Registration No. 33-96716
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5 TO
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(Exact name of registrant as specified in charter)
NEW YORK 7011
------------------------------ ----------------------------
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code No.)
16-1485632 100 Corporate Woods
------------------------------ Rochester, New York 14623
(IRS Employer ID No.) (716) 272-2300
---------------------------
(Address, including zip code,
and telephone number, including
area code of registrant's
principal executive offices)
Essex Partners Inc.
John E. Mooney, President
100 Corporate Woods
Rochester, New York 14623
(716) 272-2300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Thomas E. Willett, Esq.
Harris Beach & Wilcox, LLP
130 East Main Street
Rochester, New York 14604
(716) 232-4440
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]___.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]____.
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission acting pursuant to Section 8(a), may
determine.
<PAGE>
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ESSEX HOSPITALITY ASSOCIATES IV L.P.
- --------------------------------------------------------------------------------
Up to $11,000,000 Consisting of
10.5% Subordinated Notes and Limited Partnership Units
Essex Hospitality Associates IV L.P., a New York limited partnership
(the "Partnership"), is seeking to raise a maximum of $11.0 million, subject to
volume and timing discounts with respect to the sale of Units (the "Maximum
Offering Amount") from the sale of a combination of up to $5.0 million of
Limited Partnership Units (the "Units") and up to $6.0 million of the
Partnership's subordinated notes (the "Notes"). As of the date of the
Prospectus, the Partnership has raised Gross Offering Proceeds of approximately
$7.6 million, including approximately $5.3 million, from the sale of Notes and
approximately $2.3 million from the sale of 2,416 Units, which were sold subject
to volume and timing discounts. The general partner of the Partnership is Essex
Partners Inc. (the "General Partner").
The Partnership's principal business is to construct, own and operate
two hotels (collectively, the "Hotels," and individually, "Hotel," as more
particularly described in the Glossary), on its properties located in Solon,
Ohio (the "Solon Property," as more specifically described herein) and in the
Summit Township of the State of Pennsylvania, near Erie, Pennsylvania (the "Erie
Property," as more specifically described herein). It is expected that the
Hotels will be operated as Hampton Inn hotels pursuant to license agreements to
be obtained from Promus Hotel Corporation, the franchisor of Hampton Inn,
Hampton Inn & Suites and Homewood Suites hotels ("Promus Hotel") (individually,
a "License Agreement," collectively, the "License Agreements"). The Partnership
also owns a 49.8% interest in Essex Glenmaura L.P., a New York limited
partnership ("Essex Glenmaura"), which partnership has constructed, and
currently owns and operates a Courtyard by Marriott hotel. The General Partner
is also the general partner of Essex Glenmaura.
As of the date of the Partnership's Prospectus dated November 24, 1995
(the "Original Prospectus"), which this Prospectus supplements and updates, the
Partnership contemplated constructing, owning and operating a series of hotels
under a variety of hotel franchises, including the Hampton Inn hotel franchise.
Since conducting operations under its business plan, the Partnership has
determined, based in large part on the terms of available External Financing (as
herein defined), to focus on the construction, ownership and operation of the
two Hotels.
Under the terms of the Original Prospectus, the Partnership was seeking
to raise a minimum amount of $1.98 million and a maximum amount of $21.0 million
from the sale of a combination of up to $5.0 million Units, up to $10.0 million
of the Partnership's notes secured by first mortgage liens on the Partnership's
hotels, together with improvements thereon (the "Mortgage Notes"), and up to
$6.0 million of the Notes. The minimum amount needed to break escrow was $1.98
million. On December 29, 1995, the Partnership received Gross Offering Proceeds
in the amount of approximately $2.3 million, and had an initial closing upon
which all subscription proceeds then held in the Escrow Account were released to
the Partnership for use as described in the Original Prospectus (the "First
Closing"). The Partnership has determined, based on the terms of available
External Financing, to no longer offer the Mortgage Notes for sale.
The minimum investment is $5,000, or $2,000 for IRAs, Keoghs and
qualified plans. Investors may invest in a combination of Units and Notes. The
General Partner will accept or reject subscriptions for Units or Notes within
four business days after its receipt by the Partnership. In the event a
subscription is rejected, subscribers will be refunded 100% of their investment,
plus interest. See "THE OFFERING."
The Offering will terminate on November 24, 1997 (the "Offering
Termination Date") unless sooner terminated as provided herein. See "THE
OFFERING -- Subscription." The Offering Termination Date may not be extended
beyond November 24, 1997.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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ESSEX CAPITAL MARKETS INC.
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The date of this Prospectus is , 1997
For information on matters occurring since the date of this Prospectus, see the
Supplement(s), if any, included herewith.
THE OFFERING INVOLVES CERTAIN RISKS INCLUDING THE FOLLOWING (SEE "RISK FACTORS"
AT PAGE ).
- Total reliance on the General Partner.
- The Gross Offering Proceeds currently raised by the
Partnership are insufficient to complete construction of a
Hampton Inn hotel on the Erie Property without additional
funding of between $5.1 million and $5.3 million, including
External Financing and/or a General Partner Loan.
- The Partnership originally intended to construct a Hampton Inn
& Suites hotel on the Solon Property, but subsequently
determined that the construction costs for such a hotel were
too high relative to the room rates that the Solon, Ohio
market could bear. The Partnership acquired property in
Warwick, Rhode Island (the "Warwick Property," as more
specifically described herein) upon which it intended to
construct a Homewood Suites hotel. The Partnership
subsequently determined not to proceed with the development of
a hotel on the Warwick Property and is pursuing the sale of
the Warwick Property.
- Front-End Fees (as herein defined) are non-refundable and are
payable out of proceeds of the Offering. Approximately 15.4%
of the Gross Offering Proceeds have been paid and 16.6% from
the Maximum Offering Amount will be payable as Front-End Fees.
- The Notes and Units are subject to material restrictions on
transfer and no public market in the Notes or Units is
expected to develop.
- Limited net worth of General Partner (approximately $1.7
million as of June 30, 1997) is substantially less than the
potential liabilities of the General Partner to (i) GMAC
Commercial Mortgage Corporation, a source of External
Financing, (ii) the Partnership, and (iii) other limited
partnerships for which it acts as a general partner.
- Risks relating to construction of the Hotels.
- High leverage and debt service obligations substantially in
advance of the opening of the first Hotel.
- Substantial fees are payable to the General Partner and its
affiliates whether or not the Partnership's business
objectives are realized. In addition to the payment of
Front-End Fees, management and other fees are payable to the
General Partner and its affiliates.
- General Partner's and Trustee's liabilities are limited and
they are relieved of certain fiduciary duties that they would
otherwise have under applicable law, requiring investors to
prove bad faith or gross negligence to recover damages in a
legal action against them.
- Cash distributions to Partners and repayment of the Notes will
depend upon future Partnership performance and investors could
lose the entire amount of their investment if the Partnership
is unable to operate profitably.
ADDITIONAL RISKS ASSOCIATED WITH THE NOTES
- The General Partner is not personally liable for repayment of
the Notes.
- There is no sinking fund for retirement of the Notes.
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- The Notes will be subordinated to the External Financing,
there is no limit or restriction on the amount of such
indebtedness to which the Notes may be subordinated, however,
the total debt of the Partnership cannot exceed 85% of the
Partnership's total capital.
ADDITIONAL RISKS ASSOCIATED WITH THE UNITS
- The Partnership must pay amounts due under the Notes before
Partners are entitled to receive distributions from the
Partnership. There can be no assurance as to when a Partner
will begin to receive distributions.
THIS OFFERING INVOLVES CERTAIN RISKS INCLUDING THE FOLLOWING (SEE "RISK FACTORS"
AT PAGE ).
<TABLE>
<CAPTION>
======================================================================================
Price to Selling Proceeds to
Public[1] Commissions[1][3] Partnership[2][3]
======================================================================================
<S> <C> <C> <C>
Per Note 1,000 $ 55 $ 945
Per Units . 1,000 80 920
Total[3][4] 10,914,627 723,170 10,191,457
======================================================================================
<FN>
[1] The Notes and Units are being offered through Essex Capital Markets
Inc. (the "Managing Dealer"), an affiliate of the General Partner and a
member of the National Association of Securities Dealers, Inc.
("NASD"). The Managing Dealer will receive selling commissions equal to
5.5% of the principal amount of each Note sold and up to 8% of the
price of each Unit sold. Volume discounts will be given on purchases of
30 or more Units. (See "THE OFFERING - Volume Discounts"). The
Partnership will pay to the Managing Dealer from operating revenues an
Investor Relations Fee for continued communications with investors
concerning, among other things, the Hotels and the Partnership's
operations. The Investors Relations Fee will be paid annually,
beginning December 31, 1998 and continuing for the next three calendar
years thereafter, in an amount equal to .25% of total Gross Offering
Proceeds from the sale of Units and the Notes, but only if and to the
extent that total Dealer Compensation does not exceed 10% of Gross
Offering Proceeds and total Organization and Offering Expenses do not
exceed 15% of Gross Offering Proceeds. Payment of the Investor
Relations Fee will be deferred until the Cumulative Return has been
paid. The fee shall be deemed waived and permanently extinguished in
the event such deferral continues through December 31, 2004. It should
be noted that the Partnership is obligated to file periodic reports
with the Securities and Exchange Commission relating to, among other
things, the Hotels and the Partnership's operations, regardless of
whether the Partnership is required to pay any Investor Relations Fee.
The Managing Dealer is not obligated to purchase any unsold Notes or
Units. To the extent the Managing Dealer uses the services of other
broker/dealer firms, the commissions on Notes and Units sold will be
paid by the Managing Dealer from its selling commissions. The General
Partner will receive an Organization and Offering Management Fee from
the Partnership in an amount equal to 3.4% of the Gross Offering
Proceeds. The General Partner may, in its sole discretion, reallot an
amount equal to up to 1% of the Gross Offering Proceeds to the Managing
Dealer or other broker-dealers. See "THE OFFERING - PLAN OF
DISTRIBUTION" and "COMPENSATION OF GENERAL PARTNER AND MANAGING
DEALER."
[2] These amounts represent the proceeds to the Partnership prior to the
payment of Organization and Offering Expenses (including the
Organization and Offering Management Fee to the General Partner) of
approximately $371,000. Approximately 83.4% of the Gross Offering
Proceeds will be available for investment after deduction of all
Front-End Fees if the Maximum Offering Amount is sold. See "ESTIMATED
USE OF PROCEEDS." The term "Front-End Fees" (as defined in the
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Glossary) includes selling commissions and offering expenses,
organizational fees and expenses, and acquisition and development fees.
[3] Due to the sale of 2,416 Units, which were sold subject to volume and
timing discounts under the Original Prospectus, the sale of Units
subject to volume discounts in this Prospectus, and the different
percentage selling commissions for each type of security that is being
offered, the actual amount of net proceeds to the Partnership and
selling commissions cannot be determined until the closing of the
Offering.
[4] The General Partner and its affiliates may purchase up to $1.0 million
in the aggregate of Notes and Units in the Offering. See "THE
OFFERING."
</FN>
</TABLE>
The Partnership has financed, through a combination of proceeds from
the sale of Units and Notes (i) the acquisition of the Solon Property and the
construction of a Hampton Inn hotel thereon (the "Solon Hampton Inn hotel"),
(ii) the acquisition of the Erie and Warwick Properties, (iii) the acquisition
of its limited partnership interest in Essex Glenmaura and (iv) Partnership
working capital. The Partnership has obtained a first mortgage loan from GMAC
Commercial Mortgage Corporation ("GMAC") in the principal amount of $4.5 million
to permanently finance the construction costs of the Hampton Inn hotel at the
Solon Property (the "GMAC-Solon Loan"). The Partnership intends to use the net
proceeds of this Offering, together with financing obtained from either the
General Partner ("General Partner Loan") or from sources other than the General
Partner and its affiliates, including loans from institutional lenders, which
financing is expected to be secured by a first mortgage lien on the Erie
Property and any improvements thereon ("External Financing"), to finance the
construction of a Hampton Inn hotel on the Erie Property (the "Erie Hampton Inn
hotel"), as well as for general Partnership purposes.
The General Partner believes that, if the Partnership is able to raise
an additional $5.1 million to $5.3 million through the offering of Notes and
Units and External Financing and/or a General Partner Loan, the Partnership will
have sufficient funds to construct and operate the Erie Hampton Inn hotel and
maintain a working capital reserve to finance Partnership activities. To date,
the Partnership has raised approximately $7.6 million from the sale of Notes and
Units; if the Maximum Offering Amount is raised, the Partnership would need to
secure an additional $2.0 million in External Financing or from a General
Partner Loan in order to construct and commence operations of the Erie Hampton
Inn hotel. The Partnership is currently negotiating with GMAC for a first
mortgage loan in the principal amount of $4.5 million to finance the
construction of the Erie Hampton Inn hotel. Another alternative is for the
Partnership to find a different source of External Financing for the
construction of the Erie Hampton Inn hotel, and negotiate with GMAC to provide
permanent financing at a later date. As of the date of this Prospectus, the
Partnership has received no commitment for such financing. There can be no
assurance that such financing will be obtained or, if obtained, that such
financing will be at rates or upon terms and conditions acceptable to the
Partnership. See "ESTIMATED USE OF PROCEEDS."
Interest on the Notes will be payable monthly, commencing on the first
day of the second complete calendar month after the date that an investor's
subscription proceeds have been released from escrow. The entire principal
amount of the Notes is due December 31, 2001, but this date may be extended
through December 31, 2002 if the Partnership pays certain extension fees to the
Holders. The Notes are redeemable at the option of the Partnership, in whole or
in part, at any time without payment of premium or penalty.
All subscription moneys received from investors will be deposited in an
escrow account (the "Escrow Account") at Manufacturers and Traders Trust
Company, Buffalo, New York (the "Escrow Agent") until the subscriber is either
admitted as a Limited Partner (in the case of a subscription to purchase Units),
a Note is issued by the Partnership to the subscriber (in the case of a
subscription to purchase a Note) or the subscription is rejected. A subscriber
may not withdraw his or her subscription during the period in which subscription
proceeds are held in the Escrow Account. As of the date of this Prospectus,
interest will accrue on funds in the Escrow Account at a rate of 2.5% per annum.
The Offering will
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<PAGE>
continue until the Offering Termination Date unless all Notes and Units are sold
or the General Partner for any reason elects to terminate the Offering at an
earlier date. The General Partner has not determined the bases for any early
termination of the Offering. See "THE OFFERING - Subscription."
The Partnership will distribute to each Limited Partner and Holder of Notes
annual reports containing financial statements audited by the Partnership's
independent certified public accountants. See "REPORTS." The Partnership will
provide without charge to each person to whom this Prospectus is delivered, upon
the written or oral request of such person, a copy of the Indenture under which
the Notes will be issued, the terms of which are incorporated by reference
herein. Inquiries with respect to such documents should be directed to Barbara
J. Purvis, Essex Partners Inc., 100 Corporate Woods, Rochester, New York 14623
(telephone: (716) 272-2300).
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE NOTES AND UNITS ARE SUBJECT TO MATERIAL RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND NO PUBLIC MARKET IN THE NOTES OR UNITS IS EXPECTED TO DEVELOP. THE
NOTES AND UNITS SHOULD BE PURCHASED ONLY FOR LONG TERM INVESTMENT. THIS
INVESTMENT IS SUITABLE ONLY FOR PERSONS WHO DO NOT ANTICIPATE THAT THEY WILL BE
REQUIRED TO SELL ANY INVESTMENT ACQUIRED HEREUNDER IN THE FORESEEABLE FUTURE AND
WHO UNDERSTAND OR HAVE BEEN ADVISED WITH RESPECT TO THE TAX CONSEQUENCES OF, AND
RISK FACTORS ASSOCIATED WITH, THIS INVESTMENT. SEE "INVESTOR SUITABILITY
STANDARDS," "RISK FACTORS" AND "SUMMARY OF THE PARTNERSHIP AGREEMENT
RESTRICTIONS ON TRANSFER OF UNITS."
THE PARTNERSHIP WILL RECEIVE AN OPINION OF COUNSEL PRIOR TO EFFECTIVENESS OF THE
REGISTRATION STATEMENT WITH RESPECT TO ALL MATERIAL TAX ISSUES INVOLVED IN THE
PURCHASE OF NOTES AND UNITS FROM THE PARTNERSHIP. NO RULING OF THE INTERNAL
REVENUE SERVICE WILL BE SOUGHT. THE OPINION OF COUNSEL IS NOT BINDING ON THE
INTERNAL REVENUE SERVICE. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE TAX
BENEFITS ASSOCIATED WITH THIS OFFERING WILL BE AVAILABLE. SEE "RISK FACTORS."
THIS PROSPECTUS DOES NOT CONTAIN AN UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT
TO STATE A MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS MADE, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY ARE MADE, NOT MISLEADING. IT CONTAINS A FAIR
SUMMARY OF THE MATERIAL TERMS OF DOCUMENTS PURPORTED TO BE SUMMARIZED HEREIN.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE
CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF
ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THE PARTNERSHIP OR THE NOTES IS NOT PERMITTED. THE PROCEEDS OF
THIS OFFERING WILL BE RECEIVED AND HELD IN TRUST BY THE GENERAL PARTNER OF THE
PARTNERSHIP FOR THE BENEFIT OF THE PURCHASERS OF THE NOTES AND UNITS, TO BE
APPLIED AS REQUIRED FROM TIME TO TIME ONLY FOR THE PURPOSES SET, FORTH HEREIN.
HAMPTON INN & SUITESsm IS A TRADEMARK OF, AND HOMEWOOD SUITES(R) AND HAMPTON
INN(R) ARE REGISTERED TRADEMARKS OF, PROMUS HOTEL CORPORATION AND ITS
SUBSIDIARIES; COURTYARD BY MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT
INTERNATIONAL, INC.; AND MICROTEL(R) IS A REGISTERED TRADEMARK OF U.S. FRANCHISE
SYSTEMS INC. NONE OF THE FOREGOING FRANCHISORS OR THEIR AFFILIATES HAS ENDORSED
OR APPROVED THE OFFERING OR THE MERITS OF THE INVESTMENT DESCRIBED HEREIN. A
GRANT TO THE PARTNERSHIP OF A FRANCHISE SHOULD NOT BE CONSTRUED AS AN APPROVAL
OR ENDORSEMENT BY THE FRANCHISOR (OR ITS AFFILIATES) OF THE PARTNERSHIP OR THIS
OFFERING.
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THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES. WHEN USED IN THE PROSPECTUS, THE WORDS "ANTICIPATE",
"BELIEVE", "ESTIMATE", "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE
PARTNERSHIP OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE PARTNERSHIP'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS SET FORTH IN THE
SECTION ENTITLED "RISK FACTORS".
