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HomeMy WebLinkAboutCC - ELK-1 Ventures, LLC Operating agreement-Signed OPERATING AGREEMENT OF ELK-1 VENTURES,LLC OPERATING AGREEMENT OF ELK-1 VENTURES,LLC THIS OPERATING AGREEMENT (the "Operating Agreement") of ELK-1 VENTURES,LLC,a California limited liability company (the "Company,,), is dated for reference purposes November 11,2016. This Operating Agreement is entered into by and among Erik Pilegaard, Landon Pilegaard,and Kristen Pilegaard, each a"Member"and together referred to as"Members." ARTICLE 1 DEFINITIONS The following terms used in this Agreement shall have the following meanings: 1.01. Act. "Act" shall mean the California Limited Liability Company Act, including amendments, or any successor statute thereto. 1.02.Additional Capital Contribution "Additional Capital Contribution"is defined in Section 3.03. 1.03. Adjusted Capital Contribution, "Adjusted Capital Contribution" means the Capital Contribution of the Member less all Distributions to that Member, provided that Adjusted Capital Contribution shall not be reduced below zero. 1.04. Affiliate. "Affiliate" means any individual, partnership, corporation, limited Iiability company, trust or other entity or association, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with a Member. The term "control," as used in the immediately preceding sentence,means, with respect to a corporation,the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights of the controlled corporation, and, with respect to any individual,partnership,limited liability company, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity whether through membership, ownership of voting securities,by contract or otherwise. 1.05.A regiment."Agreement"means this Operating Agreement as originally executed and amended from time to time. ELK-1 VENTURES,LLC Operating Agreement page 2 1.06. Articles. "Articles" means the Articles of Organization for the Company filed with the California Secretary of State and as amended from time to time. 1.07. Available Cash. "Available Cash" means all net revenues from the Company's operations, including, but not limited to, those from a Capital Event and/or from leasing, after repayment of all principle and interest on loans authorized by or made pursuant to the provisions of Section 3.07, that the Manager and in the Manager's sole discretion, deems in excess of the amount reasonably necessary for the operating requirements of the Company, including debt reduction and Reserves. 1.08. Bankruptcy. "Bankruptcy" shall mean, and a Member shall be deemed a `Bankrupt Member," on: (i) the filing of an application by a Member for relief by a Member or that Member's consent to the appointment of a trustee, receiver or custodian of that Member's other assets; (ii)the entry of a decree or order for relief against the Member by a court of competent jurisdiction in any involuntary case brought against the Member under any bankruptcy, insolvency or other similar law (collectively, "debtor relief laws") generally affecting the rights of creditors and relief of debtors now or hereafter in effect; (iii) the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar agent under applicable debtor relief laws for the Member or for any substantial part of that Member's assets or Property; (iv) the ordering of the winding up or liquidation of the Member's affairs; (v) the filing of a petition in any such involuntary Bankruptcy case, which petition is not dismissed within one hundred twenty (120) days of filing or which is not dismissed or suspended pursuant to §305 of the Federal Bankruptcy Code (or any corresponding provision of any future United States debtor relief law now or hereafter in effect); (vi)the consent by the Member to the entry of an order for relief in an involuntary case under any such law or to the appointment of or the taking of possession by a receiver, liquidator, assignee,trustee, custodian, sequestrator or other similar agent under any applicable debtor relief laws for the Member or for any substantial part of that Member's assets or property; or (vii) the making by a Member of any general assignment for the benefit of creditors. 1.09. Capital Account. "Capital Account" means the Capital Account of each Member determined and maintained from the inception and throughout the full term of the Company strictly in accordance with the rules set forth in Treasury Regulation §1.704-1(b)(2)(iv). Any successor provisions shall apply only when retroactivity is mandatory under the law or agreed to by an amendment to this Agreement. Each Member's Capital Account shall be increased by: (i)the amount of money contributed by that Member to the Company; (ii) the Gross Asset Value of any other property ELK-I VENTURES,LLC operating Agreement Page 3 contributed by the Member to the Company; (iii) allocations to that Member of Profits (or items thereof); and(iv)the amount of any Company liabilities assumed by that Member or that are secured by any asset distributed to that Member. Each Member's Capital Account shall be decreased by: (i) the amount of money distributed to that Member by the Company(exclusive of guaranteed payments under Internal Revenue Code §707(c)); (ii)the Gross Asset Value of other property distributed to the Member by the Company; (iii) allocations to that Member of Losses (or items thereof); and (iv) the amount of any liabilities of that Member assumed by the Company or that are secured by any asset contributed by that Member to the Company. For purposes of this Agreement, a Member who has more than one Interest in the Company shall have a single Capital Account that reflects all such Interests, regardless of the class of Interests owned by the Member and regardless of the time or manner in which the interests were acquired. In the event all or a portion of an Interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the transferred Interest. If the Gross Asset Values of the Company's assets are adjusted, the Capital Accounts of all Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Company recognized gain or loss equal to the amount of the aggregate net adjustment. If any assets of the Company are to be distributed in kind,they shall be distributed on the basis of their fair market value after the Members' Capital Accounts have been adjusted to reflect the manner in which any unrealized Profits and Losses with respect to those assets (that have not previously been reflected in the Capital Accounts) would be allocated among the Members if there were a taxable disposition of the assets for their fair market value. 1.10.Capital Account Balance "Capital Account Balance"means the amount of a Member's Capital Account at any applicable time. 1.11.Capital Contribution. "Capital Contribution"means the total value of cash and the fair market value (less any liabilities that are assumed in connection with the contribution) of Property contributed to the Company by a Member in accordance with this Agreement. Any reference in this Agreement to the Capital Contributions of a Member shall include all Capital Contributions previously made by the Member and the Member's predecessor, if any, for the Member's Interest. 1.12.Capital Proceeds."Capital Proceeds"means, with respect to each Capital Transaction, the proceeds,including cash,notes or other consideration realized by the Company as a result of such Capital Transaction, decreased by the sum of. (i)the amount of the Capital Transaction Reserve; (ii) the amount of such proceeds used, set aside or committed by the Company for restoration and repair ELK-1 VENTURES,LLC Operating Agreement Page 4 of the Property as a result of damage or destruction to the Property; (iii) any incidental or ancillary expenses,costs or Iiabilities incurred by the Company in effecting or obtaining any such Capital Transaction or the proceeds thereof(including without limitation, attorney and accountant fees, court costs,expert witness fees,recording fees,transfer taxes and fees,appraisal costs,brokerage fees and the like); (iv)current Company accounts payable including those owed to a Member; and(v) such other reserves which the Manager reasonably determines are necessary for working capital and for contingencies. 1.13. Capital Transaction. "Capital Transaction" means the sale, exchange, condemnation (or similar eminent domain taking) or other disposition of any Company Property, a refinancing of any Company Property, receipt of casualty insurance proceeds(excluding any business interruption or rental insurance proceeds), in connection with any Company Property, or any similar item or transaction the proceeds of which under generally accepting accounting principles are deemed attributable to capital. 