the outstanding balance of the Letter of Credit or the Escrow Deposit (the "Required Deposit") shall be in an amount not less than the product of (A) thirty percent (30%), multiplied by (B) the committed balance of the Loan (i.e., the stated principal of the Loan reduced by the total of all principal payments made by Borrower under the Loan). At the end of each calendar month, provided that no Event of Default is then existing under this Agreement or any other Loan Document, Guarantor may obtain a replacement Letter of Credit (which shall contain the same terms and conditions as the original Letter of Credit except for the reduction in the face amount thereof) or a release of funds from the Escrow Deposit with Lender, as the case may be, in the amount necessary to reduce the face amount of the Letter of Credit or the balance of the Escrow Deposit with Lender to the amount of the then Required Deposit. THIS AGREEMENT AND THE LOAN DOCUMENTS CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BORROWER: OLY WALDEN GENERAL PARTNERSHIP, a Texas general partnership By: Stratus Ventures I Walden, L.P., a Texas limited partnership, its General Partner By: STRS L.L.C., a Delaware limited liability company, its General Partner By: Stratus Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ---------------------------- William H. Armstrong III President and Chief Executive Officer LENDER: BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association By:/s/ Douglas M. Ness ---------------------- Name:Douglas M. Ness Title:Assitant Vice President EXHIBITS: Exhibit A - Approved Budget Exhibit B - Land Exhibit C - Request for Advance Exhibit D - Application and Certificate for Payment

Exhibit 10.17 GUARANTY THIS GUARANTY ("Guaranty") is made as of the 30th day of September, 1998, by Guarantor (as hereinafter defined) for the benefit of Bank (as hereinafter defined). 1. Definitions. As used in this Guaranty, the following terms shall have the meanings indicated below: (a) The term "Bank" shall mean BANK ONE, TEXAS, NATIONAL ASSOCIATION, whose address for notice purposes is the following: Bank One, Texas, National Association 1700 Pacific Avenue, Suite 2100 Dallas, Dallas County, Texas 75201 Attn: Dale Renner, Commercial Real Estate (b) The term "Borrower" (whether one or more) shall mean the following: OLY WALDEN GENERAL PARTNERSHIP, a Texas general partnership. (c) The term "Guaranteed Indebtedness" shall mean (i) all indebtedness, obligations and liabilities of Borrower to Bank of any kind or character, now existing or hereafter arising, under or in connection with the loan made by Bank to Borrower pursuant to that Development Loan Agreement dated as of September 30, 1998 between Borrower and Bank (the "Loan Agreement"), evidencing a loan in the original principal amount of $8,160,000 (the "Loan"), (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Borrower to Bank under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above (collectively, the "Loan Documents"), (iv) all costs and expenses incurred by Bank in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys' fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above. (d) The term "Guarantor" shall mean STRS GUARANTY COMPANY, L.L.C., a Delaware limited liability company, whose address for notice purposes is the following: STRS Guaranty Company, L.L.C. 98 San Jacinto Blvd., Suite 220 Austin, Texas 78701 2. Obligations. As an inducement to Bank to extend or continue to extend credit and other financial accommodations to Borrower, Guarantor, for value received, does hereby unconditionally and absolutely guarantee the prompt and full payment and performance of the Guaranteed Indebtedness when due or declared to be due and at all times thereafter. Notwithstanding the foregoing or anything to the contrary contained in this Guaranty or the Pledge Agreement of even date herewith executed by Guarantor in favor of Bank (the "Pledge Agreement"), (i) Guarantor's liability for the Guaranteed Indebtedness shall not exceed the sum of (A) the Required Deposit (as defined in the Loan Agreement) which Guarantor is required to have pledged to Bank, plus (B) all reasonable attorneys' fees and expenses incurred by Bank in connection with the enforcement of this Guaranty and the Pledge Agreement against Guarantor and (ii) Bank's recourse against Guarantor for Guarantor's obligations under this Guaranty and the Pledge Agreement shall be limited to the Required Deposit (provided Guarantor has delivered the Required Deposit to Bank in accordance with the terms and provisions of the Loan Agreement). 3. Character of Obligations. This is an absolute, continuing and unconditional guaranty of payment and not of collection and if at any time or from time to time there is no outstanding Guaranteed Indebtedness, the obligations of Guarantor with respect to any and all Guaranteed Indebtedness incurred thereafter shall not be affected. All Guaranteed Indebtedness heretofore, concurrently herewith or hereafter made by Bank to Borrower shall be conclusively presumed to have been made or acquired in acceptance hereof. Guarantor shall be liable, jointly and severally, with Borrower and any other guarantor of all or any part of the Guaranteed Indebtedness. 4. Right of Revocation. Guarantor understands and agrees that Guarantor may revoke its future obligations under this Guaranty at any time by giving Bank written notice that Guarantor will not be liable hereunder for any indebtedness or obligations of Borrower incurred on or after the effective date of such revocation. Such revocation shall be deemed to be effective on the day following the day Bank receives such notice delivered either by: (a) personal delivery to the address and designated department of Bank identified in subparagraph 1(a) above, or (b) United States mail, registered or certified, return receipt requested, postage prepaid, addressed to Bank at the address shown in subparagraph 1(a) above. Notwithstanding such revocation, Guarantor shall remain liable on its obligations hereunder until payment in full to Bank of (x) all of the Guaranteed Indebtedness that is outstanding on the effective date of such revocation, and any renewals and extensions thereof, and (y) all loans, advances and other extensions of credit made to or for the account of Borrower on or after the effective date of such revocation pursuant to the obligation of Bank under a commitment or agreement made to or with Borrower prior to the effective date of such revocation. The terms and conditions of this Guaranty, including without limitation the consents and waivers set forth in paragraph 7 hereof, shall remain in effect with respect to the Guaranteed Indebtedness described in the preceding sentence in the same manner as if such revocation had not been made by Guarantor. 