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TABLE OF CONTENTS
INVESTOR SUITABILITY STANDARDS...........................................10
PROSPECTUS SUMMARY.......................................................11
Essex Hospitality Associates IV L.P.............................11
Description of the Hampton Inn Hotel Concept....................12
The Offering of Subordinated Notes..............................15
The Offering of Limited Partnership Units.......................15
Summary of Risk Factors.........................................17
Compensation of General Partner and Managing Dealer.............21
The General Partner.............................................23
DETERMINATION OF OFFERING PRICE..........................................23
RISK FACTORS.............................................................23
Financing Related Risks.........................................23
Investment Risks Generally......................................25
Conflicts of Interest...........................................26
Specific Risks Related to the Hotels............................27
Environmental Risks.............................................29
Tax Risks.......................................................29
Default Under Partner Notes.....................................30
General Economic Risks..........................................30
COMPENSATION OF GENERAL PARTNER AND MANAGING DEALER......................31
Fees to General Partner and Managing Dealer.....................31
Expenses of the Partnership.....................................35
Partnership Interest of the General Partner.....................35
ESTIMATED USE OF PROCEEDS................................................37
Essex Partners Inc..............................................41
Experience of Essex Partners and Affiliates.....................42
Adverse Business Developments...................................48
Prior Performance of the General Partner and its Affiliates.....48
The Managing Dealer.............................................49
CONFLICTS OF INTEREST....................................................50
Limited Role of the Trustee.....................................50
No Limitation on Activities of the General Partner..............50
Potential Competition Among Hotels Owned by Affiliates..........50
Compensation of the General Partner and its Affiliates Was
Not Established Through Arm's Length Negotiations............51
Potential Conflicts Involving Sale of the Hotels or
Merger or Reorganization of the Partnership..................51
Potential Conflicts in Making Additional Investments
in Essex Glenmaura...........................................51
Potential Conflicts Involving the Purchase of Property
from the General Partner.....................................52
Potential Conflicts Involving Joint Ventures....................52
Absence of Independent Due Diligence Review.....................52
Potential Conflicts Involving Tax Matters.......................52
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER..........................53
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THE PARTNERSHIP'S BUSINESS................................................54
General ........................................................54
Description of the Hampton Inn Hotel Concept.....................55
Promus Hotel Corporation - License Agreement.....................55
Construction of the Hotels.......................................57
Operation of the Hotels..........................................57
Competition......................................................58
The Hotel Properties.............................................58
The Essex Glenmaura Investment...................................64
INVESTMENT OBJECTIVES AND POLICIES........................................67
Principal Investment Objectives..................................67
Environmental Due Diligence......................................67
Capitalization and Use of Initial Funds..........................67
Borrowing Policies...............................................67
General Partner Loans............................................68
Business Development Plan........................................68
Maintenance and Repairs; Capital Improvements....................68
Sales and Refinancing............................................68
General Restrictions.............................................69
TAX CONSIDERATIONS........................................................69
Summary of Material Tax Considerations...........................70
Discussion of Tax Consequences Of Owning Notes...................72
Discussion of Tax Consequences of Owning Limited
Partnership Units.............................................73
SPECIAL CONSIDERATIONS FOR TAX EXEMPT INVESTORS...........................90
Unrelated Business Income Tax Considerations.....................90
ERISA Considerations.............................................91
DESCRIPTION OF THE NOTES..................................................92
Subordinated Notes...............................................92
SUMMARY OF THE PARTNERSHIP AGREEMENT......................................96
Partnership Capital..............................................96
Distributions....................................................96
Allocations of Income and Loss...................................97
Authority of the General Partner.................................97
Indemnification and Limitation on Liability of
the General Partner...........................................97
Liability of Partners to Third Parties...........................98
Meetings and Voting Rights of the Limited Partners...............98
Resignation of General Partner...................................99
Assignment of General Partner Interests..........................99
Removal of General Partner.......................................99
Restrictions on Transfer of Units................................99
Dissolution......................................................99
Books and Records...............................................100
Partner's Independent Activities................................100
Appointment of General Partner as Attorney-in-fact..............100
Amendments......................................................100
Applicable Law..................................................100
MANAGEMENT'S DISCUSSION AND ANALYSIS.....................................101
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THE OFFERING.............................................................103
Subscription....................................................103
Plan of Distribution............................................104
Volume Discounts................................................105
Supplemental Sales Literature...................................106
REPORTS ................................................................106
Reports to Limited Partners.....................................106
Reports to Holders of Notes.....................................106
LEGAL MATTERS............................................................107
EXPERTS ................................................................107
GLOSSARY ................................................................107
INDEX TO FINANCIAL STATEMENTS............................................112
Exhibit A - Partnership Agreement
Exhibit B - Form of Subordinated Note
Exhibit C - Subscription Agreement and Partner Note
Exhibit D - Prior Performance Tables
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED BY THE PARTNERSHIP TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN AS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS NOT AUTHORIZED.
UNTIL _____________________ , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
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INVESTOR SUITABILITY STANDARDS
The Notes and Units are a suitable investment only for certain
investors. Notes and Units should be acquired only by persons who: (a) are
financially able to commit capital to a long-term investment which is very
difficult to convert into cash; and (b) have resources sufficient to bear the
risk of loss of their investment.
Notes and Units will be sold to individuals, corporations, partnerships
and trusts which represent in the Subscription Agreement that they satisfy one
of the following conditions imposed by the states in which the Partnership
intends to offer the Notes and Units:
(i) they have a net worth, exclusive of home, home furnishings and
automobiles, of at least $100,000; or
(ii) they have a net worth, exclusive of home, home furnishings and
automobiles, of at least $35,000 and an annual gross income of
at least $35,000.
In the case of partnerships, corporations and certain trusts, the suitability
standards will also be satisfied if each of the partners, in the case of a
partnership, each of the shareholders, in the case of a corporation, or each of
the beneficiaries, in the case of certain trusts, satisfy the suitability
standards set forth in (i) or (ii) above.
No sales of the Notes or Units will be made to nonresident aliens or to
any other persons subject to back-up income tax withholding.
NO OFFERS OR SALES OF THE NOTES OR UNITS MAY BE MADE IN ANY STATE
BEYOND THE PERIOD OF EFFECTIVENESS OF THE REGISTRATION OR QUALIFICATION IN SUCH
STATE.
By executing the Subscription Agreement, investors represent that they
meet the suitability standards applicable to them as set forth above (or in any
supplement hereto) and in the Subscription Agreement, and agree that such
standards may be applied to any proposed transferee of their Notes or Units.
The minimum investment requirement for a purchaser of Notes or Units is
$5,000, except that the minimum investment for individual retirement accounts
("IRAs"), Keoghs and qualified plans is $2,000. Upon satisfying the applicable
minimum investment requirement, investors may increase their investment in
increments of $1,000, or smaller amounts in the event that volume discounts are
received in connection with the purchase of 30 or more Units. See "THE
OFFERING."
In addition to restrictions on transfer imposed by the Partnership
Agreement and the Indenture under which the Notes will be issued, investors
seeking to transfer their Notes or Units subsequent to their initial investment
may be subject to the securities laws of the state in which transfers take
place. Under the laws of certain states investors may transfer their Notes or
Units only to transferees who meet the suitability standards applicable in
connection with their initial sale pursuant to this Offering. Accordingly, the
Partnership may require assurances at that time that such standards are met
before agreeing to any transfers of such Notes or Units. See "SUMMARY OF THE
PARTNERSHIP AGREEMENT - Restrictions on Transfer of Units," "DESCRIPTION OF THE
NOTES - Transfer and Exchange" and "RISK FACTORS - Lack of Liquidity of Notes
and Units."
In considering an investment in the Units, tax exempt investors should
consider, among other things, the extent to which the Partnership will produce
unrelated business taxable income. See "SPECIAL CONSIDERATIONS FOR TAX EXEMPT
INVESTORS." In addition, investors should consider that an investor in the Units
will be required to file state income tax returns in jurisdictions where the
Partnership is doing business, which includes New York State as well as the
states where the Partnership owns
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<PAGE>
property. An investor in Units may, therefore, be required to file income tax
returns in a number of states in addition to the state in which they reside. See
"TAX CONSIDERATION -- Tax Consequences of Owning Limited Partnership Units."
The foregoing standards are minimum requirements. Neither the
Partnership nor the General Partner undertakes to render any investment or tax
advice to any prospective investor. Therefore, prospective investors should
consult their own tax or financial advisor.
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN THE
PROSPECTUS. AS A CONDITION OF GMAC'S $4.5 MILLION FIRST MORTGAGE LOAN, THE
PARTNERSHIP WAS REQUIRED TO TRANSFER THE SOLON PROPERTY TO A
"SPECIAL-PURPOSE-ENTITY." SINCE GMAC IS A POTENTIAL SOURCE OF EXTERNAL FINANCING
WITH RESPECT TO THE ERIE PROPERTY, AND BECAUSE OTHER SOURCES OF EXTERNAL
FINANCING FOR THE ERIE PROPERTY MAY ALSO REQUIRE A SPECIAL-PURPOSE-ENTITY AS THE
BORROWER OF FUNDS, AND TO ASSURE THAT THE PARTNERSHIP CAN PURSUE FAVORABLE
EXTERNAL FINANCING OPPORTUNITIES WITH RESPECT TO THE ERIE PROPERTY, THE
PARTNERSHIP FORMED TWO SPECIAL PURPOSE ENTITIES. IN JUNE 1997, SOLON HOTEL LLC,
A NEW YORK LIMITED LIABILITY COMPANY ("SOLON HOTEL LLC"), WAS FORMED SOLELY TO
ACQUIRE, OWN, OPERATE, MORTGAGE, SELL AND OTHERWISE DEAL IN AND WITH THE HAMPTON
INN SITUATED ON THE SOLON PROPERTY, AND ERIE HOTEL LLC, A NEW YORK LIMITED
LIABILITY COMPANY ("ERIE HOTEL LLC"), WAS FORMED SOLELY TO ACQUIRE, OWN OPERATE,
MORTGAGE, SELL AND OTHERWISE DEAL IN AND WITH THE ERIE PROPERTY UPON WHICH A
HAMPTON INN IS EXPECTED TO BE CONSTRUCTED. THE MEMBERSHIP INTERESTS OF BOTH THE
SOLON HOTEL LLC AND THE ERIE HOTEL LLC ARE OWNED 99% BY THE PARTNERSHIP. ESSEX
HOTELS LLC, A NEW YORK LIMITED LIABILITY COMPANY ("ESSEX HOTELS") OWNS THE
REMAINING 1% MEMBERSHIP INTEREST IN SOLON HOTEL LLC AND IS THE MANAGING MEMBER
OF SOLON HOTEL LLC. ESSEX HOTELS II LLC, A NEW YORK LIMITED LIABILITY COMPANY
("ESSEX HOTELS II") OWNS THE REMAINING 1% MEMBERSHIP INTEREST IN ERIE HOTEL LLC
AND IS THE MANAGING MEMBER OF ERIE HOTEL LLC. THE PARTNERSHIP IS THE SOLE MEMBER
OF BOTH ESSEX HOTEL LLC AND ESSEX HOTELS II. AS A RESULT OF THE FOREGOING
STRUCTURES, THE PARTNERSHIP EFFECTIVELY CONTINUES TO OWN 100% OF THE SOLON AND
ERIE PROPERTIES AND THE HOTELS CONSTRUCTED, OR EXPECTED TO BE CONSTRUCTED,
THEREON. SEE "THE PARTNERSHIP'S BUSINESS" AND "TAX CONSIDERATIONS TAX STATUS OF
SOLON HOTEL LLC AND ERIE HOTEL LLC." UNLESS OTHERWISE INDICATED, REFERENCES TO
THE PARTNERSHIP REFER, COLLECTIVELY, TO THE PARTNERSHIP AND THE SOLON HOTEL LLC
AND THE ERIE HOTEL LLC. SEE "GLOSSARY" FOR DEFINITIONS OF CERTAIN OTHER
CAPITALIZED TERMS USED IN THIS PROSPECTUS.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
Essex Hospitality Associates IV L.P. (the "Partnership") is a New York
limited partnership formed on August 30, 1995 and which, unless sooner
dissolved, will continue until December 31, 2035. The primary purposes of the
Partnership are to construct, own and operate two Hotels under Hampton Inn
franchises on the Solon Property and Erie Property. As of the date of the
Prospectus, the Partnership has raised Gross Offering Proceeds of approximately
$7.6 million, including approximately $5.3 million, from the sale of Notes and
approximately $2.3 million from the sale of Units, after taking into account
timing and volume discounts.
As of the date of this Prospectus, the Partnership has acquired two
sites for the construction and operation of two Hampton Inn hotels. In December
1995, the Partnership acquired the Solon Property upon which it has constructed
a 103-room Hampton Inn hotel, which is expected to open at the end of July 1997.
The proceeds of the GMAC-Solon Loan are being used by the Partnership to
permanently finance the construction costs associated with the Solon Hampton Inn
hotel. See "THE PARTNERSHIP'S BUSINESS - The Hotel Properties - Solon
Property-Financing." In June 1997, the Partnership acquired the Erie Property
upon which it expects to construct and operate a 98-room Hampton Inn hotel. The
Partnership has obtained a License Agreement from Promus Hotel to construct and
operate a 100-room Hampton Inn hotel on the Erie Property. The License Agreement
will become effective upon satisfactory
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completion of construction and the opening of the hotel by a specified date. See
"THE PARTNERSHIP'S BUSINESS -- The Hotel Properties -- Solon Property and Erie
Property."
In December 1995, the Partnership acquired the Warwick Property upon
which the Partnership intended to construct a Homewood Suites hotel. After
acquisition of the property, however, the Partnership learned that additional
hotels were planned for construction near the Warwick Property. Based on the
results of an updated market study, the Partnership has determined not to build
a hotel on the Warwick Property and is currently pursuing the sale of such
property. See "RISK FACTORS" and "THE PARTNERSHIP'S BUSINESS - The Hotel
Properties - Warwick Property."
In addition to owning and operating hotels, the Partnership owns 11.46
limited partnership units in Essex Glenmaura. Until June 1997, the Partnership
held a 54.3% interest in Essex Glenmaura. As a condition of the GMAC-Solon Loan,
the Partnership was required to reduce its ownership interest in Essex Glenmaura
to 49.8%. The General Partner purchased a portion of the Partnership's limited
partnership units in Essex Glenmaura for a purchase price of $105,000, which is
equal to the purchase price originally paid by the Partnership for such
interests.
Regardless of the whether the Maximum Offering Amount is sold, the
Partnership must also secure External Financing or a General Partner Loan to
finance the construction of a Hampton Inn hotel on the Erie Property. The
ability of the Partnership to pay the monthly interest payments due under the
Notes and thereafter to make distributions to Limited Partners will depend
primarily upon whether its hotel operations are profitable. The ability of the
Partnership to repay the principal amount of the Notes at maturity and return
the capital contributions of the Limited Partners will depend upon whether
sufficient net proceeds are generated from a sale or refinancing of the Hotels
or from partnership investments or loans. See "DESCRIPTION OF THE NOTES -
General." Notwithstanding the fact that the Partnership's first hotel is not yet
open, the Partnership has made interest payments under the Notes and made
initial distributions to Limited Partners from the proceeds of this Offering.
The average construction period for a Hampton Inn hotel is between seven and
nine months. If construction of the Erie Hampton Inn hotel is delayed, the
continuing debt service requirements under the Notes could have an adverse
effect on the Partnership's financial condition.
Since 1989 the General Partner has sponsored eight private and three
publicly registered limited partnerships which own microtel hotels, one Hampton
Inn hotel and one Courtyard by Marriott hotel. See EXHIBIT D -- Prior
Performance Tables. There can be no assurance that the Partnership will achieve
results comparable to the results achieved to date by any of the affiliated
hotel partnerships cited in the Prior Performance Tables. See "THE PARTNERSHIP'S
BUSINESS."
DESCRIPTION OF THE HAMPTON INN HOTEL CONCEPT
The General Partner believes good investment opportunities exist in the
limited service segment of the lodging industry and has aligned itself with a
hotel franchise in this market which it believes has certain competitive
advantages that should position it for better than average performance. Demand
for quality limited service properties is growing as more business and leisure
travelers seek to maximize value from their travel budgets. In addition, because
they offer few amenities, these properties are less expensive to build and to
operate. The Hampton Inn hotel franchise is an established hotel chain and has
been successfully targeting the mid-scale without food and beverage segment of
the lodging industry's limited service sector.
Hampton Inn hotels are high quality hotels with limited amenities and
moderate prices. Hampton Inn hotels are located in high-visibility, high traffic
areas, usually near full-service restaurants. Hampton Inn hotels are designed to
maintain affordability by offering a superior product with those select services
most valued by travelers, but without the extraneous amenities, such as
full-service restaurants and room service, that can inflate prices. Hampton Inn
hotels are designed primarily to accommodate business travelers with limited
expense accounts, non-destination business and leisure travelers and
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<PAGE>
value-conscious vacationers. Most Hampton Inn hotels offer a lobby/breakfast
area, small meeting rooms, a swimming pool, and a selection of room types. The
selected services offered by Hampton Inn hotels include a free, self-serve
continental breakfast in the lobby, free local telephone calls, frequent
travelers' discount programs, and an unconditional 100% Satisfaction Guarantee.
A toll-free number provides access to a nationwide reservation system. Started
in 1984, there were 620 Hampton Inn hotels open at the end of 1996.
THE HOTEL PROPERTIES
The Partnership acquired the Solon Property in December 1995 and began
construction of a 103- room Hampton Inn in the fall of 1996. The Solon Hampton
Inn hotel is expected to open at the end of July 1997. The Solon Property is
situated on approximately 2.28 acres, is owned in fee by the Partnership and is
encumbered by a first mortgage lien securing the GMAC-Solon Loan. See "THE
PARTNERSHIP'S BUSINESS -- The Hotel Properties -- Solon Property." The
Partnership had originally intended to build a Hampton Inn & Suites hotel on the
Solon Property, however, the construction costs associated with a Hampton Inn &
Suites hotel were determined to be too high relative to the room rates that
could be charged in the Solon market. Therefore, based on its knowledge of the
Solon market, the General Partner determined that a Hampton Inn hotel could be
built and operated more successfully in the Solon market. Accordingly, the
General Partner secured the approval of Promus Hotel to change brand
designations. Total costs associated with the Solon Property are expected to be
approximately $7.0 million, including the cost of the land, which was
approximately $590,600 (including closing costs), cost of construction, cost of
furnishings, construction period interest, financing costs (debt and equity) and
all associated soft costs, such as architectural, engineering and franchise fees
and working capital. The proceeds of the GMAC- Solon Loan are being used by the
Partnership to finance the construction costs associated with the Solon Hampton
Inn hotel. As a condition of the GMAC-Solon loan, the Partnership was required
to transfer the Solon Property to a special-purpose-entity. In June 1997 the
Partnership transferred the Solon Property, together with the improvements
thereon, including the Solon Hampton Inn hotel, to Solon Hotel LLC. Essex Hotels
is the managing member of Solon Hotel LLC. The membership interests of the Solon
Hotel LLC are owned 99% by the Partnership and 1% by Essex Hotels, whose sole
member is the Partnership. See "THE PARTNERSHIP'S BUSINESS - The Hotel
Properties - Solon Property - Financing."
The Partnership acquired the Erie Property in June 1997 and intends to
construct a 98 room Hampton Inn hotel. The Erie Property is situated on
approximately 2.5 acres, owned in fee by the Partnership with no encumbrances.
The Gross Offering Proceeds of $7.6 million currently raised by the Partnership
are insufficient to complete construction of the Erie Hampton Inn hotel. Total
costs associated with the Erie Property are expected to be approximately $7.2
million, including the cost of the land, which was approximately $699,000
(including closing and demolition costs), cost of construction, cost of
furnishings, construction period interest, financing costs (debt and equity) and
all associated soft costs, such as architectural, engineering and franchise fees
and working capital. The Partnership must obtain at least $5.1 million to $5.3
million from a combination of the proceeds of this Offering of Notes and Units
and proceeds from External Financing or a General Partner Loan to construct and
commence operations of the Erie Hampton Inn hotel. Assuming the Partnership is
able to raise the required funds, the Partnership expects to begin construction
of the Erie Hampton Inn in October 1997. So as to enable the Partnership to
pursue favorable External Financing opportunities with respect to the Erie
Property, in June 1997 the Partnership transferred the Erie Property to Erie
Hotel LLC, a special purpose entity. Essex Hotels II is the managing member of
Erie Hotel LLC. The membership interests of the Erie Hotel LLC are owned 99% by
the Partnership and 1% by Essex Hotels II, whose sole member is the Partnership.