1.14. Ca ital Transaction Reserve. "Capital Transaction Reserve" means funds set aside or amounts allocated to reserves, maintained in amounts deemed sufficient by the Manager, in its reasonable discretion, for contingencies resulting from a Capital Transaction, including, without limitation, contingent liabilities for representations and warranties made by the Company in such Capital Transactions. 1.15.Company. "Company>3 means ELK-1 VENTURES, LLC, a California limited liability company. 116. Company Nonrecourse Debt. "Company Nonrecourse Debt" means nonrecourse liabilities, as defined in Treasury Regulation §1.704-2(b)(3), with respect to which no Member or related Person within the meaning of Treasury Regulation §1.752-4(b) bears the economic risk of loss as determined in accordance with Treasury Regulation§1.752-2. 1.17. LO—MiDanj Nonrecourse Deductions. "Company Nonrecourse Deductions" means losses, deductions or Internal Revenue Code §705(a)(2)(13) expenditures attributable to Company Nourecourse Debt within the meaning of the Treasury Regulations. 1.18.Co_mnany Property."Company Property"means all of the real,personal,tangible and intangible Property owned by the Company at any particular time. 1.19. Consent to Continue. "Consent to Continue"means all Members agree to continue the business of the Company after the Bankruptcy or dissolution of any Member or occurrence of any other event that terminates the continued membership of any Member. ELK-L VENTURES,LLC Operating Agreement Page 5 1.20.Dissolution Event. "Dissolution Event"means any of the following events. A. The expiration of the term of the Company stated in the Articles, unless seventy percent(7511/o)of the Percentage Interest held by all Members agree to extend the term of the Company- B. The entry of a court decree of dissolution, and the Members acknowledge that any Member may petition a court of competent jurisdiction for a decree of dissolution pursuant to Corporations Code and such petition shall not be a breach of this Agreement; C. The agreement of at least seventy percent (75%) of the Percentage Interest held by all Members to dissolve the Company;or D. The bankruptcy or withdrawal of all the Managers if the Members fail to appoint a new Manager within ninety (90) days thereafter, unless seventy percent (75%) of the Percentage Interest held by all Members consent to continue the business of the Company. 1.21.Distribution(s)."Distribution(s)"means any distribution(s)of cash or a non-cash asset made by the Company to a Member. 1.22.Economic Interest. "Economic Interest"means a Person's right to share in the income, gains, Profits and Losses, deductions, credits or similar items of, and to receive Distributions from, the Company, but not any other rights of a Member including, without limitation, the right to vote or to participate in management of the Company or, except as provided in the California Corporations Code, any right to information concerning the business and affairs of the Company. 1.23. Gross Asset Value. "Gross Asset Value" means, with respect to any asset of the Company, the asset's book value determined in accordance with the principles of Treasury Regulation §1.704-1(b). Consequently, each asset's Gross Asset Value is equal to the asset's adjusted basis for federal income tax purposes except as follows: A. The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of the asset as reasonably determined by the Member and the Manager,except as otherwise set forth in Section 3.01. B. The Gross Asset Value of any asset of the Company distributed to any Member shall be adjusted to equal the gross fair market value of such asset on the date of Distribution. 1.24.Initial Capital Contributions) "Initial Capital Contribution(s)" shall mean the Capital Contributions of the Members made pursuant to Section 3.01. 1.25. Interest. "Interest" shall mean the entire ownership interest of a Member in the Company at any particular time, including the right of that Member to any and all benefits to which a Member may be entitled as provided in this Agreement and under the Act, together with ELK-1 VENTURES,LLC Operating Agreement Page 6 the obligations of that Member to comply with all terms and provisions of this Agreement. 1.26.Internal Revenue Code."Internal Revenue Code"shall mean the Internal Revenue Code of 1986,as amended from time to time. 1.27.Liquidation."Liquidation"shall mean the date on which the Company ceases to be a going concern, even though it may continue in existence for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its Members. However,although the Company may not be in Liquidation, with respect to a Member, Liquidation is also used in this Agreement to mean the liquidation of a Member's Interest in the Company pursuant to Treasury Regulation §1.761-1(d).Notwithstanding the two immediately preceding sentences,the term "Liquidation"shall be consistent with the meaning of such term as used in Treasury Regulation §1.704-1(b)(2)(u)(g). 1.28.Liquidation Proceeds."Liquidation Proceeds" shall mean the amount of cash and/or assets available for Distribution after dissolution of the Company in accordance with Article 10 hereof. 1.29. MajorWy Interest. "Majority Interest" shall mean Members then holding, in the aggregate,Percentage Interests in excess of fifty percent(50%) of the Percentage Interests held by all the Members. 130.Manager.Subject to Section 6.11, "Manager"shall mean Erik Pilegaard. If Erik Pilegaard is unable or unwilling to act as Manager, then the Manager shall be appointed by a majority interest of the Members. All Managers who are elected or appointed to this Company shall receive the prior written approval from a Majority Interest. 131. Member. "Member" shall mean each Person (other than any Person who has become bankrupt or dissolved)who is an initial signatory to this Agreement, each Substituted Member, and any other Person who may subsequently be a signatory to this Agreement with the consent of seventy percent(75%)of the Percentage Interest held by all of the Members. 132.Member Nonrecourse Debt."Member Nonrecourse Debt"is defined in Section 4.03B. 133 Percents a Interests. The "Percentage Interests"of the Members are as follows: Erik Pilegaard 45.0 % Kristen Pilegaard 45.0 % Landon Pilegaard 10 0 % 134.Person."Person"shall mean any individual,partnership,limited partnership,trust, estate, association,joint venture, limited liability company, limited liability partnership, corporation, or other ELK-1 VENTURES,LLC Operating Agreement Page 7 entity, whether domestic or foreign. 135. Profits and Losses. "Profits and Losses" shall mean for each fiscal year or other period, an amount equal to the Company's taxable income or loss for the year or period, determined in accordance with Internal Revenue Code§703(a)(for this purpose, including in taxable income or loss all items of income, gain, loss or deduction required to be stated separately pursuant to Internal Revenue Code§703(a)(1),with the following adjustments: A. Any income of the Company exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to subsections B, C or D, shall be added to taxable income or Ioss. B. Any expenditures of the Company described in Internal Revenue Code §705(a)(2)(B) or treated as Internal Revenue Code §705(a)(2)(B) expenditures pursuant to Treasury Regulation §1.704-1(b)(2)(iv)(i)shall be subtracted from taxable income or loss. C. Gain or loss resulting from the disposition of any Company Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of the Property differs from its Gross Asset Value. D. In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing taxable income or loss, the Company shall compute those deductions based on the Gross Asset Value of Company Property. If the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes,the depreciation, amortization, or other cost recovery deduction computed for purposes of calculating Profits or Losses (depreciation) for each fiscal year shall be an amount that bears the same ratio to such Gross Asset Value at the beginning of such year as the federal income tax depreciation, amortization, or other cost recovery deductions bears to the adjusted tax basis of the applicable asset at the-beginning of such year; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for the fiscal year is zero, depreciation shall be determined with reference to the Gross Asset Value at the beginning of the fiscal year using any reasonable method selected by the Manager. Items of income, gain, loss, deduction, expense and credit that are specially allocated other than with respect to Profits and Losses generally shall not be taken into account in calculating Profits or Losses. 