5. Representations and Warranties. Guarantor hereby represents and warrants the following to Bank: (a) This Guaranty may reasonably be expected to benefit, directly or indirectly, Guarantor, and the members of Guarantor have determined that this Guaranty may reasonably be expected to benefit, directly or indirectly, Guarantor; and (b) Guarantor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be security for the payment of all or any part of the Guaranteed Indebtedness; provided, however, Guarantor is not relying on such financial condition or collateral as an inducement to enter into this Guaranty; and (c) Guarantor has adequate means to obtain from Borrower on a continuing basis information concerning the financial condition of Borrower and Guarantor is not relying on Bank to provide such information to Guarantor either now or in the future; and (d) Guarantor has the power and authority to execute, deliver and perform this Guaranty and any other agreements executed by Guarantor contemporaneously herewith, and the execution, delivery and performance of this Guaranty and any other agreements executed by Guarantor contemporaneously herewith do not and will not violate (i) any agreement or instrument to which Guarantor is a party, (ii) any law, rule, regulation or order of any governmental authority to which Guarantor is subject, or (iii) its articles or certificate of incorporation or bylaws, if Guarantor is a corporation, or its partnership agreement, if Guarantor is a partnership; and (e) Neither Bank nor any other party has made any representation, warranty or statement to Guarantor in order to induce Guarantor to execute this Guaranty; and (f) The financial statements and other financial information regarding Guarantor heretofore and hereafter delivered to Bank, if any, are and shall be true and correct in all material respects and fairly present the financial position of Guarantor as of the dates thereof, and no material adverse change has occurred in the financial condition of Guarantor reflected in the financial statements and other financial information regarding Guarantor heretofore delivered to Bank since the date of the last statement thereof; and (g) As of the date hereof, and after giving effect to this Guaranty and the obligations evidenced hereby, (i) Guarantor is and will be solvent, (ii) Guarantor is and will continue to be able to pay its debts as they mature, and (iii) if Guarantor is not an individual, Guarantor has and will continue to have sufficient capital to carry on its business and all businesses in which it is about to engage. 6. Covenants. Guarantor hereby covenants and agrees with Bank as follows: (a) Guarantor shall not, so long as its obligations under this Guaranty continue, transfer or pledge any material portion of its assets for less than full and adequate consideration; and (b) Guarantor shall comply with all terms and provisions of the Loan Documents that apply to Guarantor; and (c) Guarantor shall promptly inform Bank of (i) any litigation or governmental investigation against Guarantor or affecting any security for all or any part of the Guaranteed Indebtedness or this Guaranty which, if determined adversely, might have a material adverse effect upon the financial condition of Guarantor or upon such security or might cause a default under any of the Loan Documents, (ii) any claim or controversy which might become the subject of such litigation or governmental investigation, and (iii) any material adverse change in the financial condition of Guarantor. 7. Consent and Waiver. (a) Guarantor waives (i) promptness, diligence and notice of acceptance of this Guaranty and notice of the incurring of any obligation, indebtedness or liability to which this Guaranty applies or may apply and waives presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, diligence in enforcement and indulgences of every kind, and (ii) the taking of any other action by Bank, including without limitation, giving any notice of default or any other notice to, or making any demand on, Borrower, any other guarantor of all or any part of the Guaranteed Indebtedness or any other party. (b) Guarantor waives any rights Guarantor has under, or any requirements imposed by, Chapter 34 of the Texas Business and Commerce Code, as in effect on the date of this Guaranty or as it may be amended from time to time. (c) Bank may at any time, without the consent of or notice to Guarantor, without incurring responsibility to Guarantor and without impairing, releasing, reducing or affecting the obligations of Guarantor hereunder: (i) change the manner, place or terms of payment of all or any part of the Guaranteed Indebtedness, or renew, extend, modify, rearrange or alter all or any part of the Guaranteed Indebtedness; (ii) change the interest rate accruing on any of the Guaranteed Indebtedness (including, without limitation, any periodic change in such interest rate that occurs because such Guaranteed Indebtedness accrues interest at a variable rate which may fluctuate from time to time); (iii) sell, exchange, release, surrender, subordinate, realize upon or otherwise deal with in any manner and in any order any collateral for all or any part of the Guaranteed Indebtedness or this Guaranty or setoff against all or any part of the Guaranteed Indebtedness, except that Bank will not exercise any remedies with respect to the collateral pledged by Guarantor under the Pledge Agreement except upon the occurrence of a default by Borrower under any of the Loan Documents evidencing, securing and/or relating to the Loan, except that Bank may present a Letter of Credit (as defined in the Loan Agreement) as provided in the Loan Agreement in the event Guarantor fails to deliver to Bank a renewal or replacement Letter of Credit with respect to an existing Letter of Credit on or before the date which is 30 days prior to the expiration date thereof; (iv) neglect, delay, omit, fail or refuse to take or prosecute any action for the collection of all or any part of the Guaranteed Indebtedness or this Guaranty or to take or prosecute any action in connection with any of the Loan Documents; (v) exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (vi) settle or compromise all or any part of the Guaranteed Indebtedness and subordinate the payment of all or any part of the Guaranteed Indebtedness to the payment of any obligations, indebtedness or liabilities which may be due or become due to Bank or others; (vii) apply any deposit balance, fund, payment, collections through process of law or otherwise or other collateral of Borrower to the satisfaction and liquidation of the indebtedness or obligations of Borrower to Bank, if any, not guaranteed under this Guaranty pursuant to the terms hereof; and (viii) apply any sums paid to Bank by Guarantor, Borrower or others to the Guaranteed Indebtedness in such order and manner as Bank, in its sole discretion, may determine. (d) Should Bank seek to enforce the obligations of Guarantor hereunder by action in any court or otherwise, Guarantor waives any requirement, substantive or procedural, that (i) Bank first enforce any rights or remedies against Borrower or any other person or entity liable to Bank for all or any part of the Guaranteed Indebtedness, including without limitation that a judgment first be rendered against Borrower or any other person or entity, or that Borrower or any other person or entity should be joined in such cause, or (ii) Bank shall first enforce rights against any collateral which shall ever have been given to secure all or any part of the Guaranteed Indebtedness or this Guaranty. Such waiver shall be without prejudice to Bank's right, at its option, to proceed against Borrower or any other person or entity, whether by separate action or by joinder. (e) In addition to any other waivers, agreements and covenants of Guarantor set forth herein, Guarantor hereby further waives and releases all claims, causes of action, defenses and offsets for any act or omission of Bank, its directors, officers, employees, representatives or agents in connection with Bank's administration of the Guaranteed Indebtedness, REGARDLESS OF THE NEGLIGENCE OF BANK OR ANY STRICT LIABILITY, except for Bank's willful misconduct and gross negligence. 