The Partnership is currently negotiating with GMAC for a first mortgage loan in
the principal amount of $4.5 million to finance the construction of the Erie
Hampton Inn hotel. Another alternative is for the Partnership to find a
different source of External Financing for the construction of the Erie Hampton
Inn hotel, and negotiate with GMAC to provide permanent financing at a later
date. As of the date of this Prospectus, however, the Partnership has received
no commitment for such financing. There can be no assurance that the necessary
financing will be obtained or, if obtained, that such financing will be at rates
or upon
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<PAGE>
terms and conditions acceptable to the Partnership. See "THE PARTNERSHIP'S
BUSINESS - The Hotel Properties - Erie Property - Financing."
THE WARWICK PROPERTY
The Partnership acquired the Warwick Property in December 1995 with the
intention of constructing an 80 to 92 room Homewood Suites hotel. The Warwick
Property is situated on approximately 2.54 acres and is owned in fee by the
Partnership with no encumbrances. The Partnership selected a general contractor
and was prepared to start construction in the fall of 1996. However, prior to
commencing construction, the Partnership learned that additional hotels were
planned for construction near the Warwick Property which could be competitive
with the Partnership's hotel and result in an estimated 57% potential increase
in the number of hotel rooms in the area. The Partnership elected to postpone
commencement of construction until it could better assess the effect of the
additional hotel rooms on the expected performance of the Partnership's hotel.
The Partnership explored its options with respect to the Warwick Property,
including reducing the size and costs of the Homewood suites hotel, the
development of other hotel brands, and possible sale of the property. The
Partnership recently received results of an updated market study which indicated
that the demand for hotel rooms had remained fairly flat in the Warwick market
over the past 18 months. Based on the results of the market study, the
Partnership concluded that the estimated 57% potential increase in the number of
hotel rooms in the area would have a significantly negative impact upon the
expected performance of the Partnership's hotel. In light of these findings and
the Partnership's inability to sufficiently reduce total estimated costs of the
hotel, the Partnership elected not to proceed with development of a hotel on the
Warwick Property and is currently pursuing the sale of the Warwick Property.
Although the Partnership has received some interest in the site from potential
buyers, there can be no assurance that the Partnership will sell the Warwick
Property, or that it will be sold at a price sufficient to enable the
Partnership to recover all of the costs and expenses incurred by the Partnership
with respect to the Warwick Property. The General Partner has returned the
Acquisition Fee in the amount of $110,000 it received with respect to the
Warwick Property. See "RISK FACTORS - Change in Hotel Franchise and Divestiture
of Potential Hotel Site."
ESSEX GLENMAURA LIMITED PARTNERSHIP INTERESTS
In the first quarter of 1996, the Partnership acquired 12.5 limited
partnership units in Essex Glenmaura for $1.25 million ($100,00 per unit), for a
54.3% interest in Essex Glenmaura. See "THE PARTNERSHIP'S BUSINESS -- The Hotel
Properties -- The Essex Glenmaura Investment." Essex Glenmaura constructed a
120-room, three story Courtyard by Marriott hotel outside of Scranton,
Pennsylvania, which opened in September 1996. The total cost of the project was
$8.7 million, including the cost of the land, cost of construction, cost of
furnishings, construction period interest, financing costs (debt and equity) and
all associated soft costs such as architectural, engineering and franchise fees
and working capital. The project was funded with $2.3 million of partner equity,
$1.5 million of unsecured notes and a $5.0 million first mortgage loan from
GMAC. The term of the first mortgage loan is for four years with a one year
extension available if the specified debt service coverage is attained. Interest
accrues at a rate of 3% over the LIBOR rate. Monthly payments of interest only
are payable for the first year. Thereafter, principal and interest payments are
due based on a 25 year loan amortization. Starting in the second year of the
loan, the Essex Glenmaura is required to maintain a replacement reserve escrow
at 4% of room revenues.
As a condition of the GMAC-Solon Loan, in June 1997, the Partnership
reduced its interest in Essex Glenmaura to 49.8%. The General Partner purchased
a portion of the Partnership's limited partnership units in Essex Glenmaura for
a purchase price of $105,000, which is equal to the purchase price originally
paid by the Partnership for such interests.
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<PAGE>
THE OFFERING OF SUBORDINATED NOTES
Issuer: Essex Hospitality Associates IV L.P. The General Partner will
have no personal liability for any amounts payable under the
Notes.
Face Amount: The face amount of each Note will be equal to 100% of the
amount invested.
Interest Rate: 10.5% per annum, payable monthly.
Principal: Up to $6.0 million in the aggregate, payable at maturity. $5.3
million principal of the Notes have been sold.
Maturity: December 31, 2001 unless extended by the Partnership to
December 31, 2002, upon payment to Holders of an extension fee
equal to .5% of the principal amount of the Notes outstanding.
Optional The Notes may be redeemed in whole or in part, at the
and option of the Partnership, at any time without
Mandatory payment of any premium or penalty, together with accrued
Redemption: interest to the redemption date.
Maximum The ratio of Gross Offering Proceeds from the sale of Notes,
Permitted plus the principal balance of External Financing to the
Leverage: greater of: (i) Gross Offering Proceeds from the sale of the
Notes and Units, including the principal amount of any Partner
Notes, or (ii) the aggregate fair market value of the
Partnership's Hotels, plus the Partnership's limited
partnership interest in Essex Glenmaura, shall not be more
than .85 to 1.0. The potential for a highly-leveraged capital
structure increases the risks that a Limited Partner could
lose his or her investment upon a default under the Notes. See
"RISK FACTORS - Limited Partners Could Lose Their Entire
Investment if the Partnership Defaults Under the Notes."
Security for The Notes will be issued as unsecured obligations of the of
Repayment: the Partnership.
Trustee: Manufacturers and Traders Trust Company, a bank chartered
under the laws of the State of New York.
For further information, See "DESCRIPTION OF THE NOTES," "RISK FACTORS" and
"ESTIMATED USE OF PROCEEDS."
THE OFFERING OF LIMITED PARTNERSHIP UNITS
Number of Up to 5,000 Units at $1,000 per Unit. 2,416 Units have been
Units Offered: sold, resulting in gross offering proceeds of $2.3 million
to the Partnership, after taking into account volume and
timing discounts.
Purchase Payable in cash upon subscription, except that for investors
Price of purchasing 20 or more Units, the purchase price is payable
Units: 50% in cash upon subscription and 50% under a non-interest
bearing note ("Partner Note"). The Partner Note is generally
payable upon demand by the General Partner, made at least six
months after acceptance of the subscription of the Limited
Partner, based on the need of the Partnership for additional
cash in connection with the acquisition of a site or
construction of a Hotel. The Partner Note is due no later than
the earlier of two years from the date that the Limited
Partner is admitted as a Limited Partner or three years from
the Effective Date of the Registration Statement. Volume
discounts will be given on purchases of 30 or more Units. See
"THE OFFERING- Volume Discount."
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<PAGE>
Volume Discounts
<TABLE>
<CAPTION>
Number Purchase Commissions Proceeds to the
of Price Per Payable to Partnership per
Units Unit to Managing Unit, Net of Selling
Purchased Investors Dealer by Commissions
Partnership
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
1-29 $1,000 $80 $920
30-59 $ 990 $70 $920
60 Units and Over $ 980 $60 $920
</TABLE>
The price of Units purchased on or prior to December 31, 1996
was reduced. The per Unit reduction was $50 for investors that
purchased Units on or before the First Closing, $40 for
investors that purchased Units on or before March 31, 1996,
$30 for investors that purchased Units on or before June 30,
1996, $20 for investors that purchased Units on or before
September 30, 1996, and $10 for investors that purchased Units
on or before December 31, 1996. The commissions payable to the
Managing Dealer were 8% of the net purchase price of the Unit
after deducting the timing reduction. Thus, 92% of any
reduction reduced the proceeds payable to the Partnership.
Cash The General Partner has discretion in making cash
Distributions distributions and establishing reserves in connection with
From the operation of the Hotels. After the General Partner
Operations: determines the amount of cash available for distribution,
the cash is divided among the General Partner and the Limited
Partners in accordance with the rules set forth in the
Partnership Agreement. Available cash generated from the
operation of the Hotels will be distributed 1% to the General
Partner and 99% to the Limited Partners until the Limited
Partners have received their Cumulative Return. The Cumulative
Return is an annual return equal to 8% of the Limited
Partner's original investment, reduced by any capital returned
as a result of Distributions from a Sale or Refinance of
Hotels (as such term is herein defined). The amount payable
under the Partner Notes shall not be entitled to the
Cumulative Return. Limited Partners who have received timing
and volume discounts and Limited Partners who receive volume
discounts in connection with the purchase of Units are treated
as if they had paid $1,000 per Unit, even though their actual
purchase price may have been lower. See "THE OFFERING --
Volume Discounts." Limited Partners who have received timing
and volume discounts and Limited Partners who will receive
volume discounts will be specially allocated taxable income in
the amount of their timing and volume discounts in order to
equalize the capital accounts of the Limited Partners on a per
Unit basis, which allocation will generally occur in the year
that the Partnership is liquidated. See "THE OFFERING - Volume
Discounts."
From proceeds of the Offering, the Partnership paid the
Cumulative Return from the date of the First Closing (December
29, 1995) to June 30, 1997 to those persons who were Limited
Partners during that period. Such payments commenced on March
31, 1996. The distribution was equal to the Cumulative Return
accruing to each Limited Partner, without regard to any timing
or volume discounts, but only as to that portion of the per
Unit purchase price paid at the time of subscription. For the
months remaining in calendar year 1997, the General Partner
will subordinate up to 50% of the Property Management Fee
payable to it to the Cumulative Return accruing to the Limited
Partners during the remainder of calendar year 1997. Any
unpaid portion of the Property Management Fees subordinated
will accumulate and shall be payable to the General Partner
after the Cumulative Return has been paid to the Limited
Partners. There can be no assurance that any further
distributions will be paid.
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<PAGE>
After the Cumulative Return due through the date of the
distribution has been paid, additional cash distributions from
operations will be made 20% to the General Partner and 80% to
the Limited Partners pro rata in accordance with the number of
Units held by each Limited Partner.
Distributions Distributions from the net proceeds of a sale or refinancing
From a of any or all of the Hotels, or the distribution of proceeds
Sale or received by the Partnership from Essex Glenmaura resulting
Refinancing: from a sale or refinance of hotel properties of Essex
Glenmaura (collectively, "Distributions from a Sale or
Refinance of Hotels"), will be made 1% to the General Partner
and 99% to the Limited Partners pro rata in accordance with
the number of Units held by each Limited Partner until the
Limited Partners have received Distributions from a Sale or
Refinance of Hotels equal to $1,000 per Unit. Distributions
from a Sale or Refinance of Hotels shall next be made 1% to
the General Partner and 99% to the Limited Partners in
proportion to their unpaid Cumulative Return until each
Limited Partner has received any unpaid Cumulative Return
accrued through the date of the distribution. Thereafter,
additional Distributions from a Sale or Refinance of Hotels
will be made 20% to the General Partner and 80% to the Limited
Partners pro rata in accordance with the number of Units held
by each Limited Partner.
Allocations The rules governing allocations of income and loss
Income among the Partners are set forth in the Partnership Agreement
and Loss: and are generally intended to reflect the distribution
rules described above and to comply with the requirements of
the substantial economic effect safe harbor rules set forth in
the Treasury Regulations promulgated under Section 704(b) of
the Internal Revenue Code of 1986, as amended (the "Code").
These rules are summarized in detail under "TAX CONSIDERATIONS
- Allocations of Income and Loss."
For further information, See "SUMMARY OF THE PARTNERSHIP AGREEMENT" and
"COMPENSATION OF GENERAL PARTNER AND MANAGING DEALER - Partnership Interest of
the General Partner."
SUMMARY OF RISK FACTORS
Financing Related Risks
- The entire principal amount of the Notes is payable at
maturity and the Partnership is not obligated to establish any
sinking or similar fund with respect to such payment.
Therefore, the Partnership's ability to pay the Notes at
maturity will be entirely dependent upon its ability to
refinance or sell the Hotels.
- The Notes will be unsecured obligations of the Partnership and
are subordinated to the indebtedness of External Financing;
accordingly, upon any distribution of assets of the
Partnership in connection with any dissolution, winding up, or
liquidation, secured creditors (including sources of External
Financing) will first be entitled to receive payment in full
of their obligations, before the Holders of the Notes are
entitled to receive any payment upon the principal of or
interest on the Notes.
- The General Partner is not liable for repayment of the Notes.
- The Trustee will not supervise construction. Certain
procedures which would protect the lender in a typical
commercial construction loan (such as holding loan proceeds in
escrow until all necessary funding for the Hotels has been
raised and requiring disbursement of all equity proceeds
before making advances) will not be instituted.
- The Partnership will be highly leveraged and the Partnership
has had debt service obligations substantially in advance of
the opening of its first Hotel. If payments are not
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<PAGE>
made when due under the Notes, the Limited Partners may
sustain the loss of their equity investment as a result of
foreclosure of the mortgages securing any External Financing
and the foreclosure might result in the realization of taxable
income without a corresponding cash distribution to pay the
tax. The Partnership must pay amounts due under the Notes
before the Limited Partners are entitled to receive
distributions from the Partnership.
- The Trustee has not, and will not, evaluate or analyze the
offering or related documents or any assets which may be
pledged or mortgaged to secure repayment of the Notes.
Investment Risks Generally
- Investors will have no right to take any part in the control
of the Partnership's business. A prospective investor should
not purchase Notes or Units unless he or she is willing to
entrust all aspects of the management of the Partnership and
the Hotels to the General Partner.
- The Notes and Units will not be listed on a securities
exchange and, as a result of certain restrictions on
transferability, no public market will develop for these
securities. The transferability of the Units may be further
restricted by the License Agreements. Therefore, investors
will not be able to convert their investment into cash in the
event of a need to do so, and the Notes and Units should be
considered only as a long-term investment.
- The net worth of the General Partner is limited and a
substantial portion of such net worth consists of assets which
would be very difficult to convert into cash. The potential
liabilities of the General Partner to GMAC, the Partnership
and the other limited partnerships for which it acts as a
general partner could exceed its ability to pay, which could
result in an early termination and liquidation of the
Partnership that would be adverse to the interests of the
Limited Partners. See "Financial Statements of the General
Partner."
- No Holder of any Note will have the right to commence a
lawsuit to enforce any right or remedy under his or her Note.
To direct the Trustee to take such action, the Holder must
obtain the consent of the Holders of a majority in principal
amount of the Notes outstanding and meet the other
requirements set forth in the Indenture including providing
satisfactory indemnification to the Trustee.
Conflicts of Interest
The business of the Partnership will involve transactions between the
Partnership and the General Partner, and affiliates of the General Partner,
which result in conflicts of interest, including the following:
- The compensation payable to the General Partner and its
affiliates pursuant to the Partnership Agreement and the
Management Agreement has not been established through arm's
length negotiations. The General Partner and its affiliates
will receive substantial fees regardless of whether the
Partnership's business objectives are realized.
- The General Partner has the right to sell the Hotels to an
Affiliated Person or any third party without obtaining the
consent of the Limited Partners or the Trustee. In addition,
the General Partner, upon obtaining the approval of a majority
in interest of the Limited Partners, may cause the Partnership
to be merged into an Affiliated Person or reorganized.
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<PAGE>
- The terms of the Notes were structured by the General Partner
and are not the result of arm's length negotiations between
the Partnership and an independent lender.
- The Trustee will not supervise construction or review or
negotiate leases or other documents on behalf of Holders of
Notes. Therefore, investors must entrust these activities to
the discretion of the General Partner. The Trustee has acted
as trustee with respect to four prior private placements and
two public offering of mortgage notes by affiliated limited
partnerships of the General Partner.
- There is no limitation on the right of the General Partner and
its affiliates to engage in any business, including the
development of other hotels, and such activities may conflict
with the operations of the Partnership.
- The Managing Dealer is an affiliate of the General Partner and
there has been no independent due diligence review of the
Offering by an unaffiliated underwriter.
- The Partnership Agreement limits the liability of the General
Partner and relieves it of certain fiduciary duties that it
would otherwise have under the New York partnership law. In
addition, the Indenture limits the liability of the Trustee
and relieves it of certain fiduciary duties that it would
otherwise have under applicable law. These limitations may
require an investor to prove bad faith or gross negligence in
order to recover damages in a legal action against the General
Partner or the Trustee for breach of their fiduciary duties.
Specific Risks Related to the Hotels
- After acquisition of the Solon Property, the Partnership
determined that the construction costs associated with a
Hampton Inn & Suites hotel were to high relative to the room
rates that the Solon, Ohio market could bear. Therefore the
Partnership is currently constructing a Hampton Inn hotel on
the Solon Property. After acquisition of the Warwick Property,
the Partnership determined that the Warwick, Rhode Island
market could not support another hotel. Therefore, the
Partnership is currently pursuing the sale of the Warwick
Property.
- A default under the License Agreements could result in
substantial liquidated damages and a termination of the
Partnership's right to operate one or more of the Hotels as
part of the Promus Hotel's hotel chain. Either of such events
would have a material adverse effect on the value of an equity
investment in the Partnership.
- The License Agreements do not grant the Partnership an
exclusive territory.
- The Hotels may compete with hotels and motels that may have
greater name recognition and greater financial resources than
Promus Hotel or the Partnership.
Environmental Risks
There can be no assurance that pre-purchase investigations conducted by
the Partnership did not fail to uncover, or that they uncovered, all or any
potential environmental liabilities. Environmental liabilities (including
liability under government programs such as Superfund) could cause the
Partnership to incur significant expenses, including the obligation to remedy or
clean up hazardous substances or other pollutants, regardless of fault. Such
liabilities could exceed the Partnership's cost of acquiring a property and
could have a significant adverse effect on the value of the Units.
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<PAGE>
Tax Risks
- Any losses allocated to Limited Partners by the Partnership
may be deducted only against taxable income generated by the
Partnership in later years or "passive income" from other
sources, such as income from limited partnerships, S
corporations or other businesses in which the investor does
not materially participate.
- The Partnership may be determined to be a publicly traded
partnership, or otherwise not to qualify as a partnership for
federal income tax purposes, which would cause Partnership
taxable income to be taxed at corporate rates, cash
distributions to the Limited Partners to be treated as
dividends and deductions of the Partnership not to be passed
through to the Limited Partners.
- Tax exempt investors purchasing Units should be aware that
income from Hotel operations will constitute unrelated
business taxable income. Tax exempt investors purchasing Notes
should also be aware that if they borrow funds to pay for the
purchase of a Note, the interest on the Note will constitute
unrelated business taxable income.
- Tax exempt investors should be aware that, although the
Partnership has been structured to qualify for an exemption
from the Department of Labor's "plan asset" rules, there can
be no assurance that such exemption will be available to the
Partnership.
- Tax exempt investors purchasing Notes should be aware that
investing in Notes may constitute a "prohibited transaction"
under ERISA if a party in interest holds an equity interest in
the Partnership.
- During some years of the Partnership the tax liabilities of
individual Limited Partners may exceed their cash
distributions from the Partnership, and on sale or other
disposition of Units or of the Hotels, the tax liability to
the Limited Partners may be greater than their share of the
cash proceeds.
- Investors purchasing Units may be subject to income taxes in
the states in which the Hotels are located on portions of
their income from the Partnership regardless of their state of
residence.