1.36. Prwertv. "Property" shall mean any real property that shall become owned by the Company at a future date. 137.Intentionally Left Blank ELK-] VENTURES,LLC Operating Agreement page 8 1.38.Regulatory Allocations."Regulatory Allocations"is defined in Section 4.06A. 139. Reserves. "Reserves"means the aggregate of reserve accounts that the Manager, and in the Manager's sole discretion, deems reasonably necessary to meet accrued or contingent liabilities of the Company, reasonably anticipated operating expenses, and working capital requirements. 1.40.Restricted Transfer."Restricted Transfer"is defined in Section 8.03. 1.41.Substituted Member. "Substituted Member"shall mean a Person admitted as a Substituted Member pursuant to the provisions of Section 8.04. 1.42. Transfer. "Transfer" shall mean to sell, assign, convey, hypothecate or create any other interest in or otherwise dispose of property or a right. 1A3. Treasury Relations. "Treasury Regulations" shall mean the income tax regulations promulgated by the United States Department of Treasury for purposes of interpreting and applying the provisions of the Internal Revenue Code. 1.44 Unreturned Capital. "Unreturned Capital" shall mean the excess, if any, of a Members Capital Contribution to the Company over the aggregate amount of any Capital Proceeds distributed to such Member, as such excess may vary from time to time. ARTICLE 2 ORGANIZATIONAL MATTERS 2.01. Forte Pursuant to the Act, the Members have formed a California limited liability company under the laws of the State of California by filing the Articles with the California Secretary of State. The rights and liabilities of the Members shall be determined pursuant to the Act and this Agreement. To the extent that the rights or obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall control,to the extent permitted by the Act. 2.02. Name. The name of the Company shall be "ELK-1 VENTURES, LLC." The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that a Majority Interest deems appropriate or advisable. The Manager shall file any fictitious name certificates and similar filings, and any amendments thereto, that the Manager considers appropriate or advisable. 2.03. Term. The term of the existence of the Company commenced on November 11, 2016,the date of filing of the Articles of Organization with the California Secretary of State and shall continue until terminated by the provisions of this Agreement or as provided by law. ELK-1 VENTURES,LLC Operating Agreement page 9 2.04.Office and Agent. The Company shall continuously maintain its principal executive office at 2452 Bay View Avenue, Carmel, CA 93923 and thereafter at such other location within the State of California as the Manager shall designate. The Company's registered agent at such address shall be Erik Pilegaard or an individual or entity designated by the Manager. 2.05. Purpose of Company. The purpose of the Company shall be to build and own income real estate properties or to otherwise own an ownership interest in an entity that builds and owns income real estate properties. In furtherance of such purposes, the Company and the Manager may exercise all the powers conferred on limited liability companies by the Act. 2.06.Legal Filings.s. The Manager shall: (i) execute and cause to be filed with the California Secretary of State any amendment of the Articles, or any certificate of dissolution required by the Act; (ii) execute and cause to be filed, recorded, or published such fictitious business name statement or statements as the Manager deems appropriate; and (iii) file or record any other documents required to be filed or recorded by this Agreement or in accordance with applicable law. ARTICLE 3 CAPITAL AND FINANCING 3.01. Initial Capital Contributions The Initial Capital Contributions of the Members have been made by a transfer to the Company by each Member of that Member's respective interest in that portion of the Property as set forth in Section 1.36 herein. 3.02.Additional Reguired Capital Contributions. The Members shall not be required to make Additional Capital Contributions if any predevelopment or carrying costs of the Property are required prior to completion of the senior community improvements. No other Capital Contribution may be required of any Member and no Member may voluntarily make any other Capital Contributions except as specifically provided in Section 3.03. 3.03. Voluntary Additional Capital Contributions. If, from time to time, the Manager determines that the Company requires funds to pay the obligations of the Company or to achieve the purposes of the Company, all in the sole discretion of the Manager,the Members may, but shall not be required to, make such contributions of additional capital ("Additional Capital Contributions") in proportion to the Percentage Interests of the Members. A. On making such a determination, the Manager shall give written notice or notice delivered via email to all Members at least 45 days prior to the date on which such additional Capital ELK-1 VENTTTI2ES,LLC Operating Agreement Page IQ Contribution is required. The notice shall set forth the amount of additional Capital Contribution needed, the purpose for which it is needed, and the date by which all Members who wish to contribute shall contribute. B. If a Member ("Noncontributing Member") fails to make any Additional Capital Contribution, the Company shall offer to each other Member("Contributing Member")the right, but not the obligation, to contribute the Noncontributing Members' pro rata share of such Additional Capital Contribution. If any Member elects pursuant to this Section to contribute the Noncontributing Members' share of an Additional Capital Contribution, then the Percentage Interest of each Member shall thereupon be recalculated as the date of the contribution of the Additional Capital Contribution(the "Computation Date")as described herein below- C. On payment of each Additional Capital Contribution, the amount of the Additional Capital Contribution shall be added to such Member's Capital Account and the Member's Percentage Interest shall be adjusted as described herein below. D. If all the requested Additional Capital Contributions are not contributed within the time limits set by the Manager, the Manager may offer memberships in the Company to new Members who contributed all or a portion of the Additional Capital Contribution. E. Upon payment of any Additional Capital Contribution(s), the Percentage Interest of the Members shall be adjusted, effective as of the end of the calendar month in which Additional Capital Contribution(s) are made. The Percentage Interests of each Member shall be adjusted to equal the percentage derived by dividing (i) the Member's Unreturned Capital including the Additional Capital Contributions by(ii)the Unreturned Capital of all Members. 3.04. Return of Distributions. In accordance with the laws of the State of California, a Member under certain circumstances may be required to return to the Company, for the benefit of the Company's creditors, amounts previously distributed to that Member. If any court of competent jurisdiction holds that any Member is obligated to make any such payment, that Member shall indemnify the other Members against any liability for the return of such amounts. 3.05.Capital Accounts.A Capital Account shall be established and maintained for each Member in accordance with the requirements of this Agreement. 3.06. Withdrawal of Capital. Except as specifically provided in this Agreement, (i) no Member shall be entitled to withdraw all or any portion of that Member's Capital Contributions, or Capital Account balance, and (ii) no specific time has been agreed on for the return of Capital Contributions to any Member. ELK-1 VENTURES,LLC Operating Agreement Page 11 3.07.Loans From Members or Affiliates. The Manager is authorized to loan money to the Company from time to tune in amounts as the Manager shall reasonably determine are required for the business of the Company, directly, or through any affiliate of Manager and/or Erik Pilegaard, bearing interest at commercially reasonable rates and terms,unsecured,payable from positive cash flow after debt service on all secured Company loans from a bank or institutional lender, and/or from Capital Transactions after repayment of all Company obligations to bank or institutional lenders,to be repaid by the Company prior to any distributions to the Members.No Member or any Affiliate of a Member may otherwise make a loan to the Company unless approved by the Manager and at commercially reasonable terms and rate. 3.08. No Adiustment on a Capital Contribution. There shall be no interest accruing and/or payable on any Capital Account. ARTICLE 4 ALLOCATIONS 4.01.Profits. Subject to the other provisions of this Article 4,Profits shall be allocated to the Members as follows: A. First, to the extent Losses have been allocated to the Members pursuant to Section 4.02.A or 4.02.B for any prior years, Profits shall be allocated first to offset any Losses allocated pursuant to Section 4.02.B and then to offset any Losses allocated pursuant to Section 4.02.A (in each case among the Members in Proportion to their respective shares of the Losses being offset). To the extent any allocations of Losses are offset pursuant to this Section 4.01.A, such Losses shall be disregarded for purposes of computing subsequent allocations pursuant to this Section 4.01 and Section 4.02. 