8. Obligations Not Impaired. (a) Guarantor agrees that its obligations hereunder shall not be released, diminished, impaired, reduced or affected by the occurrence of any one or more of the following events: (i) the death, disability or lack of corporate power of Borrower, Guarantor or any other guarantor of all or any part of the Guaranteed Indebtedness, (ii) any receivership, insolvency, bankruptcy or other proceedings affecting Borrower, Guarantor or any other guarantor of all or any part of the Guaranteed Indebtedness, or any of their respective property; (iii) the partial or total release or discharge of Borrower or any other guarantor of all or any part of the Guaranteed Indebtedness, or any other person or entity from the performance of any obligation contained in any instrument or agreement evidencing, governing or securing all or any part of the Guaranteed Indebtedness, whether occurring by reason of law or otherwise; (iv) the taking or accepting of any collateral for all or any part of the Guaranteed Indebtedness or this Guaranty; (v) the taking or accepting of any other guaranty for all or any part of the Guaranteed Indebtedness; (vi) any failure by Bank to acquire, perfect or continue any lien or security interest on collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty; (vii) the impairment of any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty; (viii) any failure by Bank to sell any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty in a commercially reasonable manner or as otherwise required by law; (ix) any invalidity or unenforceability of or defect or deficiency in any of the Loan Documents; or (x) any other circumstance which might otherwise constitute a defense available to, or discharge of, Borrower or any other guarantor of all or any part of the Guaranteed Indebtedness. (b) This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of all or any part of the Guaranteed Indebtedness is rescinded or must otherwise be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other guarantor of all or any part of the Guaranteed Indebtedness, or otherwise, all as though such payment had not been made. (c) In the event Borrower is a corporation, joint stock association or partnership, or is hereafter incorporated, none of the following shall affect Guarantor's liability hereunder: (i) the unenforceability of all or any part of the Guaranteed Indebtedness against Borrower by reason of the fact that the Guaranteed Indebtedness exceeds the amount permitted by law; (ii) the act of creating all or any part of the Guaranteed Indebtedness is ultra vires; or (iii) the officers or partners creating all or any part of the Guaranteed Indebtedness acted in excess of their authority. Guarantor hereby acknowledges that withdrawal from, or termination of, any ownership interest in Borrower now or hereafter owned or held by Guarantor shall not alter, affect or in any way limit the obligations of Guarantor hereunder. 9. Actions against Guarantor. In the event of a default in the payment or performance of all or any part of the Guaranteed Indebtedness when such Guaranteed Indebtedness becomes due, whether by its terms, by acceleration or otherwise, (i) Guarantor shall, without notice or demand, promptly pay the amount due thereon to Bank, in lawful money of the United States, at Bank's address set forth in subparagraph 1(a) above, (ii) Bank may exercise any of its rights and remedies set forth in the Pledge Agreement or any other rights or remedies permitted at law or in equity and/or (iii) Bank shall be entitled to offset the deposit account of Guarantor held by Bank (and which has been pledged by Bank pursuant to the Pledge Agreement) against the Guaranteed Indebtedness. One or more successive or concurrent actions may be brought against Guarantor, either in the same action in which Borrower is sued or in separate actions, as often as Bank deems advisable. The exercise by Bank of any right or remedy under this Guaranty or under any other agreement or instrument, at law, in equity or otherwise, shall not preclude concurrent or subsequent exercise of any other right or remedy. The books and records of Bank shall be admissible in evidence in any action or proceeding involving this Guaranty and shall be prima facie evidence of the payments made on, and the outstanding balance of, the Guaranteed Indebtedness. In addition to the foregoing, all property of Guarantor now or hereafter in the possession or custody of or in transit to Bank for any purpose, including safekeeping, collection or pledge, for the account of Guarantor, or as to which Guarantor may have any right or power (including without limitation, the deposit account described in the Pledge Agreement), shall be held by Bank subject to a lien and security interest in favor of Bank to secure payment and performance of all obligations and liabilities of Guarantor to Bank hereunder. The balance of every account of Guarantor with, and each claim of Guarantor against, Bank existing from time to time shall be subject to a lien and subject to set-off against any and all liabilities of Guarantor to Bank, and Bank may, at any time and from time to time at its option and without notice, appropriate and apply toward the payment of any of such liabilities the balance of each such account or claim of Guarantor against Bank. 10. Payment by Guarantor. Whenever Guarantor pays any sum which is or may become due under this Guaranty, written notice must be delivered to Bank contemporaneously with such payment. Such notice shall be effective for purposes of this paragraph when contemporaneously with such payment Bank receives such notice either by: (a) personal delivery to the address and designated department of Bank identified in subparagraph 1(a) above, or (b) United States mail, certified or registered, return receipt requested, postage prepaid, addressed to Bank at the address shown in subparagraph 1(a) above. In the absence of such notice to Bank by Guarantor in compliance with the provisions hereof, any sum received by Bank on account of the Guaranteed Indebtedness shall be conclusively deemed paid by Borrower. 