See "RISK FACTORS" and "CONFLICTS OF INTEREST" for a more detailed
description of these and other risk factors and conflicts of interest which
should be considered in evaluating an investment in the Notes or Units.
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COMPENSATION OF GENERAL PARTNER AND MANAGING DEALER
The General Partner and its affiliates will receive substantial fees in
connection with this Offering and the management of the Partnership and may
receive substantial fees from the sale, refinancing and operation of the Hotels,
including the following:
TYPE OF COMPENSATION
AND RECIPIENT ESTIMATED MAXIMUM AMOUNT OF COMPENSATION
------------- ----------------------------------------
ORGANIZATION AND OFFERING STAGE
-------------------------------
Selling Commissions to Up to $80 per Unit and $55 per $1,000 Note
Essex Capital Markets Inc. sold. The aggregate amount will not exceed
approximately $723,200 if the Maximum
Offering Amount is sold.
Organization and Offering 3.4% of the Gross Offering Proceeds. The
Management Fee aggregate to Essex Partners amount will not
exceed approximately $371,100 if the Maximum
Offering Amount is sold.
ACQUISITION AND DEVELOPMENT STAGE
---------------------------------
Acquisition Fee to Essex $110,000 per Hotel.
Partners
Development Fee to Essex $160,000 per Hotel increased by 5% of total
Partners construction, site development and
furniture, fixture and equipment costs in
excess of $2.7 million, but not to exceed
$325,000 per Hotel. For the Solon
and Erie Hampton Inn hotels, the
aggregate amount is likely to be
approximately $500,000.
OPERATING STAGE
---------------
Property Management Fee to 4.5% of gross operating revenues from the
Essex Partners Hotels.
Partnership Management Fee to .75% of gross operating revenues from the
Essex Partners Hotels.
Investor Relations Fee to .25% of Gross Offering Proceeds from the sale
Essex Capital Markets of Units and Notes, payable annually from
operating revenues commencing December 31,
1998 and continuing on the 31st day of
December in each of the next three calendar
years thereafter, but only if and to the
extent that total Dealer
Compensation does not exceed 10% of
Gross Offering Proceeds and total
Organization and Offering Expenses do not
exceed 15% of Gross Offering Proceeds.
Payment of the Investor Relations Fee is
deferred until the Cumulative Return has
been paid and the fee shall be deemed paid
to the extent that such deferral continues
through December 31, 2004. The Investor
Relations Fee will not exceed $210,000.
Accounting Fee to $800 per month per Hotel.
Essex Partners
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Financing Fee to Essex 1% of gross loan proceeds of any financing or
Partners refinancing from institutional lenders of any
or all of the Hotels. No fee will be payable,
however, upon the conversion of construction
financing to permanent financing except to
the extent such permanent financing shall
exceed the original principal amount of the
construction loan. Additionally, no fee will
be payable to the General Partner in the
event any refinancing occurs within 24 months
from the closing of the original financing or
a prior refinancing of a particular Hotel.
Essex Partners and the Managing Dealer are
also entitled to receive the fees and sales
commissions customarily charged by them if
the refinancing involves the sale of
promissory notes to investors in a private
placement which is exempt from registration
under the Securities Act of 1933, as amended,
or a public offering similar to the offering
of Notes pursuant to the Prospectus.
LIQUIDATION STAGE
-----------------
Sales Fee to Essex Partners 3% of gross sales price on a sale of any or .
all of the Hotels
INTEREST IN PARTNERSHIP
-----------------------
Partnership Interest of A 1% interest, which increases up to 20%
General Partner of all cash distributions after the
Cumulative Return and certain other
distributions have been paid to Limited
Partners. The General Partner's capital
contribution for this interest is an amount
equal to 1/99 times the aggregate capital
contributions of the Limited Partners, which
is payable from distributions or upon
liquidation of the Partnership.
The following table summarizes the fees paid from November 24, 1995 through June
30, 1997 by the Partnership to the General Partner and its affiliates in
connection with this Offering, the management of the Partnership and the
acquisition, construction, operation and financing of the Hotels:
<TABLE>
<S> <C>
Selling Commissions $ 477,800
Organization and Offering
Management Fee 259,400
Acquisition Fee 220,000
Development Fee 216,000
Financing Fee 45,000
--------
Total $1,218,200
</TABLE>
See "COMPENSATION OF THE GENERAL PARTNER AND MANAGING DEALER" for a
more detailed description of the fees payable to the General Partner and its
affiliates.
22
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THE GENERAL PARTNER
Essex Partners Inc. ("Essex Partners" or the "General Partner"), a New
York corporation with offices at 100 Corporate Woods, Rochester, New York 14623
(telephone (716) 272-2300), is the sole General Partner of the Partnership. The
Partnership's principal executive offices are located at the offices of the
General Partner. Management of the Partnership and the Hotels will be the sole
responsibility of the General Partner. For example, the General Partner will
determine the amount of cash available for distribution to Partners, which
properties will be sold or refinanced by the Partnership, Hotel room rates and
Partnership tax matters. See "SUMMARY OF THE PARTNERSHIP AGREEMENT" "THE
PARTNERSHIP'S BUSINESS - Operation of the Hotels."
DETERMINATION OF OFFERING PRICE
The price at which the Units are being offered to investors and the
method of calculating the Cumulative Return have been determined arbitrarily.
The offering price for the Units does not bear any relationship to the General
Partner's contribution to the capital of the Partnership or the price at which a
Unit might be resold. The terms of the Notes were structured by the General
Partner and are not the result of arm's length negotiations between the
Partnership and an independent lender.
RISK FACTORS
Investing in Notes and Units involves a substantial degree of risk and
is suitable only for persons of adequate means who have no need for liquidity of
their investment. Therefore, prospective investors should consider, in addition
to the factors set forth elsewhere in this Prospectus, the following matters
before making a decision to subscribe for Notes or Units.
FINANCING RELATED RISKS
Absence of Financing Commitment
The Partnership estimates that the aggregate gross proceeds received
from the sale of Units and Notes, in combination with External Financing or a
General Partner Loan must equal approximately $7.2 million in order to have
sufficient funds to construct a Hampton Inn hotel on the Erie Property and pay
fees and expenses related thereto. The actual amount of financing required will
depend upon the source and type of financing and the cost associated therewith.
If the Partnership is unable to secure External Financing, the cost of
additional financing from the sale of Notes and Units will increase
incrementally with the costs associated with the Offering. Proceeds of the
Offering will be advanced to the Partnership to pay fees and expenses before the
full amount necessary to pay such costs has been received. Although it is the
intent of the Partnership to seek External Financing for the construction of the
Erie Hampton Inn hotel, there can be no assurances that such financing will be
available or, if available, will be on favorable terms to the Partnership and
the Limited Partners. No commitments have been received as of the date of this
Prospectus for such External Financing.
Repayment of Notes at Maturity Dependent Upon Ability to Sell or
Refinance the Hotels
The entire aggregate principal amount of the Notes will be payable at
maturity. The Partnership is not obligated to establish any sinking or similar
fund with respect to such payment. The ability of the Partnership to pay the
entire principal amount of the Notes when it comes due will be dependent upon
the value of the Hotels at that time and the Partnership's ability to obtain
adequate refinancing or sell the Hotels. There is no assurance that the final
principal payment will be paid or refinanced when due. See "DESCRIPTION OF THE
NOTES."
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<PAGE>
Subordination of the Notes
The Notes will be unsecured obligations of the Partnership, and will be
subordinated to all indebtedness of the Partnership which arises as a result of
External Financing. There is no limitation or restriction in the Notes or the
Indenture governing the Notes on the creation of Senior Indebtedness by the
Partnership or on the amount of such Senior Indebtedness to which the Notes may
be subordinated. There is also no limitation on the creation of or the amount of
indebtedness which is pari passu with (i.e. having no priority of payment over
and not subordinated in right of payment to) the Notes ("Pari Passu
Indebtedness"), however, the total debt of the Partnership cannot exceed 85% of
the Partnership's total capital. Accordingly, upon any distribution of assets of
the Partnership in connection with any dissolution, winding up, liquidation or
reorganization of the Partnership, the holders of all Senior Indebtedness will
first be entitled to receive payment in full of the principal and premium, if
any, thereof and any interest due thereon, before the Holders of the Notes are
entitled to receive any payment upon the principal of or interest on the Notes,
and thereafter payments to Holders of Notes will be pro rata with payments to
Holders of Pari Passu Indebtedness. See "DESCRIPTION OF THE
NOTES-Subordination."
Notes are Non-Recourse Obligations
The General Partner is not liable for repayment of the Notes. If the
Partnership fails to make any payment when due under the Notes or fails to
perform any obligation thereunder or under the Indenture, the sole remedy of the
Trustee and the Holders of the Notes is against the Partnership. There can be no
assurance that the net proceeds from a judgment against the Partnership would be
sufficient to pay the amounts due under the Notes. See "DESCRIPTION OF THE
NOTES."
Construction Risk
Although the General Partner has overseen the construction and
completion of 15 hotels and has experienced a significant delay and related cost
overruns with respect to only one hotel, there can be no assurance that
construction delays or cost overruns will not occur in connection with the
construction of the Erie Hampton Inn hotel, and materially adversely affect the
value of the Hotel and cause a termination of the License Agreement. If the
Partnership and the General Partner are unable to pay the construction cost of
the Erie Hampton Inn hotel, unpaid contractors may file mechanics liens against
the Hotel and impair the ability of the Partnership to complete construction. In
addition, the equity of the Partnership could be reduced or eliminated through
foreclosure by unpaid contractors.
Limited Partners Could Lose Their Entire Investment if the Partnership
Defaults Under the Notes
The Partnership will be highly leveraged. If the Maximum Offering
Amount is sold, the General Partner estimates that approximately 77.4% of the
aggregate Investment in Hotels (as herein defined) (including fees paid to the
General Partner relating to acquisition of the sites and construction of the
Hotels) will be financed by the Notes and External Financing (which will in all
likelihood require that such debt be secured by, among other things, a mortgage
on one or more of the Hotels) or a General Partner Loan. Principal and interest
payments on the Notes and any External Financing must be made regardless of
levels of income from the Hotels. If payments are not made when due, the Limited
Partners may sustain the loss of their equity investment as a result of
foreclosure. Such foreclosure might also result in the realization of taxable
income by the Limited Partners without a corresponding distribution of cash to
pay the tax. The Limited Partners' right to receive distributions from the
Partnership is subordinated to the rights of Holders of Notes to receive amounts
due under the Notes.
24
<PAGE>
Holders of Notes Must Rely Upon the Discretion of the General Partner
Because of the Trustee's Limited Role
Manufacturers and Traders Trust Company, as Trustee, has not, and will
not, negotiate any provisions of the Indenture, License Agreements or related
documents on behalf of the Holders of the Notes. The Trustee has not, and will
not, evaluate or analyze the Offering, or related documents, or any assets
securing repayment of the Notes on behalf of the Holders of the Notes. More
specifically, as examples and not by way of limitation, the Trustee has not, and
will not, call for or review any appraisals with respect to any of such assets,
make any environmental assessment or review of any of the Hotel properties or
the use thereof, review or approve of any contractors, architects, engineers,
insurers or any other persons with respect to the Offering or any of the Hotel
properties, evaluate or monitor any of the construction or the use by the
Partnership of any of the Note proceeds. The only duties expected to be
undertaken by the Trustee on behalf of the Holders of the Notes will be as
specifically set forth in the Indenture and the Escrow Agreement.
INVESTMENT RISKS GENERALLY
Total Reliance on Management
The Holders of Notes and Limited Partners will have no right to take
any part in the control of the Partnership business, except that the Partnership
Agreement authorizes the Limited Partners, without concurrence of the General
Partner, to vote on certain matters, including amendment of the Partnership
Agreement, the removal of the General Partner and election of a successor
General Partner. The General Partner will have exclusive authority and control
over the management of the Partnership's business. Accordingly, the General
Partner will determine the terms on which the Erie Hampton Inn hotel is
constructed and the terms on which the Hotels are operated, and may cause the
Partnership to sell one or more of its Hotels, to refinance a Hotel or otherwise
incur indebtedness (subject to certain limitations) and to take other actions
which may substantially affect the Partnership's operations.
A prospective investor should not purchase Notes or Units unless he or
she is willing to entrust all aspects of the management of the Partnership to
the General Partner. See "SUMMARY OF THE PARTNERSHIP AGREEMENT."
Lack of Liquidity of Notes and Units
Pursuant to the Partnership Agreement, the transferability of the Units
will be subject to certain restrictions. As a result of such restrictions and
other factors, no public trading market will develop for the Notes or Units.
Holders of Notes and Units may not, therefore, be able to convert their
investment into cash in the event of an emergency, and Notes and Units may not
be readily accepted as security for a loan. Consequently, the Notes and Units
should be considered only as a long-term investment. See "SUMMARY OF THE
PARTNERSHIP AGREEMENT" and "DESCRIPTION OF THE NOTES - Transfer and Exchange."
The current Hampton Inn License Agreement provides that for
"publicly-traded equity interests," no consent of Promus Hotel is required with
respect to any transfers of less than a 25% interest in the Partnership unless
the transferee owns, or would own after the transfer is completed, an interest
in the Partnership of 25% or more. Promus Hotel has advised the Partnership
that, solely for the purposes of the License Agreements, the Units would be
considered "publicly-traded equity interests." See "THE PARTNERSHIP'S BUSINESS -
Promus Hotel Corporation - License Agreements."
25
<PAGE>
Limited Net Worth of the General Partner
The net worth of the General Partner as of June 30, 1997 was
approximately $1.7 million. A significant portion of the General Partner's
aggregate net worth consists of assets which would be very difficult to convert
into cash. Should such net worth be materially reduced in the future, the
General Partner's ability to satisfy its obligations to the Partnership could be
impaired. Moreover, the Partnership's ability to obtain financing may be
negatively affected as a result of a reduction in the General Partner's net
worth and the illiquid nature of the General Partner's assets. The Partnership's
ability to obtain External Financing may also be negatively affected by the
guaranties the General Partner has provided in connection with the GMAC-Solon
Loan as well as any reduction in the General Partner's net worth or by the
illiquidity of its assets. The General Partner is also a general partner of
other limited partnerships; as such, it would be liable for the debts and
obligations of such partnerships if the partnerships were unable to pay them.
Such potential liability may exceed the net worth of the General Partner. If the
General Partner is forced into bankruptcy or receivership and the Limited
Partners did not elect to continue the Partnership, dissolution of the
Partnership could result at a time when such dissolution would be adverse to the
interests of the Limited Partners. See "Financial Statements of the General
Partner" and "TAX CONSIDERATIONS."
Action by Individual Holders of Notes Restricted
No Holder of any Note will have the right to commence a lawsuit to
enforce any right or remedy under his or her Note. In order to direct the
Trustee to take action on his or her behalf, the Holder must obtain the consent
of the Holders of a majority in principal amount of the Notes outstanding and
meet the other requirements set forth in the Indenture, including providing
satisfactory indemnity to the Trustee.
See "DESCRIPTION OF THE NOTES - Individual Action by Holder Restricted."
Potential Liability of Limited Partners
The liability of a Limited Partner who does not take part in the
control of the business of the Partnership is limited to his or her investment
in the Partnership and his or her share of the undistributed profits of the
Partnership. However, if the Partnership would be insolvent after giving effect
to a distribution, a Limited Partner who received such distribution and knew at
the time thereof that such distribution would render the Partnership insolvent
would be obligated to return the amount distributed. The Partnership is a New
York limited partnership and the Partnership Agreement, by its express terms,
provides that it is to be governed by New York law. The Partnership Agreement
grants the Limited Partners certain voting rights with respect to the removal of
the General Partner, the amendment of the Partnership Agreement and other
matters. Under New York law, the exercise of such voting rights will not cause
the Limited Partners to be deemed to be taking part in the management or control
of the Partnership's business. However, if a court in another state where the
Partnership does business determined that the law of such state, rather than New
York law, should apply, it is possible that such court might also conclude that
the possession or exercise of the voting rights provided for in the Partnership
Agreement would cause the Limited Partners to be liable as general partners. See
"SUMMARY OF THE PARTNERSHIP AGREEMENT."
CONFLICTS OF INTEREST
The business of the Partnership will involve transactions between the
Partnership and the General Partner, and affiliates of the General Partner,
which result in conflicts of interest, including the following:
- The compensation payable to the General Partner and its
affiliates pursuant to the Partnership Agreement and the
Management Agreement has not been established through arm's
length negotiations. The General Partner and its affiliates
will receive substantial fees regardless of whether the
Partnership's business objectives are realized.
26
<PAGE>
- The General Partner has the right to sell the Hotels to an
Affiliated Person (or any third party) without obtaining the
consent of the Limited Partners or the Trustee, provided that
the terms of such transaction are fully disclosed and
competitive with those which could be obtained from a third
party. In addition, the General Partner, upon obtaining the
approval of a majority in interest of the Limited Partners,
may cause the Partnership to be merged into an Affiliated
Person or reorganized.
- The terms of the Notes were structured by the General Partner
and are not the result of arm's length negotiations between
the Partnership and an independent lender.
- The Trustee will not supervise construction or review or
negotiate leases or other documents on behalf of Holders of
Notes. Therefore, investors must entrust these activities to
the discretion of the General Partner. The Trustee has acted
as trustee with respect to four prior private placements and
two public offerings of mortgage notes by affiliated limited
partnerships of the General Partner.
- There is no limitation on the rights of the General Partner
and its affiliates to engage in any business, including the
development of other hotels, and such activities may conflict
with the operations of the Partnership.
- The Managing Dealer is an affiliate of the General Partner.
Therefore, there has been no independent due diligence review
of the offering by an unaffiliated underwriter.
- The Partnership Agreement limits the liability of the General
Partner and relieves it of certain fiduciary duties that it
would otherwise have under the New York partnership law. In
addition, the Indenture limits the liability of the Trustee
and relieves it of certain fiduciary duties that it would
otherwise have under applicable law.
- The General Partner has the right to loan Partnership funds to
an Affiliated Person (or any third party) without obtaining
the consent of the Limited Partners or the Trustee, provided
that the terms of such loans are fully disclosed and are, in
the opinion of the General Partner, beneficial to the
Partnership.
SPECIFIC RISKS RELATED TO THE HOTELS
Change in Hotel Franchise and Divestiture of Potential Hotel Site
The Partnership initially contemplated constructing a Hampton Inn &
Suites on the Solon Property, however, the construction cost of the Hampton Inn
& Suites was too high relative to the room rates that could be charged in the
Solon area. Based on its knowledge of the Solon market, the General Partner
determined that a Hampton Inn could be built and operated more successfully.
The Partnership acquired the Warwick Property with the intention of
constructing and operating an 80 to 92 room Homewood Suites hotel. Prior to
starting construction, the Partnership learned that additional hotels were
planned to be built near the Warwick Property which could be competitive with
the Partnership's hotel and result in an estimated 57% potential increase in the
number of hotel rooms in the area. The Partnership recently received results of
an updated market study which indicated that the demand for hotel rooms had
remained fairly flat in the Warwick area over the past 18 months. Based on the
results of the market study, the Partnership concluded that the estimated 57%
potential increase in number of hotel rooms in the area would have a
significantly negative effect upon the expected performance of the Partnership's
hotel. In light of these findings and the Partnership's inability to
sufficiently reduce total estimated costs of the hotel, the Partnership has
elected not to proceed with development of a hotel on the Warwick Property and
is pursuing the sale of the Property. Although the Partnership has received some
interest in the site from potential buyers, there can be no assurance that
27
<PAGE>
the Partnership will sell the Warwick Property, or that it will be sold at a
price sufficient to enable to the Partnership to recover all of the costs and
expenses to the Partnership associated with the Warwick Property. In addition to
the purchase price ($501,400) and associated closing costs ($15,200), the
Partnership estimates that it has incurred an additional $165,000 in
architectural, engineering and franchise fees, and taxes, travel and legal
expenses.