4.02.Losses. Subject to the other provisions of this Article 4,Losses shall be allocated as follows: A. Until Each Member has been allocated an amount of Losses sufficient to reduce the balance in such Member's Capital Account to zero, one hundred percent (100%) of Losses shall be allocated to the Members in proportion to the credit balances in their respective Capital Accounts. B. The balance,in accordance to their respective Member ownership. 4.03. Allocation of Company Nourecourse Deductions and Minimum Gain ELK-1 VENTURES,LLC Operating Agreement Page 12 Char ebaek Provisions. A. Notwithstanding any other provisions in this Agreement; (i) Company Nonrecourse Deductions shall be allocated in proportion to Percentage Interests; and (ii) if for any taxable year of the Company there is a net decrease in Company Minimum Gain (as determined in accordance with Treasury Regulation §1.704-2(d)) ("Company Minimum Gain") attributable to Company Nonrecourse Debt, each Member shall be specially allocated items of Company income (including gross income) and gain for such year (and, if necessary, subsequent years) equal to that Member's share of the net decrease in Company Minimum Gain (as determined in accordance with Treasury Regulation §1.704-2(g)).However,no such special allocation shall be made to the extent that an exception or waiver provided for in Treasury Regulation §1.704-2(f)(2), (3), (4) or(5) applies. This Section 4.03A is intended to comply with the minimum gain chargeback requirements of the Treasury Regulations and shall be interpreted consistently therewith. B. Notwithstanding any other provision of this Agreement, if for any taxable year of the Company there is a net decrease in Member Nonrecourse Debt Minimum Gain (as determined in accordance with Treasury Regulation §1.704-2(i)(3)) ("Member Nonrecourse Debt Minimum Gain") attributable to Nonrecourse Debt with respect to which one or more Members ("Risk Members") or a Person related to such Member(s) (within the meaning of Treasury Regulations §1.752-4(b)) bears the economic risk of loss (as determined in accordance with Treasury Regulation §1.752-2) ("Member Nonrecourse Debt"), each such Risk Member shall be specially allocated items of Company income(including gross income)and gain for such year(and, if necessary, subsequent years) equal to that Risk Member's share of the net decrease in the Member Nonrecourse Debt Minimum Gain(as determined in accordance with Treasury Regulation §1.704-2(i)(4)). However,no such special allocation shall be made to the extent that an exception or waiver provided for in Treasury Regulation §1.704-2(1)(4) applies. This Section 4,03B is intended to comply with the minimum gain chargeback requirement of the Treasury Regulations and shall be interpreted consistently therewith. C. Items of Company income and gain shall be allocated pursuant to Section 4.03A and 4.03B as follows: (1)Gain from the disposition of Property subject to Company Nonrecourse Debt shall first be allocated pursuant to Section 4.03A; (2)Gain from the disposition of Property subject to Member Nourecourse Debt shall first be allocated pursuant to Section 4.03B; and ELK-1 VENTURES, LLC Operating Agreement Page 13 (3)Items of income and gain not allocated pursuant to Section 4.03C(1) or Section 4.03C(2)shall be allocated first pursuant to Section 4.03A and second pursuant to Section 4.03B.For purposes of applying this Section 4.03C(3),the items of Company income or gain allocated Pursuant to Section 4.03B shall not include any item of income or gain allocated pursuant to Section 4.03A. D. This Section 4.03 is intended to comply with the ordering rules of Treasury Regulation§1.704-20)(2)and shall be interpreted consistently therewith. 4.04. Qualiflied Income Offset Provision.Notwithstanding any other provision in this Article 4, if any Member unexpectedly receives any adjustments, allocations, or Distributions described in Treasury Regulation §1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain (consisting of a pro rata portion of each item of Company income, including gross income, and gain for such year) shall be specifically allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, a deficit balance (in excess of the amount the Member is obligated to restore under this Agreement and deemed obligated to restore pursuant to Treasury Regulation §1.704-2(g)(1) and (i)(5)) in the Capital Account of that Member as quickly as possible. The provisions of this Section 4.04 shall be applied after application of Section 4.03, 4.05. Member Nonrecourse Deductions. Any deductions attributable to Member Nonrecourse Debt for any fiscal year or other period shall be specially allocated to the Members in accordance with Treasury Regulation§1.704-2(i)(1). 4.06.Curative Allocations. A. The allocations set forth in Sections 4.03, 4.04 and 4.05 (the "Regulatory Allocations") are intended to comply with certain requirements of Treasury Regulations under Internal Revenue Code §704(b). Notwithstanding any other provisions of this Article 4 (other than the Regulatory Allocations), any Regulatory Allocations made by the Company shall be taken into account in allocating other Profits, Losses, and items of income, gain, loss, and deductions among the Members so that, to the extent possible, the net amount of such allocations of other Profits, Losses, and other items, and such Regulatory Allocations, to each Member shall be equal to the amount that would have been allocated to each Member if the Regulatory Allocations had not occurred. B. Notwithstanding any provision of this Agreement other than the minimum gain chargeback provisions (Section 4.03) and qualified income offset provisions (Section 4.04) and after the application of such provisions, on any Liquidation of the Company, or any sale or exchange of all or ELK-1 VENTURES,LLC Operating Agreement Page 14 substantially all the Property of the Company in connection with such a Liquidation, all Profits, losses and items of income, gain, loss, and deductions realized in connection with any transaction or Distribution in connection with such Liquidation or on such sale or exchange, or recognized during the taxable year within which such Liquidation occurs, shall be allocated so that, to the maximum extent possible,the net amount of such allocations of Profits, Losses, and items of income,gain, loss, and deductions and the Regulatory Allocations shall be equal to the net amount that would have been allocated to each Member if the Regulatory Allocations had not occurred. If there are insufficient amounts of Profits, Losses, and items of income, gain, loss, and deductions to fully achieve the objectives set forth in the immediately preceding sentence, the Manager shall request waiver of the minimum gain chargeback provisions to the extent necessary to fully achieve such objectives. 4.07. Recapture Allocations. After calculating the dollar amount of all allocations pursuant to this Article 4 without the application of this Section 4.07, and subject to the applicable provisions of the Internal Revenue Code and Treasury Regulations under Internal Revenue Code §704(b) depreciation recapture (i.e., any income required to be recognized in accordance with Internal Revenue Code §1245 or Internal Revenue Code §1250 or in accordance with similar principles of federal or state law, affecting the character or timing of the recognition of income on disposition of property), if any, and tax credit recapture (i.e., any increase in tax required by reason of Internal Revenue Code §47 or in accordance with similar principles of federal or state law, that increase tax liability as a result of the disposition of,or other occurrences concerning,property with respect to which tax credits had previously been taken), if any, shall, to the extent permitted by the Internal Revenue Code, be allocated among the Members so that the Members (or their successors in interest)to whom the prior corresponding depreciation deductions or tax credits, as the case may be,were allocated, shall be allocated such items in the same proportions and up to the same extent of such corresponding deductions or tax credits; provided, however, that such an allocation shall be made pursuant to this Section only to the extent that the dollar amount of the allocations pursuant to this Article 4 prior to the application of this Section would not be affected. 