11. Notice of Sale. In the event that Guarantor is entitled to receive any notice under the Uniform Commercial Code, as it exists in the state governing any such notice, of the sale or other disposition of any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty, reasonable notice shall be deemed given when such notice is deposited in the United States mail, postage prepaid, at the address for Guarantor set forth in subparagraph 1(d) above, five (5) days prior to the date any public sale, or after which any private sale, of any such collateral is to be held; provided, however, that notice given in any other reasonable manner or at any other reasonable time shall be sufficient. 12. Waiver by Bank. No delay on the part of Bank in exercising any right hereunder or failure to exercise the same shall operate as a waiver of such right. In no event shall any waiver of the provisions of this Guaranty be effective unless the same be in writing and signed by an officer of Bank, and then only in the specific instance and for the purpose given. 13. Successors and Assigns. This Guaranty is for the benefit of Bank, its successors and assigns. This Guaranty is binding upon Guarantor and Guarantor's heirs, executors, administrators, personal representatives and successors, including without limitation any person or entity obligated by operation of law upon the reorganization, merger, consolidation or other change in the organizational structure of Guarantor. 14. Costs and Expenses. Guarantor shall pay on demand by Bank all costs and expenses, including without limitation, all reasonable attorneys' fees incurred by Bank in connection with the preparation, administration, enforcement and/or collection of this Guaranty. This covenant shall survive the payment of the Guaranteed Indebtedness. 15. Severability. If any provision of this Guaranty is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Guaranty and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable. 16. No Obligation. Nothing contained herein shall be construed as an obligation on the part of Bank to extend or continue to extend credit to Borrower. 17. Amendment. No modification or amendment of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specific instance and for the purpose for which given. 18. Cumulative Rights. All rights and remedies of Bank hereunder are cumulative of each other and of every other right or remedy which Bank may otherwise have at law or in equity or under any instrument or agreement, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. 19. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS. 20. Venue. This Guaranty has been entered into in the county in Texas where Bank's address for notice purposes is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Guaranty and venue for any such disputes shall be in the county or judicial district where the Bank's address for notice purposes is located. 21. Compliance with Applicable Usury Laws. Notwithstanding any other provision of this Guaranty or of any instrument or agreement evidencing, governing or securing all or any part of the Guaranteed Indebtedness, Guarantor and Bank by its acceptance hereof agree that Guarantor shall never be required or obligated to pay interest in excess of the maximum nonusurious interest rate as may be authorized by applicable law for the written contracts which constitute the Guaranteed Indebtedness. It is the intention of Guarantor and Bank to conform strictly to the applicable laws which limit interest rates, and any of the aforesaid contracts for interest, if and to the extent payable by Guarantor, shall be held to be subject to reduction to the maximum nonusurious interest rate allowed under said law. 22. Descriptive Headings. The headings in this Guaranty are for convenience only and shall not define or limit the provisions hereof. 23. Gender. Within this Guaranty, words of any gender shall be held and construed to include the other gender. 24. Entire Agreement. This Guaranty contains the entire agreement between Guarantor and Bank regarding the subject matter hereof and supersedes all prior written and oral agreements and understandings, if any, regarding same; provided, however, this Guaranty is in addition to and does not replace, cancel, modify or affect any other guaranty of Guarantor now or hereafter held by Bank that relates to Borrower or any other person or entity. 25. JURY WAIVER. THE GUARANTOR AND BANK HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ALL RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE PARTIES HERETO ARISING OUT OF OR IN ANY WAY RELATED TO THIS GUARANTY OR ANY OF THE LOAN DOCUMENTS OR ANY RELATIONSHIP BETWEEN GUARANTOR AND BANK. THIS PROVISION IS A MATERIAL INDUCEMENT TO BANK TO PROVIDE THE LOAN TO BORROWER DESCRIBED IN THE LOAN AGREEMENT. 26. Arbitration. Bank and Guarantor agree that upon the written demand of either party. whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims, and controversies between them, whether individual, joint, or class in nature, arising from this Guaranty any other Loan Document, or otherwise, including, without limitation, contract disputes and tort claims, shall be resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration Association (the "AAA"). Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Guarantor's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral, whether real or personal, covered by the Deed of Trust or any other Loan Document ("Collateral") shall constitute a waiver of this arbitration provision or be prohibited by this arbitration provision. This arbitration provision shall not limit the right of either party during any dispute, claim, or controversy to seek, use, and employ ancillary or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon, or proceeding under forcible entry and detainer for possession of, any real or personal property (including the Collateral) and any such action shall not be deemed an election of remedies. Such remedies include, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under the Deed of Trust, the Pledge Agreement or any other deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including exercising the right of set-off, or taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims or controversies concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to such Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to such Collateral, shall also be arbitrated; provided, however, that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by an arbitrator may be entered in any court having jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. EXECUTED as of the date first above written. GUARANTOR: STRS GUARANTY COMPANY, L.L.C., a Delaware limited liability company By: Stratus Properties Inc., a Delaware limited company, its sole member By:/s/ William H. Armstrong III Name:William H. Armstrong III Title:President and Chief Executive Officer