Although it is the Partnership's intention to construct a 98-room
Hampton Inn hotel on the Erie Property, there can be no assurance that the
Partnership will build the hotel or that the Partnership will not subsequently
become aware of information that it believes warrants a change in the type of
hotel to be constructed on the Erie Property or the sale of the Erie Property.
In the event the Partnership determines that a different hotel should be
constructed and operated on the Erie Property, the Partnership will be required
to seek a franchise or license from other hotel franchisors. Such other
franchises or licenses may require a greater initial investment, and/or may not
have the reputation or financial resources as the Promus Hotel.
Termination of the Hampton Inn License Agreement Would Adversely Affect the
Value of the Hotels
The Hampton Inn hotels currently being constructed on the Solon
Property and intended to be constructed on the Erie Property will be operated
under License Agreements with Promus Hotel. The term of the current Hampton Inn
License Agreement is 20 years and is not renewable. If the Partnership defaults
under the License Agreements for any reason (including the failure to upgrade
the Hotels from time to time to meet Promus Hotel's then current standards) and
the Trustee is unable or unwilling to cure such default to the reasonable
satisfaction of Promus Hotel and locate a substitute franchisee acceptable to
Promus Hotel within 30 days after receipt of notice thereof from Promus Hotel,
the License Agreements may be terminated by Promus Hotel. Upon termination or
expiration of the License Agreements, the Partnership must immediately cease
using Promus Hotel's service marks, reservation system and all confidential
methods, procedures and techniques provided by Promus Hotel and remove and
discontinue using all signs, advertising and other materials which could cause
the Partnership's business to be associated with Promus Hotel. The Partners
could also lose all or a substantial portion of the value of their investment if
any License Agreement were terminated or expired without renewal. In addition,
the proceeds received from a foreclosure sale could be substantially reduced as
a result of certain conditions (including payment of all accrued monetary
obligations of the Partnership to Promus Hotel and any affiliates of Promus
Hotel relating to the Hotel and substantial liquidated damages) which the
Trustee or the purchaser may be required to pay in order to continue operating
the Hotel as a franchise. See "THE PARTNERSHIP'S BUSINESS - Promus Hotel
Corporation - License Agreements."
Absence of Exclusive Territory
The License Agreements do not grant the Partnership an exclusive
territory. Therefore, there can be no assurance that Promus Hotel will not
develop itself or license others to operate one or more franchised hotels in the
vicinity of any or all of the Hotels. See "THE PARTNERSHIP'S BUSINESS - Promus
Hotel Corporation - License Agreements" "CONFLICTS OF INTEREST" and "THE GENERAL
PARTNER."
Competition
The operation of hotels and motels is a highly competitive business.
The Partnership's Hotels may be required to compete with hotels and motels that
may have greater name recognition, and greater financial resources, and may have
personnel with more experience than Promus Hotel or the Partnership. Some of
these hotels could have service and architectural features similar to the Hotels
and may offer rates comparable to or lower than those estimated by the
Partnership. Furthermore, there can be no assurance that, after the construction
and successful operation of a Hotel, competitors will not offer lower room
rates, or that additional limited service hotels which offer similar rooms,
services and rates in competition with the Hotels will not be developed near the
Hotels, and that such development will not have
28
<PAGE>
an adverse effect on occupancy rates and profitability. See "THE PARTNERSHIP'S
BUSINESS - Competition."
General Partner Not Required to Fund Operating Deficits
The General Partner and its affiliates are not obligated to advance to
the Partnership funds needed to meet any operating expenses or operating
deficits (although it may, in its sole discretion, make such loans on the terms
set forth in the Partnership Agreement). Accordingly, in the event of operating
deficits (for example, by reason of operating income being insufficient to meet
operating expenses, rent and debt service on mortgage loans) neither the General
Partner nor its affiliates are obligated to provide any additional funds, and if
the Partnership does not have, or is not able to borrow, sufficient funds to
meet such obligations, any mortgages on the Hotels may be foreclosed, in which
case the Limited Partners could lose their entire investment and may suffer
serious adverse tax and other consequences. See "INVESTMENT OBJECTIVES AND
POLICIES - Borrowing Policies."
Risks Relating to Continuing Repairs and Capital Expenses
To meet competition in the hotel industry and to maintain economic
values, continuing expenditures must be made for modernizing, refurbishing and
maintaining existing Hotel facilities prior to the expiration of their
anticipated useful lives. The Partnership intends to pay for such expenditures
entirely out of operating revenues. In the event that the proceeds from the
operation of the Hotels are insufficient to pay for the cost of such
expenditures, the Partnership may be unable to protect its investment in the
Hotels unless additional funds are provided by the Partnership from other
sources, such as borrowing. In addition, the payment of such expenditures out of
operating revenues could result in the realization of taxable income by the
Limited Partners without a corresponding distribution of cash to pay the tax
because a portion of such expenditures may not give rise to a current deduction.
See "INVESTMENT OBJECTIVES AND POLICIES - Maintenance and Repairs; Capital
Improvements.
ENVIRONMENTAL RISKS
Federal and state environmental laws can impose liability on owners and
operators of real estate without regard to fault, even when other parties are or
were responsible for the environmental impairment. Although the Partnership
caused an environmental due diligence review to be performed before acquiring
any site, including soil testing, surface and/or ground water testing and/or
other investigations, there can be no assurance that these investigations did
not fail to uncover or, that they uncovered, all or any potential environmental
liabilities. Environmental liabilities (including liability under government
programs such as Superfund) could cause the Partnership to incur significant
expenses, including the obligation to remedy or clean up hazardous substances or
other pollutants, regardless of fault. Such liabilities could exceed the
Partnership's cost of acquiring a property and could have a significant adverse
effect on the value of the Notes and Units. See "INVESTMENT POLICIES AND
OBJECTIVES - Environmental Due Diligence."
TAX RISKS
Limited Partners will be able to deduct losses, if any, from the
Partnership only to the extent that they have "passive income" from other
sources, such as income from limited partnerships, S corporations or other
businesses in which the investor does not materially participate, or to the
extent in later years that the Partnership generates taxable income.
Furthermore, future regulations under the passive loss rules may recharacterize
income attributable to the Cumulative Return as portfolio income, such as
interest income and dividends, which would be taxable to the investor and would
not be reduced by any losses from the Partnership. In addition, investors should
consider the following tax risks:
- the Partnership may be determined to be a publicly traded
partnership, or otherwise not to qualify as a partnership for
federal income tax purposes, which would cause Partnership
29
<PAGE>
taxable income to be taxed at corporate rates, cash
distributions to the Limited Partners to be treated as
dividends and deductions of the Partnership not to be passed
through to the Limited Partners;
- tax exempt investors purchasing Units should be aware that
income from Hotel operations will constitute unrelated
business taxable income;
- tax exempt investors purchasing Units should be aware that if
the Partnership were subject to the Department of Labor's
"plan asset" rules, an investment in the Partnership could
result in a violation by the fiduciary of several provisions
of ERISA including an improper delegation of the duty of the
fiduciary to manage such assets of the plan and a failure to
hold the plan assets in trust. However, the regulations
contain exemptions from the treatment of limited partnership
assets as plan assets. Although there can be no assurance that
the Partnership Agreement and the terms of the offering have
been structured so that any one of the exemptions contained in
the regulations would apply to the Partnership, the General
Partner will use its best efforts to structure the sales of
the Units and the operations of the Partnership to attempt to
qualify for the possible exemptions. Accordingly, an
investment by a tax exempt investor in Units should not be
deemed an investment in the assets of the Partnership.
- tax exempt investors purchasing Notes should be aware that
investing in Notes may constitute a "prohibited transaction"
under ERISA if a party in interest holds an equity interest in
the Partnership;
- tax exempt investors purchasing Notes should also be aware
that if they borrow funds to pay for the purchase of a Note,
the interest on the Note will constitute unrelated business
taxable income;
- during some years of the Partnership the tax liabilities of
individual Limited Partners may exceed their cash
distributions from the Partnership, and on sale or other
disposition of Units or of the Hotels, the tax liability to
the Limited Partners may be greater than their share of the
cash proceeds;
- investors purchasing Units may be subject to income taxes in
the states in which the Hotels are located on portions of
their income from the Partnership regardless of their state of
residence. See "TAX CONSIDERATIONS" for a further discussion
of these risks.
DEFAULT UNDER PARTNER NOTES
If a Limited Partner purchasing 20 or more Units defaults on the
payment of his or her Partner Note, the Partnership may purchase such Limited
Partner's Unit for a price equal to the amount of cash per Unit contributed by
such Limited Partner less the amount of expenses incurred by the Partnership in
purchasing or reselling the Unit (including reasonable attorneys' fees and a
sales commission to the Managing Dealer in the amount of $50 per Unit that is
resold), payable at the option of the General Partner by a non-interest bearing
note due five years from the date of the default. Because the Partner Notes
given by the Limited Partners will not be secured by any collateral, the
Partnership may be unable to generate sufficient funds from the resale of such
Units to meet its obligations.
GENERAL ECONOMIC RISKS
The major risk of owning or leasing income-producing property is the
possibility that the property will generate income sufficient to meet operating
expenses and debt service. The net income from Hotel properties may be affected
by many factors, including: (a) reduced gross receipts due to an inability to
maintain high occupancy levels; (b) adverse changes in general economic
conditions and adverse local
30
<PAGE>
conditions; (c) adverse changes in real estate zoning laws or in health, safety
and environmental laws and regulations; (d) the need for renovations,
refurbishment and improvements; (e) unanticipated increases in utility,
insurance or other operating costs; (f) increases in real estate taxes; (g)
legal restrictions on the use of signs, billboards and other forms of roadside
advertising typically utilized in marketing hotel properties; and (h) natural
disasters such as earthquakes, floods and tornados and other factors beyond the
reasonable control of the owner or operator. To the extent that it becomes
necessary for the Partnership to obtain secondary debt financing, high fixed
interest rates or increases in floating interest rates may adversely affect the
Partnership's ability to meet its payment obligations under the Notes. See "THE
PARTNERSHIP'S BUSINESS."
COMPENSATION OF GENERAL PARTNER AND MANAGING DEALER
FEES TO GENERAL PARTNER AND MANAGING DEALER
The General Partner and its affiliates will receive substantial fees
and other compensation from the Partnership in connection with this Offering and
the operation of the Hotels. These arrangements were not determined by arm's
length negotiations. The General Partner believes that the fees are reasonable
based on the level of service required and the fees that it has charged for
comparable services in other limited partnerships and three prior limited
partnership public offerings. See "CONFLICTS OF INTEREST."
As compensation for its services in connection with the formation and
reorganization of the Partnership and the offering of Notes and Units pursuant
to the Original Prospectus and this Prospectus, the General Partner will receive
an Organization and Offering Management Fee equal to 3.4% of the Gross Offering
Proceeds, including the principal amount of any Partner Notes contributed by
Limited Partners, resulting in a maximum fee of approximately $371,000 if Gross
Offering Proceeds of $10.9 million, after taking into account volume and timing
discounts, are raised. The Organization and Offering Management Fee, if any,
will be paid at the time of each closing of this Offering. The General Partner
may, in its sole discretion, reallow from such fee and pay to the Managing
Dealer or Soliciting Dealers an amount equal to up to 1% of the Gross Offering
Proceeds. See "THE OFFERING - Plan of Distribution."
As compensation for its services in selecting and purchasing the land
upon which the Hotels are being or will be constructed, the General Partner will
receive an Acquisition Fee of $110,000 for each Hotel site that is acquired by
the Partnership. The Acquisition Fee shall be payable $35,000 upon execution of
a valid purchase, lease or sublease agreement (which amount shall be refunded to
the Partnership if the transaction does not close) and the remainder upon the
closing of the purchase.
As compensation for its services in connection with the development of
the Hotels, the General Partner will receive a Development Fee of $160,000 per
Hotel, increased by 5% of total construction, site development and furniture,
fixtures and equipment costs in excess of $2.7 million, but not to exceed
$325,000 per Hotel. The Development Fee for each Hotel shall be payable 15% per
month beginning on the last day of the month in which the General Partner
formally solicits bids for general contractor services and continuing for a term
not to exceed six months, with the unpaid balance thereof payable upon the
obtaining of a certificate of occupancy for the Hotel.
The Partnership shall pay to the General Partner (or any subsequent
property manager) a Property Management Fee of 4.5% of gross operating revenues
under the Management Agreement. The property manager will also receive an
accounting fee of $800 per month, per Hotel pursuant to the Management
Agreement. As compensation for its services in connection with the management of
the Partnership, the General Partner will receive a Partnership Management Fee
of .75% of gross operating revenues relating to the Hotels, beginning upon the
issuance of a certificate of occupancy for the first Hotel. The Partnership
Management Fee will be payable at the end of each calendar month. See "THE
PARTNERSHIP'S BUSINESS - Operation of the Hotels."
31
<PAGE>
The General Partner may be required to waive or reallow a portion of
its Acquisition Fee or Development Fee if necessary to commit a percentage of
the Gross Offering Proceeds to Investment in Hotels and in Essex Glenmaura which
is at least equal to the greater of: (i) 80% of Gross Offering Proceeds reduced
by .1625% for each 1% of indebtedness encumbering Partnership properties; or
(ii) 67% of Gross Offering Proceeds. Investment in Hotels includes amounts
expended for the purchase, lease or sublease, development, construction or
improvement of Hotels, but excludes any acquisition fees or development fees
payable to any affiliate of the General Partner.
The General Partner will also receive fees for services in connection
with the financing or refinancing from institutional lenders of any or all of
the Hotels. Upon the closing of any financing or refinancing of any Hotel, the
General Partner will receive a fee equal to 1% of the gross loan proceeds of
such financing; provided, however, the General Partner will not receive a fee on
the conversion of construction financing to permanent financing, except to the
extent such permanent financing exceeds the original principal amount of such
construction loan. In the event any refinancing occurs 24 months from the
closing of the original financing or a prior refinancing of a particular Hotel,
the General Partner will not be entitled to payment of a fee. In addition, if
the refinancing involves the sale of promissory notes to investors in a private
placement which is exempt from registration under the Securities Act of 1933, as
amended, or a public offering similar to the offering of Notes pursuant to the
Prospectus, the General Partner and the Managing Dealer are expressly authorized
to receive from the Partnership the fees and sales commissions customarily
charged by the General Partner and Managing Dealer for rendering comparable
services on competitive terms.
The General Partner will receive a sales fee upon the closing of a sale
of each Hotel in the amount of 3% of the gross sales price, provided that the
sum of such fee and any competitive real estate commission paid by the
Partnership with respect to such sale does not exceed 6% of the gross sale price
and that the General Partner renders substantial services in connection with the
sale of the Hotel.
A summary of the compensation to be received by the General Partner and
its affiliates in connection with this offering and the operation of the Hotels
is as follows:
32
<PAGE>
TYPE OF COMPENSATION
AND RECIPIENT ESTIMATED MAXIMUM AMOUNT OF COMPENSATION
- --------------------------------------------------------------------------------
ORGANIZATION AND OFFERING STAGE
-------------------------------
Selling Commissions to Up to $80 per Unit and $55 per $1,000 Note
Essex Capital Markets Inc. sold. The aggregate amount will not exceed
approximately $723,200 if the Maximum
Offering Amount is sold.
Organization and Offering 3.4% of the Gross Offering Proceeds. The
Management Fee aggregate to Essex Partners amount will not
exceed approximately $371,100 if the Maximum
Offering Amount is sold.
ACQUISITION AND DEVELOPMENT STAGE
---------------------------------
Acquisition Fee to Essex $110,000 per Hotel.
Partners
Development Fee to Essex $160,000 per Hotel, increased by 5% of the
Partners total construction, site development and
furniture, fixtures and equipment costs in
excess of $2.7 million, but not to exceed
$325,000 per Hotel. For the Solon and Erie
Hampton Inn hotels, the aggregate amount is
likely to be approximately $500,000.
OPERATING STAGE
---------------
Property Management Fee to 4.5% of gross operating revenues from the
Essex Partners Hotels.
Partnership Management Fee .75% of gross operating revenues from the
To Essex Partners. Hotels.
Investor Relations Fee to .25% of Gross Offering Proceeds from the sale
Essex Capital of Units and Notes, payable annually from
operating revenues beginning December 31,
1998 and continuing on the 31st day of
December in each of the next three calendar
years thereafter, but only if and to the
extent that total Dealer Compensation does
not exceed 10% of Gross Offering Proceeds and
total Organization and Offering Expenses do
not exceed 15% of Gross Offering Proceeds.
Payment of the Investor Relations Fee is
deferred until the Cumulative Return has been
paid and the fee shall be deemed paid to the
extent that such deferral continues through
December 31, 2004. The Investor Relations Fee
will not exceed $210,000.
Accounting Fee to Essex Partners $800 per month, per Hotel.
Financing Fee to Essex Partners 1% of gross loan proceeds of any financing
or refinancing from institutional lenders of
any or all of the Hotels. No fee will be
payable, however, upon the conversion of
construction financing to permanent financing
except to the extent such permanent financing
shall exceed the original principal amount of
the construction loan. Additionally, no fee
will be payable to the General Partner in the
event any refinancing occurs within 24
33
<PAGE>
months from the closing of the original
financing or a prior refinancing of a
particular Hotel. Essex Partners and the
Managing Dealer are also entitled to receive
the fees and sales commissions customarily
charged by them if the refinancing involves
the sale of promissory notes to investors in
a private placement which is exempt from
registration under the Securities Act of
1933, as amended, or a public offering
similar to the offering of Notes pursuant to
the Prospectus.
LIQUIDATION STAGE
-----------------
Sales Fee to Essex Partners 3% of gross sales price on a sale of any or
all of the Hotels.
INTEREST IN PARTNERSHIP
-----------------------
Partnership Interest of A 1% interest, which increases up to 20%
General Partner of all cash distributions after the
Cumulative Return and certain other
distributions have paid to Limited Partners.
The General Partner's capital contribution
for this interest is an amount equal to 1/99
times the aggregate capital contributions of
the Limited Partners, which is payable from
distributions or upon liquidation of the
Partnership.
The following table and footnotes illustrates the effect of the number
of Notes and Units sold on the maximum possible compensation of the General
Partner and the Managing Dealer:
<TABLE>
<CAPTION>
MAXIMUM
OFFERING AMOUNT[1]
------------------
<S> <C>
Selling Commissions[2] $ 723,200
Organization and Offering
Management Fee 371,100
Acquisition Fee 220,000
Development Fee 500,000
Financing Fee 65,000
---------
TOTAL: $1,879,300
==========
<FN>
- ----------
[1] The information set-forth above are approximates only. The actual
amount of compensation that may be paid to the General Partner and the
Managing Dealer cannot be determined until the termination of the
Offering.
[2] Includes actual timing and volume discounts on proceeds raised on Units
prior to the date of this Prospectus, but does not assume volume
discounts for future proceeds.