4.08. Internal Revenue Code 704(c) AIloeation. In accordance with Internal Revenue Code §704(c), and the Regulations thereunder, and Treasury Regulation §1.704-1(b)(4)(i), income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and ELK-1 VENTURES,LLC Operating Agreement Page 15 its initial Gross Article 1 hereof).In the event that the Gross Asset Value of any Company Property is adjusted pursuant to subsection B of the definition of Gross Asset Value in Article 1 hereof, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same or in a generally consistent manner as under Internal Revenue Code §704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Manager in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this subsection are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, or other items or Distributions pursuant to any other provision of this Agreement. ARTICLE 5 PAYMENTS TO MEMBERS AND DISTRIBUTIONS 5.01. CH PAW__ Proceeds. All Available Cash from Capital Proceeds shall be at least annually distributed in in accordance with their respective ownership interest in the Company. 5.02. Non Capital Proceeds. All Available Cash resulting from other than Capital Proceeds shall be distributed in accordance with their respective ownership interest in the Company. ARTICLE 6 POWERS AND RESPONSIBILITIES OF THE MANAGER 6.01. In General. Except for the voting and approval rights of the Members set forth herein, the Manager shall have the exclusive control over the management of the business and affairs of the Company. As long as the Company has a Manager, then, except as otherwise expressly stated in this Agreement, the Members shall have no right to manage or conduct the Company's business or to sign for or on behalf of or bind the Company, and the Manager shall have that right. Subject to the voting and approval rights of the Members as specifically set forth in this Agreement, all decisions regarding the management of the Company's business and affairs shall be made by the Manager_ A Member, unless also appointed as a Manager or employee, shall not participate in the day-to-day operation of the business or affairs of the Company, and if so appointed, shall participate only within the scope of authority of such position as defined in this Agreement or elsewhere. ELK-1 VENTURES,LLC Operating Agreement Page 16 6.02. The Company to Act Through the Manager. Subject to the conditions, limitations, and exceptions as set forth hereinafter, the Manager shall have the rights, powers, and authority granted hereunder and by law to obligate and bind the Company and, on behalf of in the name of the Company, to take such action as the Manager deems necessary or advisable in furtherance of the Company's business and purposes. 6.03.Tax Matters Partner, The Manager shall act as the tax matters partner for the Company pursuant to Internal Revenue Code§6231(a)(7). 6.04.Powers of Man er.The Manager shall have all powers which may which may be held by managers of a limited liability company except as otherwise provided by Section 7.03. The Manager shall have the right,power and authority to cause the Company to incur all reasonable expenditures and to enter into any and all contracts or agreements in connection with the Company's business and purpose, and to do and perform everything which the Manager deems advisable to carry out the purpose and objectives of the Company. 6.05.Devotion of Time.The Manager shall devote such time to the Company's business as the Manager,in the Manager's own good faith discretion,deems necessary. 6.06. Indevendent Activities. The Manager and the Members, notwithstanding the existence of this Agreement, may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the financing, acquisition, ownership, renting, development, and sale of residential, industrial, or commercial real property, which may or may not compete with the business of the company. Neither the Company nor any of the Members shall have any right in or to such independent ventures or to the income or profits derived therefrom. As a material part of the consideration for each Member's execution hereof, each Member hereby waives,relinquishes,and renounces any such right or claim of participation. 6.07.Liability and Indemnification of the Manager.The Manager's act or the failure to do any act, the effect of which may cause or result in loss or damage to the Company, shall not subject the Manager to any liability if it was the result of a decision made by the Manager in good faith to promote the best interests of the Company, unless such act or failure to act constituted willful misconduct or gross negligence. The Company (but not the Members) shall indemnify and hold harmless the Manager from and against any liability, loss, expense (including, without limitation, attorneys' fees), damage, cost and claim incurred by the Manager by reason of any alleged acts or omissions (even if such acts or omissions constituted the negligence of the Manager) arising out of the activities of the Manager on behalf of the Company, as long as such acts or omissions were for a ELK-1 VENTURES,LLC Operating Agreement Page 17 purpose reasonably believed by the Manager to be in the best interests of the Company and did not constitute willful misconduct or gross negligence. Any judgment, order, or settlement shall not create a presumption that the Manager acted in bad faith or with gross negligence, absent a specific finding thereon. 6.08.Manager Compensation. A. The Managers may be paid a monthly management fee for duties related to the operation of the business. B. The Managers shall be entitled to reimbursement of all expenses reasonably incurred by the Manager in the performance of the Manager's duties. C. The Managers shall not be entitled to any compensation for the Manager's services except as expressly set forth in this Agreement or agreed to in a separate agreement with the written signature of all Members; 6.09. Removal of.Manager. A Manager shall serve until either: (i) resignation by giving written notice to all Members specifying the date of resignation; or (ii) if an individual, he or she suffers an illness or injury which will materially interfere with the proper and timely performance of his or her normal duties; or (iii) if an individual, his or her death; or (iv) the Manager becomes insolvent or bankrupt; or (v) the Manager materially breaches the Manager's obligations or fiduciary duties under this Agreement, whether as a Member or as a Manager, after receiving written notice of and thirty (30) days opportunity to cure such breach, or (vi) conviction of a felony. Upon the occurrence with respect to a Manager of any of the events described in clauses (ii), (iv), (v) or (vi) of this Section, then any Member may remove such Manager by written notice to such Manager. In the event of a dispute about the existence of these causes or the right to remove, then the dispute will be settled by arbitration pursuant to the provisions of the California Code of Civil Procedure commencing at Section 1280 et seq. The parties sha I be entitled to discovery pursuant to Code of Civil Procedure Section 1283.05. The arbitrator's decision shall be final and binding without right to a trial de novo. In the event that a Manager is z'emoved subject to Section 6.11 (iv), (v) or (vi), then a replacement Manager shall be elected to this Company by a written approval from a Majority Interest ARTICLE 7 MEMBERS ELK-1 VENTURES,LLC Operating Agreement Page 18 7AL Membership.Subject to the last sentence of Section 8.02,a Person and/or entity may become a Member by issuance of an Interest in the Company only with the approval of the Manager and 50%of all Members. 7.02. Limited Liability. No Member or Manager of the Company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the Company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a Member or Manager of the Company, except as required by law. 7.03.Vokinu Rfi-hts. A. Any amendment of this Agreement shall require the approval of fifty one percent (51%)of the Percentage Interests held by all of the Members,except as provided below. B. A vote of at least 75% of the Members shall be required for any amendment which: (a) Imposes a new material obligation on a Member; (b) Reduces a capital account or Percentage Interest of a Member except as provided in Section 3.03; (c) Reduces a Member's rights to allocations or distributions under this Agreement; or (d) Modifies any provision of the Operating Agreement that requires a unanimous vote of the Members,including this provision. 