Exhibit 10.18 MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement") is made and entered into as of the 9th day of April, 1998, between OLY/FM Walden, L.P., a Texas limited partnership (the "Operating Partner"), and STRATUS MANAGEMENT, L.L.C., a Delaware limited liability company ("Manager"). W I T N E S S E T H WHEREAS, the Operating Partner is the operating partner of Oly Walden General Partnership, a Texas general partnership ("Owner"), and Owner is engaged in the acquisition, ownership, development and sale of certain tracts of land, more particularly described on Exhibit A attached hereto, together with all improvements located thereon (collectively, the "Property"). WHEREAS, the Operating Partner desires to appoint Manager to manage and oversee the day to day operations and responsibilities of the Operating Partner with respect to the management of the Property subject to the terms and conditions herein. NOW, THEREFORE, for and in consideration of the premises and mutual covenants and agreements contained in this Agreement and the compensation to be paid hereunder, the Operating Partner and Manager hereby agree as follows: ARTICLE I ESTABLISHMENT OF AGENCY The Operating Partner hereby appoints Manager and Manager hereby accepts appointment on the terms and conditions hereinafter provided as agent for Owner. Manager shall oversee and manage the day to day operations of Owner pursuant to that certain Business Plan (as amended from time to time and as attached as Exhibit B to the Partnership Agreement of Owner) in an efficient and first class manner and shall exercise due diligence in all of its endeavors. ARTICLE II SERVICES TO BE PERFORMED BY MANAGER 2.1 Expenses. Everything done by Manager under the provisions of this Agreement shall be done as the agent of the Operating Partner and Owner, and all obligations or expenses incurred by Manager in the performance of its duties hereunder in accordance with the provisions hereof shall be at the expense of Owner consistent with the Operating Budget (as defined in Section 2.5 hereof), except as otherwise specifically provided in this Agreement. 2.2 Contracts. To the extent necessary to fulfill its obligations under this Agreement, Manager shall (i) identify contracts with independent contractors to perform services necessary or advisable for the oversight or management of the Property, and (ii) with the prior written approval of Owner, place orders in Owner's name for such materials and supplies as are reasonable and necessary to properly oversee, maintain, manage, or operate the Property, in each case, consistent with the Operating Budget. Any contracts or other agreements shall be entered into in Owner's name and be executed by Owner. Except with the prior written consent of Owner, every contract entered into by Manager for or in connection with Owner shall include as a condition thereof the right by Owner to terminate, with or without cause, on thirty (30) days prior written notice, without the payment of a cancellation fee. Owner shall be obligated to pay the cost of any contract or agreement described in this section only if such cost is provided for in the Operating Budget or if Owner otherwise approves such cost in writing. 2.3 Oversight and Management. Manager shall oversee and manage the day to day operations of the Property and shall do so in accordance with the "Management Standard" (as defined in Section 4.1 hereof), including within such oversight and management without limitation thereof, such normal business activities as may be necessary or, with Owner's prior written consent, desirable. 2.4 Insurance. Upon the request of Owner, Manager shall cause to be placed and kept in force, at Owner's sole cost and expense, all forms of insurance requested by Owner. All insurance coverage to be placed by Manager shall be placed with such companies, in such amounts, and with such beneficial interests appearing therein as shall be requested by Owner. 2.5 Approved Operating Budgets: Projections. On or before November 15th of each year, Manager shall submit to Owner, for Owner's approval, proposed operating budgets for the Property for the immediately succeeding calendar year, which proposed budgets shall reflect thereon projections of all receipts (if any) and operating costs and expenses, capital expenditures and reserves that Manager, in the exercise of good business judgment, believes will be received or necessary to be incurred, as the case may be, implement the Business Plan during such year. Owner shall give Manager Owner's written approval or disapproval of the proposed operating budget within thirty (30) days after receipt thereof by Owner. In the event that Owner disapproves the proposed operating budget, it will advise Manager of the items therein that are disapproved and the line items and amounts, if any, that will replace the disapproved items. Thereafter, the portions of the proposed operating budget approved by Owner, together with the line items and amounts required by Owner to replace any disapproved items, shall constitute the Operating Budget (herein so called) for the following year. Exhibit B attached hereto contains the Operating Budget (herein so called) for the remainder of calendar year 1998. Except as otherwise expressly provided in this Agreement, Manager shall not be reimbursed by Owner for, and Manager hereby expressly indemnifies Owner against, any loss, expense or claim in connection with any expenditure, liability or obligation incurred by Manager (without Owner's approval) not reflected in the Operating Budget. 2.6 Manager Disbursement. Manager shall, from the available good funds collected and deposited in the Operating Account (as defined in Section 4.2 hereof), cause to be disbursed regularly and punctually (1) the amounts from time to time payable to Manager pursuant to this Agreement; and (2) amounts otherwise due and payable as operating expenses of the Property authorized to be incurred under the terms of this Agreement. Manager shall at all times use Manager's reasonable efforts to obtain for Owner, and shall credit to the account of Owner in each case, all discounts, rebates and other favorable financial terms which may be available in connection with any costs or expenses Manager shall incur under this Agreement. Any funds remaining at the end of each calendar month during the term of this Agreement in the Operating Account (in excess of the balance required to be maintained in such account) shall be disbursed or transferred as generally or specifically directed from time to time by Owner. Within fifteen (15) days after the end of each calendar month, Manager shall provide Owner with a list of the disbursements made by Manager during such month and, at the request of Owner, invoices supporting the disbursements. 