</FN>
</TABLE>
34
<PAGE>
The following table summarizes the fees paid from November 24, 1995 through June
30, 1997 by the Partnership to the General Partner and its affiliates in
connection with this Offering, the management of the Partnership and the
acquisition, construction, operation and financing of the Hotels:
<TABLE>
<S> <C>
Selling Commissions $ 477,800
Organization and Offering
Management Fee 259,400
Acquisition Fee 220,000
Development Fee 216,000
Financing Fee 45,000
Total $1,218,200
==========
</TABLE>
EXPENSES OF THE PARTNERSHIP
All expenses of the Partnership will be billed directly to and paid by
the Partnership. However, the General Partner and its affiliates have been and
may be reimbursed for (i) organizational and offering expenses; (ii) salaries,
travel expenses and other employee expenses for services that could be performed
directly for the Partnership by independent parties, including legal,
accounting, transfer agent, data processing, duplicating and administration of
investor accounts; (iii) the cost of all Partnership reports and communications
to investors; and (iv) any other direct expenses incurred by the General Partner
or its affiliates relating to the purchase, construction, development,
management, operation or disposition of the Hotels and the administration of the
Partnership, subject to limitations set forth in Section 4.10 of the Partnership
Agreement. These reimbursements have been and will be paid out of the Gross
Offering Proceeds and/or the gross revenues from the operation of the Hotels. No
reimbursement will be permitted, however, for (i) salaries or fringe benefits
incurred by the executive officers or directors of the General Partner or its
affiliates, and (ii) any indirect expenses incurred in performing services for
the Partnership such as rent or depreciation, utilities, and other unallocable
administrative items. Notwithstanding the foregoing, no reimbursement will be
permitted for services for which the General Partner or its affiliates are
entitled to compensation by way of a separate fee.
In no event will any amount charged by the General Partner as
reimbursable expenses for goods and materials exceed the actual cost to the
General Partner of such goods or materials. Further, in no event will any amount
charged by the General Partner as a reimbursable expense for services rendered
by employees of the General Partner or its affiliates exceed the lesser of the
actual cost of such services or the amount that the Partnership would be
required to pay to independent parties for comparable services in the same
geographic location. The Partnership's annual report to the Limited Partners
will contain financial statements with an itemized breakdown of expenses
reimbursed to the General Partner and its affiliates during the year covered by
the report, and such financial statements will be audited by the Partnership's
independent certified public accountants, who will furnish their report thereon.
PARTNERSHIP INTEREST OF THE GENERAL PARTNER
Under Section 3.05 of the Partnership Agreement, the General Partner
will receive one percent of all distributions to Partners from Partnership
operations until all Limited Partners have received, from cash flow, their
Cumulative Return due through the date of the distribution and any unpaid
Cumulative Return from prior years. The General Partner will receive one percent
of all Distributions from a Sale or Refinance of Hotels until all Limited
Partners have received Distributions from a Sale or Refinance of Hotels equal to
(a) their capital contributions; plus (b) any unpaid Cumulative Return due
through the date of the distribution.
35
<PAGE>
The General Partner will receive 20% of all additional distributions to
Partners from cash flow of the Hotels and 20% of all additional Distributions
from a Sale or Refinance of Hotels. See "SUMMARY OF THE PARTNERSHIP AGREEMENT"
and "TAX CONSIDERATIONS - Discussion of Tax Consequences of Owning Limited
Partnership Units, Allocations of Income and Loss."
Allocations of income and loss among the Partners will be made in
accordance with the rules set forth in Section 3.01 of the Partnership Agreement
and are generally intended to reflect the distribution rules described above and
to comply with the requirements of the substantial economic effect safe harbor
set forth in the Treasury Regulations promulgated under Section 704(b) of the
Code. These rules are summarized in detail under "TAX CONSIDERATIONS -
Discussion of Tax Consequences of Owning Limited Partnership Units, Allocations
of Income and Loss."
36
<PAGE>
ESTIMATED USE OF PROCEEDS
The following table illustrates the intended uses by the Partnership of
Gross Offering Proceeds, all of which are to be paid by the Partnership and not
by the Holders of the Notes. Approximately 88.2% of the Gross Offering Proceeds
will be available for investment if the Maximum Offering Amount is sold. Under
the assumptions described below, the total amount of fees to be paid to the
General Partner and its affiliates from the Gross Offering Proceeds of this
Offering and the other sources described below would be $1.9 million (10.8%).
The amounts set forth below are estimates only, and consequently should not be
relied upon as an assurance of the actual use of the proceeds of this Offering.
<TABLE>
<S> <C> <C> <C> <C>
AS OF THE DATE OF THIS MAXIMUM OFFERING
SOURCE PROSPECTUS ($7.6 MILLION) PERCENT AMOUNT ($10.9 MILLION)[1] PERCENT
- ------ ------------------------- ------- ---------------------- -------
Units[1] $ 2,330,627 19.2% 4,914,627 28.2%
Subordinated Notes 5,298,000 43.7% 6,000,000 34.5%
External Financing 4,500,000 37.1% 6,500,000 37.3%
--------- ----- --------- -----
Total Sources[2][3] $12,128,627 100.0% $17,414,627 100.0%
========== ====== =========== ======
USES
Public Offering Expenses:
Selling Commissions[3] 477,840 3.9% 723,170 4.2%
Organization and
Offering Expenses[4] 431,373 3.6% 543,097 3.1%
Interest in Essex
Glenmaura L.P. 1,145,000 9.4% 1,145,000 6.6%
Construction
Furnishings, Fees
And Expenses[5] 7,264,450 59.9% 12,530,100 72.0%
Construction Period
Interest 809,259 6.7% 979,259 5.6%
Working Capital and
Construction Reserve[6] 1,393,505 11.5% 582,801 3.3%
Franchise Fees[7] 126,200 1.0% 126,200 0.7%
Acquisition Fee[8] 220,000 1.8% 220,000 1.3%
Development Fee[9] 216,000 1.8% 500,000 2.9%
Financing Fee 45,000 0.4% 65,000 0.4%
------------ ------ --------- -------
Total Use of Proceeds $ 12,128,627 100.0% $17,414,627 100.0%
=========== ====== ========== ======
Total Amount Available
for Investment $ 10,738,414 88.5% $14,780,559 88.2%
----------- ------- ----------- -------
- ----------
<FN>
[1] To date the Partnership has sold a total of 2,233 Units subject to
timing and/or volume discounts.
[2] The actual amount of the Gross Offering Proceeds cannot be determined
until the termination of the Offering. All proceeds of the Offering
will be held in trust for the benefit of the purchasers of the Notes
and Units to be used only for the purposes set forth above and under
the caption "INVESTMENT OBJECTIVES AND POLICIES."
[3] The Managing Dealer, an affiliate of the General Partner, will receive
selling commissions equal to 5.5% of the principal amount of each Note
sold and up to 8% of the price of each Unit sold (assuming that no
volume discounts are received with respect to Units sold). The Managing
Dealer may, but is not obligated to, reallot all or a portion of each
commission to Soliciting Dealers. Due to the different percentage
selling commissions for each type of security that is being offered and
the discounts available on the sale of the Units, the actual amount of
selling commissions cannot be determined until the closing of the
Offering.
37
<PAGE>
[4] Consists of fees payable to the Trustee, the Securities and Exchange
Commission, the NASD and applicable state securities authorities and
estimated legal, accounting, printing, filing fees and other expenses
relating to the organization of the Partnership and the offering of the
Notes and Units (other than selling commissions and any additional
selling commissions), including preparation of the Original Prospectus
and this Prospectus. The table includes an Organization and Offering
Management Fee payable to the General Partner equal to 3.4% of the
Gross Offering Proceeds. The General Partner may, in its sole
discretion, reallot from such fee and pay to the Managing Dealer or
Soliciting Dealers an amount equal to up to 1% of the Gross Offering
Proceeds. The General Partner has agreed to pay Organization and
Offering Expenses of the Partnership and selling commissions to the
extent that the aggregate of such expenses and commissions exceed 15%
of the Gross Offering Proceeds.
[5] The table assumes, solely for purposes of illustration, that the
Partnership has used or will use the Gross Offering Proceeds, in
combination with External Financing to purchase land, construct and
equip one 103- room Hampton Inn and a 98-room Hampton Inn hotel and
purchase of the Warwick Property. The Partnership will have to secure
additional financing. See "RISK FACTORS -- Absence of Financing
Commitment." The table includes land purchase and estimated site
development costs (i.e., expenditures for earthwork, installation of
underground utilities, curbs and sidewalks, land clearing and
landscaping) and architectural and engineering costs and the estimated
cost of construction and furnishings for each Hotel. The amount shown
in the above table in Construction, Furnishings, Fees and Expenses and
under the headings Working Capital Reserve, Construction Period
Interest, Franchise Fees, and limited partnership interest in Essex
Glenmaura represent the amount of the Partnership's investment in the
purchase, lease or sublease, development, construction and improvement
of properties ("Investment in Hotels"). Investment in Hotels shall not
include any fee paid to any affiliate of the General Partner in
connection with the purchase, lease or sublease and development of
properties. The Partnership Agreement requires the General Partner to
commit a percentage of Gross Offering Proceeds to Investment in Hotels
which is at least equal to the greater of: (i) 80% of Gross Offering
Proceeds reduced by .1625% for each 1% of indebtedness encumbering
Partnership properties; or (ii) 67% of Gross Offering Proceeds.
[6] To be used to finance the construction of the Erie Hampton Inn hotel.
[7] The Partnership has paid non-refundable initial franchise fees of
$45,000 for the Erie Hampton Inn hotel, $41,200 for the Solon Hampton
Inn hotel and $40,000 for the Homewood Suites hotel that the
Partnership expected to construct on the Warwick Property. See "THE
PARTNERSHIP'S BUSINESS - Promus Hotel Corporation - License
Agreements."
[8] The Partnership has paid Acquisition Fees to the General Partner of
$110,000 for the Solon Hampton Inn hotel and $110,000 for the Erie
Hampton Inn hotel.
[9] The Partnership will pay a Development Fee to the General Partner of
$160,000 per Hotel site that is acquired by the Partnership increased
by 5% of total construction, site development and furniture, fixtures
and equipment costs in excess of $2.7 million, but not to exceed
$325,000 per Hotel. The Development Fees are expected to equal
approximately $250,000 for the Solon Hampton Inn hotel and
approximately $250,000 for the Erie Hampton Inn hotel.
</FN>
</TABLE>
HOTEL PROPERTIES.
In December 1995, the Partnership acquired the Solon Property, which
consists of approximately 2.28 acres of real property in Solon, Ohio, at a
purchase price of approximately $590,600, inclusive of closing costs of
approximately $6,000. The 103-room Hampton Inn hotel on the Solon Property is
expected to open at the end of July 1997. See "THE PARTNERSHIP'S BUSINESS -- The
Hotel Properties."
In June 1997, the Partnership acquired the Erie Property, which
consists of approximately 2.5 acres of real property in Summit Township,
Pennsylvania, at a purchase price of $651,000, plus closing costs of
approximately $33,000 and demolition costs of approximately $15,000. The
Partnership intends to construct a 98-room Hampton Inn hotel on the Erie
Property. See "THE PARTNERSHIP'S BUSINESS --- The Hotel Properties."
38
<PAGE>
THE WARWICK PROPERTY
In December 1995, the Partnership acquired the Warwick Property, which
consists of approximately 2.54 acres of real property in Warwick, Rhode Island
at a purchase price of approximately $516,600, including closing costs of
approximately $15,200. Since its acquisition of the Warwick Property, the
Partnership has re-evaluated the hotel market in the Warwick area and has
elected not to proceed with the development of a hotel on the Warwick Property
and is pursuing the sale of that property.
ESSEX GLENMAURA L.P.
In the first quarter of 1996, the Partnership acquired 12.5 limited
partnership units, at a cost of $1.25 million, in Essex Glenmaura. As a
condition of the GMAC-Solon Loan, the partnership has reduced its ownership of
Units to 11.45 units. Essex Glenmaura was formed by affiliates of the
Partnership to acquire undeveloped land and construct, own and operate a 120
room Courtyard by Marriott hotel located in the Borough of Moosic, near the City
of Scranton, Pennsylvania under a franchise from Marriott International Inc. The
Courtyard by Marriott hotel was opened in September 1996. The General Partner is
the general partner of Essex Glenmaura. See "THE PARTNERSHIP'S BUSINESS -- The
Essex Glenmaura Investment."
SHORT TERM INVESTMENTS
Pending investment of the net proceeds as specified above, the
Partnership has been and will continue to invest such proceeds in highly liquid
sources, such as interest-bearing bank accounts, bank certificates of deposit or
other short term money market instruments.
THE GENERAL PARTNER
Essex Partners is the General Partner of the Partnership. The
Partnership Agreement provides that management of the Partnership shall be the
sole responsibility of the General Partner, except for certain voting rights of
the Limited Partners. See "SUMMARY OF 'THE PARTNERSHIP AGREEMENT.'"
ESSEX INVESTMENT GROUP, INC.
Essex Partners is a wholly-owned subsidiary of Essex Investment Group,
Inc. ("Essex"), a New York corporation that was formed in December, 1986, by
combining the management of a series of affiliated companies. Essex is an
integrated financial services company which develops and markets a broad range
of investment and insurance products and services for individuals, pension
accounts, businesses and not-for-profit organizations. Essex is a privately held
company, with approximately 87% of its common stock held by current employees.
The company has also issued preferred stock which is held by a diverse group of
primarily non-affiliated investors.
Principal Officers and Directors of Essex Investment Group, Inc.
John E. Mooney - President, Chief Executive Office and Director.
Mr. Mooney, age 52, received a B.S. in Mathematics from LeMoyne College
in 1966 and a M.B.A. from the University of Rochester in 1969. He held positions
as Assistant Vice President and Loan Officer of the First National Bank of
Chicago and Vice President and Assistant to the Chairman of A.G. Becker, a New
York City investment banking firm. Mr. Mooney was the founder, Chief Executive
Officer, and in over 45 real estate investments, including most of the company's
hotel investments, and in three venture capital funds. Mr. Mooney is directly
involved in all facets of Essex's hotel activities. He also is Chairman of the
Board of Genesee Capital, Inc., a Rochester-based Small Business Investment
Company, and is Chairman of the Board of Moscom Corporation, and a Director of
Performance Technologies, Inc., the
39
<PAGE>
Greater Rochester Housing Partnership and the Monroe County Industrial
Development Agency. Mr. Mooney was a Co-Founder of Essex.
Thomas W. Blank - Senior Vice President.
Mr. Blank, age 49, received a B.A. degree from Hartwick College in 1970
and a LLP/JD from Union University, Albany Law School in 1973. He was a partner
in charge of commercial and residential real estate with Weidman, Jordan, Mackey
& Blank, until 1985, when he joined JTS Computer Services, Inc. as General
Counsel. Mr. Blank worked at JTS Computer Services, Inc. until 1990. He joined
Essex in July 1990, and has overseen the development of 15 hotels. He directly
oversees all hotel development and construction activities.
James A. Young - First Vice President.
Mr. Young, age 48, received a B.S. Degree in Education from West
Chester State University in 1970. From 1970 to 1983 he held a number of
positions in education and business. He joined the Marriott Corporation in 1983
and until 1991 served in various management capacities with Courtyard by
Marriott, most recently as Area Manager with total profit and loss
responsibility for 11 properties. From 1990 to 1991 he was the General Manager
of the Georgetown University Hotel and Conference Center. From 1991 to 1993 he
served as the Executive Director of Auxiliary Services of Georgetown University,
with full administrative responsibility for many of the university's services,
including the motel and conference center. He joined Essex in 1993, and is
responsible for hotel management and operations.
Jerald P. Eichelberger - Executive Vice President, Secretary and
Director.
Mr. Eichelberger, age 53, received a B.S. in Engineering from the
United States Military Academy at West Point in 1965 and a M.B.A. in Finance and
Marketing from the University of Rochester in 1979. He was the co-founder of a
privately held construction and land development firm, and he was the Executive
Vice President, Secretary/Treasurer and a Director of MM&S group of companies, a
forerunner of Essex. Mr. Eichelberger was a Co-Founder of Essex and has served
as a principal partner in several real estate investments and one venture
capital fund. He is a Director of Genesee Capital, Inc. and St. Josephs Villa.
Mr. Eichelberger has been responsible for the selection of Essex's hotel sites
since 1989.
Salvatore A. Messina - Executive Vice President and Director.
Mr. Messina, age 38, received a BA in Economics from Princeton
University in 1981. He joined Dean Witter Reynolds as a securities broker in
1981 and was promoted to assistant manager in 1984. In 1985 he became branch
manager of Advest, Inc., a northeast regional brokerage firm. While at Advest,
Mr. Messina was a member of the firm's Advisory Council. He currently serves on
the Board of Compeer. Mr. Messina joined Essex in 1988 and is responsible for
its Financial Services Division.
Richard C. Brienzi - Senior Vice President, Chief Financial Officer and
Treasurer
Mr. Brienzi, age 39, received a B.S. from St. John Fisher College in
1981 and is a Certified Public Accountant licensed in New York State. From 1981
to 1985 he was with the national accounting firm of Coopers and Lybrand LLP in
Rochester, N.Y. From 1985 to 1988 he was with The Cabot Group, a real estate
development company, as Controller of the Development Division and Director of
Acquisitions. From 1988 to 1993 Mr. Brienzi was Chief Financial Officer of
DiMarco Constructors Corp. While at DiMarco he established Baldwin Real Estate
Corp., a subsidiary which manages the properties of the DiMarco Group. Mr.
Brienzi is a member of the New York Society of Certified Public Accountants,
American Institute of Certified Public Accountants, and Construction Financial
Management Association. He joined Essex in March, 1993, and oversees all
corporate and real estate budgeting and financial reporting. Mr. Brienzi is
responsible for the day to day operations of Essex's Multi-Family Division.
40
<PAGE>
Barbara J. Purvis - Senior Vice President.
Ms. Purvis, age 43, received her B.S. Degree from Northern Arizona
University in 1975 and an M.B.A. from the University of Rochester in 1983. From
1976 to 1981, she was involved in biomedical research at the University of
Rochester Medical Center. Ms. Purvis joined the MM&S group of companies in 1983
as a financial analyst and has been responsible for structuring, financing, and
managing a series of real estate projects. She has been an officer of Essex
since its formation in 1986, and is primarily responsible for structuring and
securing equity and debt capital for Essex's hotel investments. Ms. Purvis is a
director of Genesee Capital, Inc., and serves on the board of directors of a
number of not-for-profit agencies.
Lorrie L. LoFaso - Vice President and Assistant Secretary.
Ms. LoFaso, age 40, received a B.S. degree in Accounting in 1979 from
Indiana University in Bloomington, Indiana, and the Certified Public Accountant
designation in 1982 from the Commonwealth of Massachusetts. From 1979 until
1983, she worked for the Cincinnati and Boston offices of KPMG Peat Marwick LLP,
as a Supervising Senior Auditor. From 1984 until 1989, she worked at Horsley
Keogh & Associates, Inc., a venture capital firm in Rochester, New York, as
Information Systems Manager. She joined Essex in June 1989, and is responsible
for the financial control of Essex's Hotel Division.
ESSEX PARTNERS INC.
Essex Partners the General Partner of the Partnership, is a New York
corporation which was formed in December, 1986 for the general purpose of acting
as managing general partner for limited partnerships formed to own real estate
and other investments. In addition to acting as General Partner of the
Partnership, the General Partner is also a general partner of other limited
partnerships and, as such, it may be held liable for all recourse debt and
obligations of such limited partnerships to the extent that the obligations are
not paid by the limited partnerships. As of December 31, 1996, the amount of
such contingent liabilities was approximately $11.0 million. See "Financial
Statements of the General Partner." The General Partner has a net worth of
approximately $1.7 million as of June 30, 1997. See "Financial Statements of the
General Partner." The audited financial statements of the General Partner as of
and for the years ended December 31, 1996 and 1995, and the unaudited balance
sheet of the General Partner as of June 30, 1997, are attached hereto. The Notes
will not be obligations payable by the General Partner. See "DESCRIPTION OF THE
NOTES - Non-Recourse Obligations."