7.04. Mechanism for Approval bv Members. Membership meetings may take place in person or by phone. Approval of the Members may be obtained without a meeting. If a meeting tapes place the approval shall be in writing,setting forth the action so taken,is signed by all of the Members. 7.05. Meetings. There shall be no regularly scheduled meetings of the Members. A meeting of the Members may be called by the Manager, or any Member or Members for the purpose of addressing any matters. Meetings of Members shall be held at the principal office of the Company or at such other location selected by the Person or Persons calling the meeting or by a teleconference of the Members if all are present on the teleconference. 7.06. Notice of Meetings. Written notice of a meeting shall be given to each Member entitled to vote not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted. No other business may be transacted at the meeting. 7.07. No Dissenters' Rights-, To the extent pemuttcd by the Act, Members shall have no ELK-1 VENTURES,LLC Operating Agreement Page 19 dissenters' rights in the event of the merger of the Company with any corporation, partnership, other limited liability company or other business entity, or in the event of any other reorganization of the Company. 7.08.No Member Authority.No Member acting solely in the capacity of a Member is an agent of the Company, nor can any Member acting solely in the capacity of a Member bind the Company or execute any instrument on behalf of the Company. Accordingly, each Member shall indemnify, defend,and save harmless each other Member and the Company from and against any and all loss, cost, expense, liability or damage arising from our out of any claim based upon any action by such Member in contravention of the first sentence of this section. 7.09.Withdrawal of Members.The Members shall not have the right to withdraw,resign or retire from the Company,except as expressly provided in this Agreement. 710. Independent Activities. The Members, notwithstanding the existence of this Agreement, may engage in or possess an interest in other business ventures of every nature and description, .independently or with others, including, but not limited to, the financing, acquisition, ownership,renting,development, and sale of residential,industrial,or commercial real property. Neither the Company nor any of the Members shall have any right in or to such independent ventures or to the income or profits derived therefrom. As a material part of the consideration for each Member's execution hereof, each Member hereby waives, relinquishes, and renounces any such right or claim of participation. ARTICLE 8 TRANSFER WITHDRAWAL AND TERMINATION OF INTERESTS 8.02. Withdrawal. A Member may withdraw from the Company at any time by giving Notice of Withdrawal to all other Members at least one hundred eighty (180) calendar days before the effective date of withdrawal. Withdrawal shall not release a Member from any obligations and liabilities under this Agreement accrued or incurred before the effective date of withdrawal in accordance with the transfer restrictions and option rights set forth below. 8.02.Transfer. Except as expressly provided in this Agreement, a Member shall not Transfer any part of the Member's Membership Interest in the Company, whether now owned or hereafter acquired,unless(1)the other Members unanimously approve the transferee's admission to the Company as a Member upon such Transfer and (2) the Membership Interest to be transferred, when added to the total of all other Membership Interests transferred in the preceding twelve (12) months, will not cause ELK-1 VENTURES,LLC Operating Agreement page 20 the termination of the Company under the Code. No Member may encumber or permit or suffer any encumbrance of all or any part of the Member's Membership Interest in the Company unless such encumbrance has been approved in writing by all the other Members. Any Transfer or encumbrance of a Membership Interest without such approval shall be void. Notwithstanding any other provision of this Agreement to the contrary,a Member who is a natural person may transfer all or any portion of his or her Membership Interest to his or her spouse or to any revocable trust created for the benefit of the Member, or any combination between or among the Member, the Member's spouse, and the Member's issue;provided that the Member retains s a beneficial interest in the trust and all of the Voting Interest included in such Membership Interest. A transfer of a Member's entire beneficial interest in such trust or failure to retain such Voting In shall be deemed a Transfer of a Membership Interest. 8.03. Triggering Events. On the happening of any of the following events (Triggering Events) with respect to a Member,the Company and the other Members shall have the option to purchase all or any portion of the Membership Interest in the Company of such Member (Selling Member) at the price and on the terms provided in Section 8.6 of this Agreement: (a) the death or incapacity of a Member; (b) the bankruptcy of a Member; (c) the winding up and dissolution of a corporate Member, or merger or other corporate reorganization of a corporate Member as a result of which the corporate Member does not survive as an entity; (d) the withdrawal of a Member; or (e) except for the events stated in Section 8.4,the occurrence of any other event that is or that would cause, a Transfer in contravention of this Agreement. Each Member agrees to promptly give Notice of a Triggering Event to all other Members. 8.04. Triuerim Event Option On the receipt of Notice by the other Members as contemplated by Section 8.1,and on receipt of actual notice of any Triggering Event,the Company shall have the option, for a period ending thirty (30) calendar days following the determination of the purchase price as provided in Section 8.06, to purchase the Membership Interest in the Company to which the option relates, at the price and on the terms provided in Section 8.6, and the other Members, pro rata in accordance with their prior Membership Interests in the Company, shall then have the option, for a period of thirty(30)days thereafter,to purchase the Membership Interest in the Company ELK-1 VENTURES,LLC Operating Agreement Page 21. not purchased by the Company, on the same terms and conditions as apply to the Company. If A other Members do not elect to purchase the entire remaining Membership Interest in the Company, then the Members electing to purchase shall have the right,pro rata in accordance with their prior Membership Interest in the Company,to purchase the additional Membership Interest in the Company available for purchase. The Membership Interest in the Company that is not purchased as provide above shall continue to be held by the transferring Member subject to all of the provisions of this Agreement. 8.,05.Vote.No Member shall participate in any Vote or decision in any matter pertaining to the disposition of that Member's Membership Interest in the Company under this Agreement. 8.06. Purchase Price. The purchase price of the Membership Interest that is the subject of an option under this Agreement shall be the Fair Market Value of such Membership Interest as determined under this Section 8.06. Each of the selling and purchasing parties shall use his, her, or its best efforts to mutually agree on the Fair Market Value. If the parties are unable to so agree within thirty (30) days of the date on which the option is first exercisable (the Option Date), the selling parry and the purchasing party shall each submit in writing to the other party his final determination of the purchase price within forty-five (45) days after the Option Date. The parties shall then have ten (10) days to mutually select an independent appraiser. If within said time the parties are unable or unwilling to agree upon the appraiser, either party may request the Superior Court of Sacramento County to appoint the appraiser. The appraiser's sole duty shall be to select either the selling parry's determination of the purchase price and/or the purchasing parry's determination of the purchase price as the final purchase price. Each party shall pay for one-half('/2) of the services of the appraiser. The option purchase price as so determined shall be payable ten percent (10%) down in cash within sixty (60) days after determination of the Fair Market Value; the balance payable by a Promissory Note secured by the interest being purchased, bearing interest at the rate of Bank of America San Francisco prime plus one at the date of the cash down payment; quarterly payments based upon a twenty-five (25) year amortization of principal and interest, with a balloon payment of the balance due three (3) years from the date of the note. The note shall have common provisions such as a due on sale of the Property clause, acceleration upon default and an attorney's fees clause. 