2.7 Records; Reporting. (a) Records. All statements, receipts, invoices, checks, leases, contracts, worksheets, financial statements, books and records, and all other instruments and documents relating to or arising from the operation or management of the Property shall be the property of Owner; provided that, throughout the term of this Agreement, all of such items shall be maintained by Manager in a manner consistent with the terms of this Agreement and with books and records customarily maintained by managing agents of businesses similar in location, size and revenue to Owner. Owner and Manager shall have the right to inspect and to copy all such items, at such party's expense, at all reasonable times, and from time to time, during the term of this Agreement. Upon the termination of this Agreement, all of such books, records and all other information relating to Owner promptly shall be delivered to Owner; provided, however, that at Manager's sole expense, Manager or its representatives shall have the right, for a reasonable period of time not to exceed three (3) years following such termination, to inspect such books, records and other information for data that directly relates to the period during which Manager managed the Property and to make copies thereof, at reasonable times at the offices of the Operating Partner upon reasonable advance notice to the Operating Partner. (b) Monthly Statements. Manager shall prepare and deliver to Owner on a calendar monthly basis, Manager's written estimates of the amounts, if any, by which any categories of the Operating Budget must be adjusted to adequately fund the day to day management and oversight of the Property for the then current month, although the Operating Partner and Owner shall be under no obligation to change the Operating Budget. Such monthly reports shall include the following information: (i) a statement of operations of the Property during such month, and the cost thereof, (ii) a statement of year-to-date operations on the Property, and the cost thereof, (iii) a statement of the actual cost of operations of the Property during such month compared to the Operating Budget which identifies any variance between such costs and the Operating Budget, and (iv) a description and explanation of such variances. Manager also shall furnish the Operating Partner, within ten (10) days after the Operating Partner's request, such further information covering the day to day oversight and management of the Property as the Operating Partner may reasonably require. (c) Annual Accounting Report. Manager agrees (i) to deliver to owner, within twenty (20) days after the end of each fiscal year, an annual accounting report (including balance sheet, income statement and other financial statements), showing the results of gross receipts, gross operating expenses, net operating income, net cash flow and the Management Fee which would be payable if the Agreement were terminated as of the end of such Fiscal Year and any other information necessary to make the computations required hereby or which may be requested by Owner, all for such fiscal year and (ii) to cooperate fully with Owner, at no additional expense to Manager, but without limiting Manager's obligations under Section 2.7(e), in supplying all of the information and documentation necessary for a nationally recognized firm of certified public accountants selected by Owner (the "Auditor") to prepare and deliver to Owner an audit of the annual accounting report provided by Manager to Owner pursuant to this Section 2.7(d) within forty-five (45) days after the end of each fiscal year. (d) Additional Fiscal Reports. Manager shall, upon the request of Owner, prepare for Owner or assist Owner in the preparation of such additional financial reports with respect to the Owner or te Property as Owner may reasonably request or may be required in the preparation of the audited annual accounting to be prepared pursuant to this Section 2.7. Manager acknowledges and agrees that the Management Fee to be paid under this Agreement includes compensation to Manager for the preparation of papers and schedules reasonably necessary for the Auditor to conduct its review of the Property's books and records. To the extent such papers and schedules are not properly prepared, Manager agrees to reimburse Owner for the reasonable additional cost and expense incurred by Owner for the Auditor to prepare such papers or schedules. (e) Returns Required by Law. Manager shall be responsible for preparing and filing any forms, reports or returns (except Owner's tax returns) that may be required by law relating to the Property. Manager shall also be responsible for any forms, reports or returns that may be required by law relating to any of Manager's employees. 2.8 Compliance with Legal Requirements. Manager shall take such action as may be necessary to comply with any and all orders or requirements affecting the Property by any federal, state, county or municipal authority having jurisdiction thereover. Manager, however, shall not take any such action as long as the Operating Partner is contesting, or has affirmed the Operating Partner's intention to contest and institutes proceedings contesting, any such order or requirement, except that if failure to comply promptly with any such order or requirement would or might expose Manager to criminal liability, Manager shall comply with same. Manager shall promptly notify the Operating Partner in writing of all such orders and notices or requirements. The Operating Partner agrees to pay all reasonable expenses incurred by Manager, including, without limitation, reasonable attorneys' fees for counsel employed to represent Manager or the Operating Partner, with respect to any proceeding or suit involving an alleged violation by Manager or the Operating Partner, or both, of any orders or requirements of any federal, state, county or municipal authority (unless Manager is finally adjudicated to have personally and not in a representative capacity violated such order or requirement), but nothing contained herein shall require Manager to employ counsel to represent the Operating Partner in any such proceeding or suit. 2.9 Independent Contractor. The parties hereby acknowledge that the Manager is and shall be an independent contractor for all purposes. ARTICLE III FEES TO MANAGER In consideration for the performance of Manager's duties and responsibilities under this Agreement, in exchange for its services provided to Owner and the Property, Manager shall be paid a management fee to be computed as follows: Manager shall receive an annual fee (the "Management Fee") equal to one percent (1%) of the Acquisition and Development Costs (as defined hereinbelow) computed as follows: (i) the Management Fee shall commence on the first day of the month following the initial acquisition of the Property; (ii) the monthly balance subject to the Management Fee shall be the arithmetic average of the Acquisition and Development Costs of the Property owned by Owner on the first day of the month and on the last day of the month; and (iii) the Management Fee shall be payable monthly in arrears and shall be equal to 0.000833 multiplied by the balance computed in (ii) above. As used herein, "Acquisition and Development Costs" means the sum of (a) purchase price, whether cash or credit, paid, or for