THE FOLLOWING ORGANIZATIONAL CHART SHOWS THE RELATIONSHIP BETWEEN THE GENERAL
PARTNER AND ITS AFFILIATES:
ESSEX INVESTMENT GROUP, INC.
ESSEX PARTNERS INC. [1] [2] ESSEX CAPITAL MARKETS INC. [2]
Managing Dealer
ESSEX HOSPITALITY ASSOCIATES IV L.P.
Registrant
[1] Essex Partners is the General Partner of the Registrant, a New York
limited partnership. The General Partner is entitled to 1% of all cash
distribution, which increases to 20% after the Cumulative Return and
certain other distributions have been paid to Limited Partners.
41
<PAGE>
[2] Essex Partners and Essex Capital Markets Inc. are New York corporations
the capital stock of which is wholly owned by Essex Investments Group,
Inc.
THE OFFICERS AND DIRECTORS OF ESSEX PARTNERS ARE AS FOLLOWS:
John E. Mooney - President, Chief Executive Officer and Director.
Thomas W. Blank - Senior Vice President and Director.
James A. Young - First Vice President of Hotel Operations.
Jerald P. Eichelberger - Executive Vice President, Secretary and
Director.
Richard C. Brienzi - Senior Vice President, Treasurer and Director.
Barbara J. Purvis - Senior Vice President and Director.
Lorrie L. LoFaso - Vice President and Assistant Secretary.
EXPERIENCE OF ESSEX PARTNERS AND AFFILIATES
Since 1982, Essex Partners and its affiliates have sponsored 51 limited
partnerships and limited liability companies having real estate interests and
have raised over $108 million from approximately 3,800 investors. These limited
partnerships have invested in an aggregate of 63 properties, valued at
approximately $180 million, based on the purchase price of such properties.
These properties are located primarily in the eastern half of the United States,
and are concentrated in the northeastern and midwestern part of the United
States. Approximately 67% of the properties, based on acquisition costs, are
comprised of residential properties and the remainder are commercial properties,
including hotel properties, which comprise 30% of such commercial properties.
Based on acquisition costs, approximately 51% of the properties were existing,
46% were constructed by entities, and the remaining 3% were acquired newly
built. To date, 20 of the properties have been sold. Of the 51 limited
partnerships and limited liability companies sponsored by the General Partner
and its affiliates, three were public and raised an aggregate of $28 million
from 1,600 investors. These limited partnerships have constructed seven new
hotels at a cost of $23 million, exclusive of working capital reserves.
With respect to limited partnerships having similar objectives to those
of the Partnership, since 1982, the General Partner has raised approximately
$51.5 million from over 2,100 investors to build and/or acquire 15 hotels at an
aggregate acquisition cost of approximately $54 million, exclusive of working
capital reserves. Based on acquisition costs, 89% of these properties were
constructed by the limited partnerships, 7% were existing, and 5% were acquired
newly built. None of the properties have been sold. As described below, three of
the 19 hotel related offerings were public programs.
The following is a summary of these partnerships, including the
partnership name, a description of the properties acquired and the total amount
raised in each offering.
<TABLE>
<CAPTION>
TOTAL AMOUNT
NAME OF PARTNERSHIP TYPE OF PROPERTY AND LOCATION RAISED
- ------------------- -------------------- -------- ------
<S> <C> <C>
Essex Diversified Formed to acquire interests in a limited $1,680,000
Equities-I partnership owning an apartment project
in Atlanta, Georgia and in at least two
other unspecified real estate limited
partnerships.
Essex Water's Edge Formed to become sole limited partner 575,000[1]
Associates L.P. in a partnership developing a condominium
project in Buffalo, New York.
Essex-Ashford Formed to acquire, own, operate, further 1,050,000[1]
42
<PAGE>
Countryside L.P. develop and dispose of a mobile home
park located in the Township of McKean,
Erie County, Pennsylvania.
Essex-Ashford Royal Formed to acquire, own, operate and 735,000[1]
Park L.P. dispose of a mobile home park located
in the Township of Canton, Washington
County, Pennsylvania.
Essex Geneseo Formed to construct, own and operate 1,950,000
Associates L.P. a 110-unit apartment project located in
the Village of Geneseo, Livingston
County, New York.
The Partnership also completed an offering 325,000
of unsecured notes in order to refinance
debt and pay costs of additional
construction.
Essex-Ashford Formed to acquire, own, operate, further 950,000[1]
LaPorte L.P. develop and dispose of a mobile home
park located in LaPorte County, Indiana.
Essex-Ashford Formed to acquire, own, operate and 1,075,000[1]
Greentree L.P. dispose of mobile home parks located
in Conneaut, Ohio; Columbus, Ohio; and
Falconer, New York.
Essex Windsor Formed to acquire 2/3 of the limited 1,829,000[1]
Parke-I L.P. partnership interests of Windsor Parke
Gold Limited Partnership, which was formed
to acquire, develop, own and manage an 18
hole golf course located in Jacksonville,
Florida.
Essex-Ashford Formed to acquire, own, operate and 1,300,000
River Oaks L.P. dispose of a mobile home park located in
Springfield, Illinois.
Essex Microtel Formed to construct, own and operate a 1,487,500
1989 L.P. 100-room Microtel hotel in the Town of
Lancaster, New York.
The partnership also completed an 1,200,000
offering of second mortgage notes
the proceeds of which were used to
prepay a portion of the mortgage
indebtedness and to make
distributions to its limited
partners.
Essex Windsor Formed to acquire, own, operate, and 1,232,445[1]
Park-II L.P. develop 20 acres of land located in
Jacksonville, Florida for the
construction of single family
homes.
An offering of Notes to develop 846,000
lots for single family homes and to
construct two homes in a
Jacksonville, Florida golf course
development and to pay related
accrued expenses.
Essex Village Formed to acquire, own, operate, further 1,360,000
Park L.P. develop and dispose of a mobile home
park located in Greensboro, North
Carolina.
Essex Evansdown Formed to develop and operate a low-income 2,750,013
43
<PAGE>
Associates housing project in LeRay, New York.
Essex Microtel Formed to acquire, own and operate 1,871,480
Lehigh L.P. a 99-room Microtel hotel located in
the Town of Henrietta, near
Rochester, New York.
The partnership also completed an 1,290,000
offering of second mortgage notes
the proceeds of which were used to
prepay a portion of the mortgage
indebtedness and to make
distributions to its limited
partners.
Essex-Ohio Formed to acquire interests in two 540,000
Properties L.P. limited partnerships formed to
develop and operate a low-income
housing project located in Mt.
Gilead, Ohio and a low-income
housing project located in Salem,
Ohio.
Essex Microtel Formed to acquire, own and operate 1,531,254
LeRay L.P. a 100-room Microtel hotel in the
Town of LeRay, near Watertown, New
York.
Essex Microtel LeRay L.P. completed 217,000
an offering of second mortgage
notes to repay debt and provide
working capital
Essex Microtel Formed to construct, own and 3,083,000
Associates L.P. operate up to four Microtel hotels.
Essex Microtel Associates L.P. also 434,000
completed an offering of first
mortgage notes to refinance its
first mortgage.
Hagel-Essex Formed to develop, own and operate 1,012,750
Microtel L.P. a Microtel hotel in the Town of
Tonawanda, New York.
Essex Avalon L.P. Formed to acquire, own, operate, 500,000[1]
further develop and dispose of a
mobile home park located in
Middletown, Ohio.
Essex Microtel Formed to construct, own and 1,327,000
Carrier Circle L.P. operate a 100-room Microtel hotel
near Syracuse, New York.
The partnership also completed an 2,200,000
offering of first mortgage notes
which were used to pay for a
portion of the hotel construction
cost.
Essex Charleston Formed to construct, own and 3,390,000
Associates L.P. operate a 102-room Microtel hotel
located in the City of South
Charleston, West Virginia. The
partnership completed a combined
offering of limited partnership
interests and first mortgage notes.
44
<PAGE>
Essex Microtel A public program formed to 10,487,000
Associates II L.P. construct, own and operate an
87-room Microtel hotel located in
Kingsport, Tennessee; a 92-room
Microtel hotel located in Boardman,
a suburb of Youngstown, Ohio; and a
101-room Microtel hotel located in
Erie, Pennsylvania.
Essex Hospitality A public program formed to 14,000,000
Associates III L.P. construct, own and operate a
102-room Microtel hotel located in
the City of Homewood, a suburb of
Birmingham, Alabama, a 118-room
Hampton Inn in the Town of Greece,
a suburb of Rochester, New York and
a 100-room Microtel hotel in
Chattanooga, Tennessee.
Essex Knoxville A Delaware limited partnership 1,000,000
Associates L.P. formed to construct, own and
operate a 105-room Microtel hotel
in the City of Knoxville,
Tennessee.
The partnership also completed an 2,000,000
offering of first mortgage notes
which were needed to pay a portion
of the hotel construction costs.
The partnership also completed an 500,000
offering of 12% Notes.
Essex Honeoye A Delaware limited partnership 325,000
Valley L.P. formed to acquire, own and operate
a mobile home park located in the
Town of Canadice, near Rochester,
New York.
Essex Elmira A New York limited partnership 3,425,000
Credits L.P. formed to purchase the sole limited
partnership interest in an
operating partnership which
rehabilitated, owns and operates a
complex consisting of 66 apartments
and approximately 19,400 square
feet of commercial space in Elmira,
New York.
Essex Greenport A New York limited liability 1,200,000
L.L.C. company formed to complete, own and
operate an 81-unit apartment
project in Greenport, New York.
Essex Mobile Home A New York limited partnership 450,000
Properties - IX, L.P. formed to acquire, own and operate
four mobile home parks located in
Canton Pennsylvania; Conneaut,
Ohio; Columbus, Ohio; and Falconer,
New York.
The partnership also completed an 1,200,000
offering of 9.5% subordinated
notes.
Essex Glemaura L.P. A New York limited partnership 2,200,000
formed to develop, own and operate
a 120 room hotel in the Borough of
Moosic, Pennsylvania under a
Courtyard by Marriott franchise.
The partnership also completed an 1,500,000
offering of subordinated notes.
45
<PAGE>
Essex Albion Credits, A New York limited partnership 1,183,000
L.P. formed to purchase the sole limited
partnership interest in an
operating partnership which will
own and operate a new 24 unit
apartment complex in Albion, New
York which is rented to low income
families.
- -------
<FN>
[1] This partnership no longer owns property and has been dissolved.
</FN>
</TABLE>
Essex Partners is a general partner of Essex Manufactured Home
Communities - X L.P., a New York limited partnership formed to acquire, own and
operate three manufactured, home communities two of which are located near Erie,
Pennsylvania and the third is located in LaPorte, Indiana. This offering, which
seeks to raise a maximum of $900,000, is currently in process. The partnership
also expects to offer up to $1.2 million of subordinated notes.
Essex Partners and John E. Mooney were general partners of Essex
Strategic Opportunities Fund L.P., a Delaware limited partnership formed to
invest in limited partnerships which would have invested in distressed apartment
and hotel/motel properties acquired from financial institutions and agencies.
The general partners abandoned the concept and no proceeds were raised for this
partnership.
Essex Investment Group, Inc., the sole shareholder of Essex Partners,
was one of two general partners of Essex Shire Developers, the general partner
of The Pavilion Partners, L.P., a New York limited partnership formed to
develop, own and operate a major retail and commercial project on the Buffalo,
New York waterfront. The total dollar amount raised was approximately $2.4
million, $555,000 of which was represented by notes issued by the limited
partners.
Essex Investment Group, Inc., the sole shareholder of Essex Partners,
is the sole common shareholder of Essex Microtel International Lodging, Inc.
("EMILI"), an Ontario company formed to acquire master franchise rights from
Microtel Franchise and Development Corporation to develop, own and operate
motels and to grant franchises to operate motels in Canada under a Master
Franchise Agreement. $749,500 was raised through a private offering of Series A
Preferred Stock. The investors in EMILI exchanged their shares of common stock
of EMILI for shares of common stock of Essex Investment Group, Inc., on a share
for share basis and EMILI was dissolved in 1995.
Essex Investment Advisors Inc., a wholly-owned subsidiary of Essex
Investment Group, Inc., and John E. Mooney are general partners of Essex
Diversified Credits L.P., a Delaware limited partnership formed to acquire
interests in low-income housing that qualifies for the low-income housing tax
credit. The total dollar amount raised was approximately $1.6 million. The
officers and directors of Essex Investment Advisors Inc. are Barbara J. Purvis,
President and Director, and Jerald P. Eichelberger, Treasurer, Secretary and
Director.
Essex Investment Advisors Inc. is one of two general partners of Essex
Diversified Equities-II, which was formed to acquire interests in other
partnerships owning real estate. A total of approximately $1.0 million was
raised for this partnership.
Prior to the formation of Essex Partners, John E. Mooney, Jerald P.
Eichelberger and Barbara J. Purvis were involved in real estate syndications
through MM&S Resources, Inc.
MM&S was formed by John E. Mooney in 1980 and has been a general
partner in seventeen real estate offerings since January, 1982, most of which
have involved the purchase of apartment projects in the upstate New York region.
Six of these partnerships own a total of 436 apartment units and limited
partnership interests and the remaining eleven partnerships are no longer in
business. The following is a list of these partnerships, a description of the
properties acquired and the total amount raised in each offering.
46
<PAGE>
<TABLE>
<CAPTION>
NAME OF PARTNERSHIP TYPE OF PROPERTY AND LOCATION TOTAL AMOUNT
RAISED
- ------------------- ----------------------------- ------------
<S> <C> <C>
173 North Street 129 unit apartment building in $ 900,000
Associates Buffalo, New York.
MM&S Sunbelt/ Unimproved residential and commercial 1,465,200[1]
Energy Properties property in Phoenix, Arizona.
- - 1982
MM&S Eastview 60 unit apartment project in Victor, 443,800[1]
Associates New York.
MM&S Northtowne 50 unit apartment project in Greece, 520,200[1]
Associates New York.
MM&S Tudor Lane 56 unit apartment project in Lockport, 396,500[1]
Associates New York.
MM&S Spanish 221 unit apartment project in Greece, 2,119,000[1]
Garden Associates New York.
MM&S Dohr 112 unit apartment project in Greece, 1,680,000
Associates New York.
MM&S Sunbelt Unimproved land in Arizona; net lease 1,926,410[1]
Properties - 1983 of model homes in residential
developments in Arizona and California.
MM&S Brighton 260 units in two apartment projects in 3,359,000[1]
Associates Brighton, New York.
MM&S Carriage 115 unit apartment project in Syracuse, 1,405,560
House Associates New York.
MM&S Triad 96 apartment units and 24,550 sq. ft. of 961,920[1]
Associates commercial space in Williamsville, New York.
MM&S Brook Hill 192 unit apartment project in Penfield, 2,932,000[1]
Associates New York.
MM&S Crossroads 150 unit apartment project in 2,244,320
Associates Spencerport, New York.
MM&S Diversified Formed to acquire interests in other 1,650,000
Properties-1985 limited partnerships owning apartment
projects.
MM&S Diversified Formed to acquire interests in other 2,500,000
Properties-1985 II limited partnerships owning apartment
projects.
Diversified Formed to acquire interests in other 187,250[1]
Properties III limited partnerships owning apartment
projects.
Essex Walden 80 unit apartment project in Batavia, 700,000
Associates New York.
47
<PAGE>
<FN>
- ----------
[1] This partnership no longer owns properties and has been dissolved.
</FN>
</TABLE>
ADVERSE BUSINESS DEVELOPMENTS
The General Partner and its affiliates have sponsored, collectively, 64
prior real estate syndications since 1982. See "EXHIBIT D -- Prior Performance
Tables -- Table III." Of these transactions, delays or other adverse
developments have occurred with respect to the following transactions.
Essex Microtel International Lodging, Inc.'s development activity in
Canada experienced delays as a result of adverse Canadian market conditions. The
master franchise agreement with Microtel Franchise and Development Corp. had
been amended to extend the development schedule and terms for payment of the
master franchise fee. In connection with the recent grant by Microtel of
worldwide franchise rights to U.S. Franchise Systems, Inc., all of this entity's
franchise rights were terminated. As noted earlier, the investors in EMILI
exchanged their shares of common stock of EMILI for shares of common stock of
Essex Investment Group, Inc. on a share for share basis, and EMILI was
dissolved.
MM&S Brighton Associates sold the two apartment projects it owned in
early 1992. The mortgage and unsecured note to the bank were paid in full,
however, there were no proceeds available for distribution to the limited
partners. Brighton had investment objectives that were heavily tax oriented, and
investors received tax benefits which approximated original projections. The
limited partners did incur a substantial amount of taxable gain as a result of
the sale.
MM&S Sunbelt Properties 1983 was unable to sell certain model homes
after the expiration of the net lease due to the downturn in the Phoenix,
Arizona real estate market. Negotiations with the bank which held the mortgages
were halted when the bank was taken over by the Resolution Trust Corporation
("RTC"). The partnership was able to negotiate discounted mortgages and sold two
model homes for the mortgages; however, the RTC was unwilling to cooperate with
future sales, and auctioned off the remaining homes at deep discounts. Sunbelt
had investment objectives that were heavily tax oriented and investors received
substantial tax benefits. Investors also received a return of 54% of their
original investment in cash distributions, which was 58% of original
projections.
The Pavilion Partners L.P. was formed to develop a mixed-use project on
the Buffalo waterfront. Since the project's original conception, the commercial
office and retail markets in the Buffalo area were adversely affected by the
economy, causing the partnership to abandon the Pavilion project in 1990. The
general partners and limited partners lost their entire investment.
Essex Water's Edge Associates L.P. is the sole limited partner in Twin
Lakes Associates L.P. ("Twin Lakes"), a partnership formed to develop a 58-unit
condominium project on the waterfront in Buffalo, New York. The developer of the
project was only able to partially complete the project due to the sluggish
market conditions for luxury condominiums in Buffalo and the construction lender
subsequently foreclosed on the project. Water's Edge did not receive any
proceeds from the foreclosure sale or from future development on the site and
pursued its remedies under the personal guarantees provided by principals of
Twin Lakes to pay to Water's Edge certain unpaid distributions totaling
$450,000. Water's Edge collected nothing and was dissolved in 1995. The limited
partners lost 85% of their original investment.
Essex Windsor Parke II L.P. was formed to develop land for the
construction and sale of 57 single family homes in a golf course community in
Jacksonville, Florida. After the land was subdivided and construction of homes
commenced, the Jacksonville housing market softened and sales of the homes
slowed. Instead of continuing to construct and sell the homes itself, Essex
Windsor Parke II elected to sell the remaining lots at a discount to a home
builder. The limited partners received approximately 61% of their original
investment and the partnership was dissolved in 1996.
PRIOR PERFORMANCE OF THE GENERAL PARTNER AND ITS AFFILIATES
48
<PAGE>
The "Prior Performance" tables set forth as Exhibit D provide
information with respect to various real estate limited partnerships in which
the General Partner is a general partner and which have business and investment
objectives similar to those of the Partnership. The General Partner has
sponsored three prior publicly registered programs, Essex Microtel Associates
L.P., which constructed and is operating a Microtel hotel in Columbus, Ohio,
Essex Microtel Associates II L.P., which constructed and is operating Microtel
hotels in Erie, Pennsylvania, Kingsport, Tennessee, and Boardman a suburb of
Youngstown, Ohio, and Essex Hospitality Associates III L.P., which constructed
and is operating Microtel hotels in the City of Homewood, a suburb of
Birmingham, Alabama and Chattanooga, Tennessee and a Hampton Inn in the Town of
Greece, a suburb of the City of Rochester, New York.