8.07. Substituted Member. Except as expressly permitted under Section 8.02, a Prospective transferee (other than an existing Member) of a Membership Interest may be admitted as a Member with respect to such Membership Interest(Substituted Member) only (1) on the unanimous Vote of the other Members in favor of the prospective transferee's admission as a Member, and ELKA VENTURES,LLC Operating Agreement page 22 (2) on such prospective transferee's executing a counterpart of this Agreement as a party hereto. Any prospective transferee of a Membership Interest shall be deemed an Assignee, and, therefore, the owner of only an Economic Interest until such prospective transferee has been admitted as a Substitute Member. 8.08. Su�b_sect To Agreement. Any person admitted to the Company as a Substituted Member shall be subject to all provisions of this Agreement. 8.09. Bonafide Offer Option If a Member wishes to transfer any or all of the Member's Membership interest in the Company pursuant to a Bona Fide Offer (as defined below), the Member shall give notice to the other Members at least thirty (30) days in advance of the proposed sale or transfer, indicating the terms of the Bona Fide Offer and the identity of the offeror. The Company and the other Members shall have the option to purchase the Membership Interest proposed to be transferred at the price and on the terms provided in this Agreement. if the price for the Membership Interest is other than cash, the Fair Market Value in dollars of the non-cash portion shall be as established in good faith by the Company. For purposes of this Agreement, "Bona Fide Offer" means an offer in writing setting forth all relevant terms and conditions of purchase from an offeror who is ready, willing, and able to consummate the purchase and who is not an Affiliate of the selling Member. For fourteen (14) days after the Notice is given, the Company shall have the right to elect by written notice to the selling Member to purchase the Membership Interest offered on the terms stated in the Notice or all cash; escrow shall close on the date set forth in the Notice or, at the option of the purchasing Company or purchasing Member, within six (b) months after the purchasing Company and/or the purchasing Member gives the written election to purchase. If the Company does not exercise the right to purchase alI of the Membership Interest, then, with respect to the portion of the Membership Interest that the Company does not elect to purchase, that right shall be given to other Members for an additional fifteen (15) day period, beginning on the day that the Company's right to purchase expires. Each of the other Members shall have the right to purchase, on the same terms, a part of the interest of the offering Member in that proportion that the Member's Percentage Interest bears to the total Percentage Interests of all of the Members who choose to participate in the purchase; provided, however, that the Company and the participating Members may not, in the aggregate,purchase less than the entire interest to be sold by the Offering Member. If the Company and the other Members do not exercise their rights to purchase all of the Membership Interest, the offering Member may, within ninety (90) days from the date the Notice is ELK-1 VENTURES,LLC Operating Agreement Page 23 given and on the terms and conditions stated in the Notice, sell or exchange that Membership Interest to the offeror named in the Notice upon price and terms not more favorable than the terms of the Bona Fide Offer presented to the Members. In the sale or exchange has not closed within such ninety (90) clay period, then the procedures provided above shall be repeated by the Member wishing to make the Transfer. Unless the requirements of Section 8.2 are met, the offeror under this section shall become an Assignee, and shall be entitled to receive only the share of Profits or other compensation by way of income and the return of Capital Contribution to which the assigning Member would have been entitled. 8.10.No Securities Registration.The initial sale of Membership Interests in the Company to the initial Members has not been qualified or registered under the securities laws of any state, or registered under the Securities Act of 1933, as amended, in reliance upon exemptions from the registration provisions of those laws. No attempt has been made to qualify the offering and sale of Membership Interests to Members under the California Corporate Securities Law of 1968, as amended, also in reliance upon an exemption from the requirement that a permit for issuance of securities be procured. Notwithstanding any other provision of this Agreement,Membership Interests may not be Transferred or Encumbered unless registered or qualified under applicable state and federal securities law or unless, in the opinion of legal counsel satisfactory to the Company, such qualification or registration is not required. The Member who desires to transfer a Membership Interest shall be responsible for all legal fees incurred in connection with said opinion. ARTICLE 9 BOOKS OF ACCOUNT RECORDS REPORTS TAX MATTERS AND MEETINGS 9.01. Maintenance of Books, Records, Reports, and Accounts. True and proper books, records, reports, and accounts of the Company shall be maintained by the Manager at all times at the principal executive office of the Company, in which shall be entered fully and accurately all Company transactions. Such records shall include: A. A current list of the full name and last known business or residence address of each Member and of each holder of an Economic Interest in the Company set forth in alphabetical order, together with the contribution and the Percentage Interest of each Member and holder of an Economic Interest; B. A copy of the Articles and all amendments thereto,together with any powers of attorney pursuant to which the Articles or any amendments thereto are executed; ELK-1 VENTURES,LLC Operating Agreement page 24 C.A copy of this Agreement,and any amendments thereto,together with any powers Of attorney pursuant to which this Agreement or any amendments thereto were executed; D. Copies of the Company's federal, state,and local income tax or information returns and reports,if any, for the six(6)most recent taxable years; E. Copies of the financial statements of the Company for the six(6)most recent fiscal years;and F. The books and records of the Company as they relate to the internal affairs of the Company for at Ieast the current and past four(4)fiscal years. 9.02. won of Books,Records, Reports,and Accounts. ,All books, records, reports, and accounts of the Company shall be open to inspection by any Member or that Member's duly authorized representatives at any time during normal business hours, on reasonable request. That Member or representative shall have the further right, at the expense of the Company, to make copies or extracts therefrom, including (without limitation) copies of the Company's federal, state, and local income tax or information returns. 9.03. Methods of Accounting. The Company's books shall be kept on the method of accounting selected by the Manager in its sole discretion and as rewired by Internal Revenue Code §448. 