which Owner is obligated to pay (if on credit), for the Property, together with all closing costs paid by Owner, including title insurance, recordation charges, registration and transfer taxes, if any, and similar expenses, and to the extent reflected on the closing statement executed by Owner in connection with the acquisition of the Property, all fees and expenses paid or incurred by or on behalf of Owner in connection with the acquisition of the Property, including legal, engineering and consulting fees, any real estate commissions or brokerage fees paid by Owner, or on behalf of Owner, to anyone in connection with such acquisition (the "Acquisition Costs") and (b) all costs and expenses incurred by Owner in connection with development and marketing of the Property, including, without limitation, engineering, legal, land planning and related expenses (the "Development Costs") as of the date of this Agreement the Property consists of two (2) undeveloped tracts (the "Undeveloped Tracts") and approximately nine hundred forty one (941) developed residential lots (the Finished Lots") which will be marketed and sold in accordance with the Business Plan. For purposes of the monthly computation in (ii) above, the Acquisition Costs shall be reduced by Thirteen Thousand Three Hundred Seventy Eight and No/100 Dollars ($13,378.00) for each Finished Lot closed and funded. ARTICLE IV RELATIONSHIP OF MANAGER TO THE OPERATING PARTNER 4.1 Standard of Care. Manager shall employ Manager's best efforts to oversee and manage the day to day operations of the Property in a manner (referred to herein as the "Management Standard") consistent with (i) first class standards (consistent with the expressed plan of Owner, including the Business); (ii) prudent business and management practices applicable to the oversight and management of the Property; and (iii) the requirements of any deeds of trust, certificates of occupancy, permits, licenses, consents or other recorded or unrecorded agreements now or hereafter affecting the Property, or as required by the Limited Partnership Agreement (collectively referred to herein as the "Documents"). Manager shall use all contacts, discount programs and cost-savings measures at its disposal to obtain services, products and tax and insurance rates for the Property at the lowest cost, without sacrificing the quality of such services or products. Manager shall perform such other acts and deeds as are reasonable, necessary and proper in the discharge of its duties under this Agreement. Manager may, with the prior written consent of the Operating Partner, obtain goods or services for the Property from direct or indirect affiliates of Manager, its officers, directors, shareholders or employees, but only if such goods and services are of at least equal quality and of no higher prices than comparable goods and services obtainable from unaffiliated parties and such goods and services are otherwise competitive with comparable goods and services. 4.2 Separation of Owner's Moneys. Manager shall establish and maintain in a banking or other financial institution identified by the Operating Partner from time to time throughout the term of this Agreement, a separate bank or similar account in the name of Owner for the deposit of moneys of Owner received, if any, with respect to the Property (the "Operating Account"). Manager shall also establish such other special bank or similar accounts as may be required by the Operating Partner. Funds may be withdrawn (i) from the Operating Account for the disbursement of any individual item not exceeding $10,000 upon the sole signature of any duly authorized representative of the Operating Partner on behalf of Owner; and (ii) for all disbursements exceeding $10,000 or for the withdrawal of funds from any account other than the Operating Account, upon the sole signature of Oly/Houston Walden, L.P., (the "Financial Partner"), on behalf of Owner. The Operating Partner and Manager hereby acknowledge and agree that, if the Operating Partner fails to deposit funds in the Operating Account in an amount sufficient to fund the expenses authorized in the Operating Budget, Manager shall not be required to incur any out of pocket costs in order to perform Manager's obligations under this Agreement. 4.3 Term/Termination. This Agreement shall commence on the date hereof and shall thereafter continue until the dissolution of Owner. Notwithstanding the foregoing, this Agreement may be terminated at any time (i) for Manager's fraud, malfeasance, misfeasance or abandonment of its responsibilities under this Agreement by the Operating Partner upon written notice thereof to Manager, (ii) upon written notice from Owner to Manager after Manager's default under this Agreement (except for breach of the Management Standard) by the Operating Partner which is not cured after thirty (30) days notice and opportunity to cure provided that if such default is not reasonably susceptible of cure within thirty (30) days then such reasonable time so long as Manager is diligently prosecuting the cure of the default but in no event longer than ninety (90) days, (iii) for the Operating Partner's default under this Agreement by Manager upon written notice thereof to the Operating Partner, (iv) upon thirty (30) days written notice from Owner to Manager in the event Manager fails to perform its duties consistent with the Management Standard as determined by the management committee of Owner or (v) by either Manager or Owner in the event Stratus fails to exercise its option under that certain Option Agreement by and between Stratus, the Operating Partner and Oly Lender Walden, L.P., of even date herewith. 4.4 Obligations Upon Termination. (a) Upon termination of this Agreement, each party shall continue to be fully liable for their respective obligations which have accrued up to and including the termination date and shall promptly pay to the other all amounts due to the other party under the terms of this Agreement. Such payment shall be made as soon after the effective date of termination as such amounts are determinable. Upon such payment, neither party shall have any further claim or right against the other, except as expressly provided herein. (b) In the event of termination of this Agreement, upon the effective date of such termination, Manager shall (i) surrender and deliver to the Operating Partner all income of the Property, if any, and other monies of the Operating Partner or Owner then held by Manager and/or in any bank account (including, without limitation, the Operating Account) in excess of the reimbursements due and payable to Manager up to and including the effective date of such termination, (ii) deliver to the Operating Partner as received by Manager any monies or other property due the Operating Partner under this Agreement but received after such termination, and (iii) deliver to the Operating Partner everything then held by Manager pertaining to the Property, including, without limitation copies of all books, records, keys and all other materials, property, and supplies pertaining to the Property and/or this Agreement. 4.5 No Partnership. Nothing contained in this Agreement shall be deemed or construed to create a partnership or joint venture between the Operating Partner or Owner and Manager, it being the intention of the parties that the only relationship hereunder is that of agent and principal. 4.6 Indemnification. Manager shall be liable for and shall indemnify and hold harmless the Operating Partner and Owner (and each partner, venturer, employee, agent, shareholder, director or officer of the Operating Partner and Owner) from any loss, damage, liability, cost or expense (including reasonable attorneys' fees) arising out of (i) any actions of Manager not within the scope of Manager's duties hereunder or (ii) the gross negligence or willful misconduct of Manager. The Operating Partner shall indemnify and hold harmless Manager (and each employee, agent, director, shareholder or officer of Manager) from any loss, damage, liability, cost or expense (including reasonable attorneys' fees) arising out of (x) a breach by the Operating Partner of the Operating Partner's obligations hereunder, (y) the Operating Partner's gross negligence or willful misconduct or (z) actions taken by Manager within the scope of Manager's responsibilities under this Agreement. ARTICLE V MISCELLANEOUS 5.1 No Assignment by Manager, Etc. Without the prior written consent of the Operating Partner, which consent may be granted or withheld in the Operating Partner's sole discretion, Manager shall not have the right to assign, transfer or convey any of Manager's right, title or interest hereunder, nor shall Manager have the right to delegate any of the obligations or duties required to be kept or performed by Manager hereunder. 5.2 Notices. All notices, demands, consents, approvals and requests given by either party to the other hereunder shall be in writing and sent via the U.S. Postal Service by registered or certified mail, return receipt requested, postage prepaid or via an overnight delivery service (e.g., Federal Express) and addressed to the appropriate party at the respective addresses shown below. All such notices shall be deemed given on the earlier of actual receipt or refusal of receipt by the addressee. The respective addresses and additional notice parties are as follows: If to Operating Partner: Oly/FM Walden, L.P. 200 Crescent Court, Suite 1650 Dallas, Texas 75201 Attention: Hal Hall with a copy to: Robert C. Feldman, Esq. Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 If to Manager : Stratus Management, L.L.C. c/o FM Properties Inc. 98 San Jacinto Blvd., Suite 2200 Austin, Texas 78701 Attn: Mr. William H. Armstrong, III With a copy to: Kenneth N. Jones Armburst, Brown & Davis, L.L.P. 100 Congress, Suite 1350 Austin, Texas Any party may at any time change its respective address by sending written notice to the other party of the change in the manner hereinabove prescribed. 5.3 GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE TERMS AND PROVISIONS HEREOF SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 5.4 Not a Third Party Beneficiary Contract. Neither this Agreement nor any part hereof nor any service, relationship or other matter alluded to herein shall inure to the benefit of any third party (specifically including any lender, tenants or contractors), to any trustee in bankruptcy, to any assignee for the benefit of creditors, to any receiver by reason of insolvency, to any other fiduciary or officer representing a bankruptcy or insolvent estate of either party, or to the creditors or claimants of such an estate. In addition, this Agreement shall terminate and be of no further force or effect upon the filing of any bankruptcy petition by or against Manager. 5.5 Validity. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 5.6 Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the matters herein contained and any agreement hereafter made shall be ineffective to effect any change or modification, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the change or modification is sought. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors, legal representatives and assigns. 5.7 Attorneys' Fees. If either the Operating Partner or Manager employs an attorney to enforce or defend its rights hereunder, the prevailing party shall be entitled to recover its reasonable attorneys' fees, costs and expenses incurred in connection with such enforcement or defense. 5.8 Confidentiality. Manager shall hold all information regarding the Property confidential and shall not disclose any such information to third parties without the prior written consent of Owner unless legally compelled to make such disclosure. Without limiting the generality of the foregoing, Manager shall not make any news releases or other public disclosures without Owner's prior written consent. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]OPERATING PARTNER: OLY/FM WALDEN, L.P., a Texas limited partnership By: Oly Fund II GP Investments, L.P., a Texas limited partnership, its general partner By: Oly Real Estate Partners II, L.P., a Texas limited partnership, its general partner By: Oly REP II, L.P., a Texas limited partnership, its general partner By: Oly Fund II, LLC, a Texas limited liability company, its general partner By:/s/ Hal R. Hall ------------------- Name:Hal R. Hall Title:Vice President MANAGER: STRATUS MANAGEMENT, L.L.C., a Delaware limited liability company By: FM Properties Inc., a Delaware corporation, its sole member By:/s/ William H. Armstrong III ---------------------------- William H. Armstrong, III, President EXHIBIT A Property Description The land referred to herein is situated in the State of Texas, County of Harris, and is described as follows: [ATTACHED] EXHIBIT B Operating Budget for Remainder of 1998 Operating Partner and Manager will attach the Operating Budget on or before June 8, 1998.

Exhibit 15.1 October 20, 1998 Stratus Properties Inc. 98 San Jacinto Blvd. Suite 220 Austin, TX 78701 Gentlemen: We are aware that Stratus Properties Inc. has incorporated by reference in its Registration Statements (File Nos. 33-78798 and 333-31059) its Form 10-Q for the quarter ended June 30, 1998, which includes our report dated October 20, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the Act), this report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP

5 This schedule contains summary financial informations extracted from Stratus Properties Inc. financial statements at September 30, 1998 and the nine months then ended, and is qualified in its entirety by reference to such statements. The earning per share (EPS) data shown was prepared in accordance with FASB No. 128 "Earnings Per Share," basic and diluted EPS have been entered in place of primary and fully-diluted EPS. 0000885508 STRATUS PROPERTIES INC. 1000 9-MOS DEC-31-1998 SEP-30-1998 3,724 0 843 0 0 9,133 99,040 100 117,757 3,366 33,117 10,000 0 143 64,987 117,757 12,302 12,302 9,165 9,165 0 0 1,480 (1,477) 0 (1,477) 0 0 0 (1,477) (0.10) (0.10)