9.04.Fiscal Year.The Company's fiscal year shall be the calendar year. 9.05.Reports.The Manager shall cause the Company to provide the Members with the following reports: A. Within seventy-five (75) days after the end of the Company's fiscal year, an annual report containing: (i)a balance sheet as of such year end; (ii) statements of income or loss, cash flows, changes in financial position, and changes in Members' equity for the year then ended; and (iii) a report of the activities of the Company during the period covered by the report; B. All annual financial statements required by this section shall be prepared in accordance with generally accepted accounting principles consistently applied for the periods indicated, and shall commence with both the beginning of the period covered and the beginning of the then-current calendar year;and C.All Members shall have access to all balance sheets and financial statements prepared by the Company. D. The accountant for the Company shall be instructed to allocate each item of income ELK-i VENTURES,LLC Operating Agreement Page 25 and expense, or portion thereof,to Parcel 2 to the extent the income or expense is generated by Parcel 2,and to Parcel 3 to the extent the income or expense is generated by Parcel 3. ARTICLE 10 EVENTS OF DISSOLUTION• CONTINUATION OF THE COMPANY;LI UIDATION 10.01.Consent to Continue Business of the Company.On the occurrence of any Dissolution Event,the Company shall dissolve except as provided in Section 1.19, 10.02.Winding Up and Liquidation A. Winding Up. On the dissolution of the Company, the Manager, or, if there is no Manager, Majority Interest, shall cause the remaining Company assets to be sold or distributed in kind to the Members in accordance with terms of this Agreement. The Members and the holders of the Economic Interests shall continue to share Distributions, Profits, Losses, and allocations during the period of Liquidation in accordance with Articles 4 and 5. B. Li uidativn. Subject to (i) the provisions of Sections 10.02A, and (ii) the requirements of Treasury Regulation §1304-1(b)(2)(h)(b)(2) concerning liquidating Distributions to partners, on the winding up and termination of the business and affairs of the Company, and subject to the right of the Investor Members in subsection C below, its assets (other than cash) shall be sold,its liabilities and obligations to creditors and all expenses incurred in its Liquidation shall be paid, and all resulting items of Company income, gain, loss, or deduction shall be credited or charged to the Capital Accounts of the Members in accordance with the principles of Article 4 of this Agreement. Thereafter, Liquidation Proceeds shall be Distributed among the Members in the following order of priority_ (1) First, to the payment and discharge of ali of the Company's debts and liabilities not previously paid; (2) Second, to fund any reserves previously established but not funded and to establish and fund any new reserves that the Manager or other liquidating Member(s) deem to be necessary, appropriate, or desirable for any future, contingent, or unforeseen liabilities, obligations, or debts of the Company arising out of, or in connection with, the Company that are not yet payable or have not yet been paid. Such reserves shall be disbursed in payment of any of such liabilities, obligations, and debts and, when it is no longer necessary to maintain, any remaining reserves shall be distributed in the manner provided below; and (3) Third, in accordance with Section 5.01. ELK-] VENTURES,LLC operating Agreement page 26 10.03. Time of Liquidation. A reasonable time shall be allowed for the orderly Liquidation of the assets of the Company and the discharge of liabilities to creditors so as to enable the Manager or other liquidating Member(s) to minimize, to the extent it deems practicable, advisable, or desirable, the normal Losses attendant on a Liquidation. The provisions of this Section 10.03 are to be interpreted in a manner consistent with the rules contained in Treasury Regulation §1.704-1(b)(2)(ii)(g). To the extent that these provisions are determined to be inconsistent with Treasury Regulation §1.704- 1(b)(2)(ii)(g), or fail to address any situation covered by such Regulations,the rules prescribed in such Regulations shall govern. ARTICLE 11 MISCELLANEOUS 11.01.Notices.All notices,approvals,disapproval,or elections required or permitted to be given under this Agreement shall be in writing and shall be(i)delivered personally,(ii)sent via Federal Express (or another comparable overnight messenger service), (iii) sent via telecopy, or (iv) mailed, certified or registered mail, return receipt requested, to the parties at the addresses set forth below their respective signatures. Personally delivered notices shall be deemed given on actual personal delivery to the intended recipient. Telecopied notices shall be deemed given on completion of transmission to the receiving telecopy machine. Notices sent via federal Express (or another comparable overnight messenger service)shall be deemed given the immediately following business day. Mailed notices shall be deemed given on the earlier of three (3) business days after deposit into the United States mail, registered or certified,with postage fully prepaid,or the date of actual receipt as evidenced by the return receipt. 11.02. Successors and Assigns. Subject to restrictions set forth in this Agreement, this Agreement shall be binding on and shall inure to the benefit of the parties hereto and their respective executors,administrators,successors,and assigns. 11.03.Disputes. A. Governing Law;.jurisdiction. This Agreement has been negotiated and entered into in the State of California, concerns a California business and all questions with respect to the Agreement and the rights and liabilities of the parties will be governed by the laws of that state, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Agreement not covered by arbitration will be ELK-1 VENTURES,LLC Operating Agreement Page 27 heard and determined before an appropriate federal or state court located in Sacramento County, California. The parties hereto acknowledge that such court has the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 11.04. Entire Agreement. This Agreement contains the entire understanding between the parties with respect to the subject matter hereof and supersedes any prior understandings and agreements between them with respect thereto. 11.05. Recovery of Attorneys' Fees In any legal proceeding among the Members seeking to enforce or to construe any of the terms and provisions of this Agreement, or in connection with the Project, including, without limitation, insolvency, bankruptcy, arbitration, declaratory relief, or other litigation, the prevailing party in such action shall be awarded, in addition to damages, injunctive, or other relief, its reasonable costs and expenses, including, without limitation, service of process, filing fees, court and court reporter costs, investigation costs, expert witness fees, and the cost of any bonds, and reasonable attorneys' fees as fixed by the court therein. 11.06. Title and Captions. Section, titles, or captions contained in this Agreement are inserted only as a matter of convenience and for reference purposes and do not define, limit, extend, or describe the scope of this Agreement,or the intent of any provisions hereof. 11.07. Counte arts. This Agreement may be executed in several counterparts and all so executed shall constitute one Agreement, binding on all parties hereto, notwithstanding that all parties are not signatories to the original,or the same counterpart. 11.08. Terms. Whenever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in the masculine, the feminine,or the neuter gender shall include the masculine,feminine,and neuter. 11.09. Severability. If any provision of this Agreement, or the application of that provision to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of that provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. 11.10. Further Assurances. Each party hereto agrees to execute, with acknowledgment or affidavit, if required, any and all documents and writings that may be necessary or expedient, and to take such further actions, in connection with the organization of the Company and the achievement Of its purposes, specifically including: (i) all amendments to the Articles and this Agreement and other documents as the Manager deems necessary or appropriate to form, qualify, or continue the ELK-1 VENTURES,LLC Operating Agreement Page 28 Company as a limited liability company for purposes of the California Corporations Code and in all other jurisdictions in which the Company conducts or plans to conduct business or a partnership for federal and state income tax purposes; (ii) all such agreements, certificates, tax statements, tax returns, and other documents as may be required of the Company or its Members by the laws of the United States of America, the State of California, or any other state in which the Company conducts or plans to conduct business,or any political subdivision or agency thereof; 11.11. Interest. It is the intention of the parties hereto to comply with all applicable state and federal usury laws. Accordingly, it is agreed that, notwithstanding any provision to the contrary in this Agreement,no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by law. I I-12. Interilretation. The parties agree that each party and its counsel have reviewed and revised this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendments or exhibits thereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. MANAGER: Erik Pilegaard 1 1 Dated: Erik Pilegaard 2452 Bay View Avenue Carmel, CA 93923 i MEMBERS: Dated: / r 2 Erik Pilegaard 2452 Bay View Avenue Carmel, CA 93923 Dated: ELK-1 VENTURES,LLC Operating Agreement Page 29 Kristen Pilegaard 2452 Bay View Avenue Carmel, CA 93923 Dated: p� ;a;ndon i egaard 2452 Bay View Avenue Carmel, CA 93923 ELK-1 VENTURES,LLC Operating Agreement Page 30