The "Prior Performance" information is provided solely to enable investors to
better evaluate the real estate investment experience of the General Partner.
INVESTORS SHOULD NOT INFER FROM THIS INFORMATION THAT COMPARABLE RESULTS WILL BE
ACHIEVED BY THE PARTNERSHIP. See "EXHIBIT D -- Prior Performance Tables."
ACQUISITIONS OF PROPERTIES.
The General Partner or its affiliates have acquired five properties,
all of which have been developed as hotel properties during the three year
period ending June 30, 1997. All of the properties are located in the eastern
United States. Of these properties, only one, the Courtyard by Marriott hotel
located in Scranton, Pennsylvania, utilized financing from external sources in
combination with proceeds from the sale of equity and debt securities. The other
properties were acquired and developed with proceeds from the sale by an
affiliate of its equity or debt securities. See "EXHIBIT D - Prior Performance
Tables -- Table VI."
THE MANAGING DEALER
Essex Capital Markets Inc., a New York corporation which is a
wholly-owned subsidiary of Essex Investment Group, Inc., will act as the
Managing Dealer in connection with the offering of Notes and Units of the
Partnership. The Managing Dealer has acted as the sales agent for the General
Partner and MM&S in connection with the offering of limited partnership
interests in several other limited partnerships. The Managing Dealer may enter
into arrangements with other broker-dealer firms which are NASD members
("Soliciting Dealers") to assist in the sale of Notes and Units. Should the
Managing Dealer engage any Soliciting Dealer to assist it in the offering and
sale of Notes and Units, the Managing Dealer will arrange for the payment from
its selling commissions of any commissions or fees of such Soliciting Dealer.
The General Partner may also pay a portion of its Organization and Offering
Management Fee to the Managing Dealer or Soliciting Dealers. See "THE OFFERING
- -- Plan of Distribution."
49
<PAGE>
CONFLICTS OF INTEREST
The Partnership will be subject to a number of conflicts of interest
arising from its relationships with the General Partner, its owners and
affiliates and because of other activities and entities in which the General
Partner and its affiliates have or may have a direct or indirect financial
interest. This Prospectus attempts to highlight those conflicts of interest, but
a potential investor should be aware that, because of future activities or
events not now foreseen, the description herein may not be complete.
LIMITED ROLE OF THE TRUSTEE
The terms of the Notes were structured by the General Partner of the
Partnership and are not the result of arm's length negotiations between the
Partnership and an independent lender. The General Partner owes fiduciary duties
to the Limited Partners of the Partnership, but does not owe any fiduciary
duties to the Holders of the Notes. The Trustee was retained by the Partnership
to serve as paying agent and registrar with respect to the Notes. The Trustee
did not supervise the construction of the Solon Hampton Inn hotel and, likewise,
will not supervise the construction of the Erie Hampton Inn hotel and it is
anticipated that the Trustee will not inquire into the operation of the Hotels
unless the Trustee becomes aware of an Event of Default under the Notes. The
Trustee has acted as trustee with respect to five prior private placements of
mortgage notes and two publicly-registered mortgage note offerings by limited
partnerships which are affiliated with the General Partner and may continue to
do so with respect to other transactions. The Trustee is also the principal
lender to the General Partner and its sole shareholder, Essex Investment Group,
Inc.
The Indenture limits the duties of the Trustee to only those duties as
are specifically set forth in the Indenture and provides that the Trustee will
not be liable to the Holders of Notes or the Partnership for any losses or
damages unless the loss or damage arises from the active negligence, willful
misconduct or willful default of the Trustee.
NO LIMITATION ON ACTIVITIES OF THE GENERAL PARTNER
There is no limitation on the rights of the General Partner or its
affiliates to engage in any business or to render services of any kind to any
entity. The General Partner and its affiliates act in the same capacity with
respect to several other limited partnerships and corporations and expect to
continue to do so. The General Partner and its affiliates may, therefore, have
conflicts in allocating their time, attention and efforts among the various
partnerships and corporations. In particular, the General Partner is the general
partner of 11 limited partnerships formed to own and operate hotels, which
programs and partnerships have investment objectives similar to those of the
Partnership. In addition, the General Partner or its affiliates expect to form
one or more limited partnerships to develop additional hotels which may have
investment objectives substantially the same as those of the Partnership. See
"THE PARTNERSHIP'S BUSINESS -- The Essex Glenmaura Investment." These franchise
operations or other investment programs established by the General Partner and
its affiliates may conflict with those of the Partnership. Neither the General
Partner nor its affiliates are obligated to afford the Partnership an
opportunity to participate in any such programs. Conflicts of interest may exist
if and to the extent that other owners of hotels affiliated with the General
Partner seek to refinance or sell their hotels at the same time as the
Partnership. During the construction period, the General Partner and its staff
expect to devote approximately 80 hours per week toward the development of each
Hotel. After construction has been completed, the General Partner and its staff
expect to devote up to approximately 40 hours per week toward the operation of
the Hotels.
POTENTIAL COMPETITION AMONG HOTELS OWNED BY AFFILIATES
Conflicts of interest will exist to the extent that, in the future,
other hotels owned or operated by the General Partner or its affiliates compete,
or are in a position to compete, with the Partnership in providing lodging to
customers within the market areas in which the Partnership's Hotels will be
located. The General Partner and its affiliates will avoid acquiring or
developing new hotels which would compete with the Partnership's Hotels if the
anticipated effect on either the Partnership's Hotels or the new
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properties would be materially adverse. In deciding whether a new hotel owned or
operated by the General Partner or its affiliates would compete with one of the
Partnership's Hotels, the directors of the General Partner will consider the
location of the Hotel and the room demand generators in the market area served
by the Hotel.
Further conflicts of interest may exist if and to the extent that other
owners of hotels affiliated with the General Partner seek to refinance or sell
their hotels at the same time as the Partnership. The directors of the General
Partner intend to resolve such conflicts by allocating refinancing opportunities
on the basis of the other available opportunities for refinancing and the
investment objectives and policies and relative financial health of each hotel
program. The Partnership intends that if the above factors have been evaluated
and the opportunity is deemed generally suitable for more than one program, then
the properties will be refinanced in the order that they were acquired, with the
property held for the longest period being refinanced first. The General Partner
will also seek to reduce any such conflicts as may arise with respect to hotels
available for sale by making prospective purchasers aware of all such hotels
available for sale.
COMPENSATION OF THE GENERAL PARTNER AND ITS AFFILIATES WAS NOT ESTABLISHED
THROUGH ARM'S LENGTH NEGOTIATIONS
Under the Partnership Agreement, the General Partner and its affiliates
are entitled to receive compensation from the Partnership for a variety of
services and undertakings. This compensation has not been established through
arm's length negotiations. In addition, the structure and timing of this
compensation will create certain conflicts of interest. For example, the General
Partner is entitled to a sales fee equal to 3% of the gross sales price from the
sale of any or all of the Hotels and also may be entitled to 1% of the gross
proceeds of any refinancing of any or all of the Hotels. The General Partner and
the Managing Dealer may also receive certain additional fees and commissions in
connection with obtaining financing for the construction and development of the
Hotels and with refinancing the Hotels. The General Partner may have an economic
interest in arranging both a refinancing and a sale when a sale alone may be in
the best interest of the Partnership. The directors of the General Partner will
decide whether to refinance or sell any of the Hotels and such decision will be
subject to the fiduciary duties described in the following section of this
Prospectus. In general, the General Partner does not expect to refinance any
Hotel unless the Partnership is likely to hold the Hotel for at least two years
thereafter.
POTENTIAL CONFLICTS INVOLVING SALE OF THE HOTELS OR MERGER OR REORGANIZATION OF
THE PARTNERSHIP
The General Partner has the right under Section 4.02(c) of the
Partnership Agreement to cause the merger or reorganization of the Partnership
upon obtaining the approval of the transaction by a Majority Vote of the Limited
Partners. In connection with any such transaction, the Limited Partners may
receive securities issued by an Affiliated Person in exchange for their Units.
The General Partner may have conflicts in structuring any such transaction or
recommending it to the Limited Partners for approval because of differing
interests of the Partnership and the Affiliated Person participating in the
transaction. In addition, under Section 4.06(b) of the Partnership Agreement,
the Partnership may sell all or substantially all of the assets of the
Partnership to an Affiliated Person, provided that the transaction is fully
disclosed and on terms competitive with those which may be obtained from persons
other than Affiliated Persons. Consent of the Limited Partners is not required
with respect to any such sale transaction. The General Partner may have
conflicts in structuring any such sale transaction because of differing
interests of the Partnership and the affiliated buyer. The General Partner will
attempt to reduce these potential conflicts by basing the sale price on an
independent appraisal of the Partnership's assets.
POTENTIAL CONFLICTS IN MAKING ADDITIONAL INVESTMENTS IN ESSEX GLENMAURA
The General Partner is also the sole general partner of Essex Glenmaura
and will, among other things, be solely responsible for determining whether
Essex Glenmaura should proceed with additional investment opportunities of Essex
Glenmaura, See THE PARTNERSHIP'S BUSINESS -- The Essex Glenmaura Investment." In
addition, under the Partnership Agreement, the General Partner shall determine,
in its sole and absolute discretion, investments to be made by the Partnership.
In the event
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the General Partner determines that Essex Glenmaura should proceed with
additional investment opportunities, the General Partner must also determine
whether it would be in the best interest of the Partnership to exercise its
right of first refusal to increase its equity interest in Essex Glenmaura. The
General Partner may have 51 conflicts in determining whether the Partnership
should increase its equity investment in Essex Glenmaura. In an effort to
minimize these potential conflicts, the General Partner will consider a number
of factors including: (I) a determination of the availability of funds, (ii)
estimation of future capital reserve requirements for operation of the Hotels,
and (iii) the existence of any unpaid Cumulative Returns.
POTENTIAL CONFLICTS INVOLVING THE PURCHASE OF PROPERTY FROM THE GENERAL PARTNER
Pursuant to Section 4.06(a) of the Partnership Agreement, the General
Partner may purchase property in its own name from an Affiliated Person or a
third party, and assume loans in connection therewith, and temporarily hold
title thereto for the purpose of facilitating the acquisition of such property,
the borrowing of money or obtaining of financing for the Partnership, or
completion of construction of the Erie Hampton Inn hotel, or any other purposes
related to the business of the Partnership. The Partnership Agreement provides
that any such property may be purchased by the Partnership provided that the
price is no greater than the cost of such property to the General Partner or, if
the General Partner acquires the property from an Affiliated Person, the cost to
any such Affiliated Person (which may include the purchase price plus carrying
costs), except for compensation paid in accordance with the Partnership
Agreement; there is no increase in the interest rates of the loans secured by
the property at the time acquired by the General Partner and at the time
acquired by the Partnership; and the General Partner does not receive any other
benefit arising out of such transaction, except for compensation paid in
accordance with the Partnership Agreement. A conflict of interest may arise in
connection with the General Partner's determination of which properties, if any,
will be purchased by the Partnership pursuant to this provision. The directors
of the General Partner will resolve this conflict by considering all of the
relevant facts and circumstances, including the cost of the property, the cost
to complete construction, the funds available to the Partnership and the
investment objectives and policies of the Partnership.
POTENTIAL CONFLICTS INVOLVING JOINT VENTURES
The Partnership may invest in general partnerships or limited
partnerships or enter into joint venture arrangements with other persons who may
be an Affiliated Persons, provided that approval by the General Partner and a
Majority Vote of the Limited Partners is obtained. With respect to any of these
partnership or joint venture arrangements, conflicts of interest could arise
between the Partnership and its affiliated co-venturer because of differing
interests or economic circumstances of the Partnership and such co-venturer. The
General Partner will attempt to minimize these potential conflicts by selecting
a co-venturer who is financially secure and has investment objectives which are
similar to those of the Partnership.
ABSENCE OF INDEPENDENT DUE DILIGENCE REVIEW
Essex Capital Markets Inc., the Managing Dealer, is an affiliate of the
General Partner. Thus, there has been no independent due diligence review of
this offering by an unaffiliated underwriter.
POTENTIAL CONFLICTS INVOLVING TAX MATTERS
Situations may arise in which the General Partner as Tax Matters
Partner (as defined in the Partnership Agreement) may be required to act on
behalf of the Partnership in administrative and judicial proceedings involving
the Internal Revenue Service or other regulatory or enforcement authorities.
Such proceedings may involve or affect other partnerships for which the General
Partner or one of its affiliates acts as general partner. In such situations,
the positions taken by the General Partner may have differing effects on the
Partnership and on these other partnerships. Any decisions made by the General
Partner with respect to such matters will be made in good faith consistent with
the General Partner's fiduciary duties both to the Partnership and the Limited
Partners and to any other partnership for which it or an affiliate may be acting
as a general partner.
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In resolving any of these conflicts, the General Partner will be
subject to the fiduciary duties described below.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership and to the
Limited Partners as a fiduciary and consequently must exercise good faith and
prudence in handling Partnership affairs. The General Partner does not owe
fiduciary duties to the Holders of the Notes.
The Partnership Agreement defines and limits these general duties by
providing that the General Partner and its affiliates shall not be liable,
responsible, or accountable in damages or otherwise to the Partnership or to any
of the Limited Partners for any act or omission performed or omitted by them in
good faith, within the scope of their authority, and which they believed to be
in the best interest of the Partnership, except for conduct constituting fraud,
bad faith or gross negligence. The General Partner and its affiliates are also
indemnified by the Partnership against and for any loss, liability or damages
(including all judgments, costs and attorneys' fees and amounts expended in the
settlement of any claims of liability or damages) incurred by them in good faith
and in a manner reasonably believed by them to be in the Partnership's best
interests and within the scope of their authority, arising from any act or
omission in connection with the business of the Partnership, provided that the
course of conduct which caused the loss or liability is not attributable to
fraud, bad faith or gross negligence with respect to any such act or omission.
Such indemnification is recoverable only out of the assets of the Partnership
and not from Limited Partners. Indemnification is not recoverable from
additional assessments on the Limited Partners. Insofar as indemnification for
liabilities under the Securities Act of 1933 may be permitted to the General
Partner and its affiliates as outlined above, the Partnership has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
The New York limited partnership law provides that a limited partner
may institute legal action on behalf of a partnership (a partnership derivative
action) to recover damages from a third party where the general partner has
failed to institute the action or where an effort to cause the general partner
to do so is not likely to succeed. In addition, the statutory or case law of
certain jurisdictions may permit a limited partner to institute legal action on
behalf of himself or all other similarly situated limited partners (a class
action) to recover damages from a general partner for violations of its
fiduciary duties to the limited partners. The Partnership Agreement contains
various provisions, described in the preceding paragraph, that have the effect
of restricting the fiduciary duties owed by the General Partner to the
Partnership and the Limited Partners, and which could be asserted as defenses in
a legal action brought by a Limited Partner. Thus, the General Partner will not
be liable for errors of judgment or for any acts or omissions if it acted in
good faith and in the best interest of the Partnership. The General Partner
could be indemnified for its negligent acts.
The Partnership Agreement also provides that neither the General
Partner nor any of its affiliates shall be indemnified against any liabilities
arising under federal or state securities laws, rules or regulations in
connection with the sale of Units or Notes, unless (i) the person seeking
indemnification is successful in defending such action on the merits of each
count involving alleged securities law violations, (ii) a court dismisses each
count involving alleged securities law violations with prejudice as to the
person seeking indemnification, or (iii) a court approves a settlement of such
action (subject to court approval of litigation and/or settlement costs) and,
before seeking court approval for such indemnification, the person seeking
indemnification advises the court as to the position of the Securities and
Exchange Commission and any state securities administrators in any state in
which the Notes or Units were offered or sold pursuant to the Prospectus or in
which Limited Partners or Holders of Notes then reside regarding indemnification
for violations of securities laws.
A successful claim by the General Partner or its affiliates for
indemnification by the Partnership would deplete Partnership assets by the
amount paid. The Partnership shall not pay for any insurance covering liability
of the General Partner or any other persons for actions or omissions for which
indemnification is not permitted by the Partnership Agreement, provided,
however, that the General Partner
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or its affiliates may be named as additional insured parties on policies
obtained for the benefit of the Partnership to the extent that there is no
additional cost to the Partnership.
The fiduciary responsibilities of general partners in limited
partnerships is a rapidly developing and changing area of the law and
prospective investors who have questions concerning the duties of the General
Partner should consult with their own counsel.
THE PARTNERSHIP'S BUSINESS
GENERAL
The Partnership's primary business is to construct, own and operate two
Hampton Inn hotels pursuant to licenses to be obtained from Promus Hotel. The
Partnership operates through two New York limited liability companies. Solon
Hotel LLC was formed in June 1997, solely to acquire, own, operate, mortgage,
sell and otherwise deal in and with the 103-room Hampton Inn hotel on the Solon
Property, which the Partnership expects will be open at the end of July 1997.
The Partnership owns 99% of the membership interests in Solon Hotel LLC and the
remaining 1% is owned by Essex Hotels, the managing member of Solon Hotels LLC,
and whose sole member is the Partnership. Erie Hotel LLC was formed in June
1997, solely to acquire, own, operate, mortgage, sell and otherwise deal in and
with the Erie Property, upon which the Partnership expects to construct, own and
operate a 98-room Hampton Inn hotel. The Partnership owns 99% of the membership
interests in Erie Hotel LLC and the remaining 1% is owned by Essex Hotels II,
the managing member of Erie Hotels LLC, and whose sole member is the
Partnership. As a result of the foregoing structures, the Partnership
effectively continues to own 100% of the Solon and Erie Properties and the
hotels constructed or to be constructed thereon. See "TAX CONSIDERATIONS Tax
Status of Solon Hotel LLC and Erie Hotel LLC."
[GRAPHIC OMITTED]
99% PARTNERSHIP 99%
100% 100%
1% ESSEX ESSEX 1%
HOTELS HOTELS II
SOLON ERIE
HOTEL LLC HOTEL LLC
The General Partner believes good investment opportunities exist in the
limited service segment of the lodging industry and that the Hampton Inn
franchise has certain competitive advantages that should position it for better
than average performance.
In addition to the hotel properties, the Partnership owns a 49.8%
interest in Essex Glenmaura, which partnership has constructed, and currently
owns and operates a Courtyard by Marriott hotel in the Borough of Moosic, near
the City of Scranton, Pennsylvania. See "THE PARTNERSHIP'S BUSINESS -- The Essex
Glenmaura Investment" and "ESTIMATED USE OF PROCEEDS."
HAMPTON INN & SUITESsm IS A TRADEMARK OF, AND HOMEWOOD SUITES(R) AND
HAMPTON INN,(R) ARE REGISTERED TRADEMARKS OF, PROMUS HOTEL CORPORATION AND ITS
SUBSIDIARIES; COURTYARD BY MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT
INTERNATIONAL, INC.; AND MICROTEL(R) IS A REGISTERED TRADEMARK OF U.S. FRANCHISE
SYSTEMS INC. NONE OF THE FOREGOING FRANCHISORS OR THEIR AFFILIATES HAS ENDORSED
OR APPROVED THE OFFERING OR THE MERITS OF THE INVESTMENT DESCRIBED HEREIN. A
GRANT TO THE PARTNERSHIP OF A FRANCHISE SHOULD NOT BE CONSTRUED AS AN APPROVAL
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OR ENDORSEMENT BY THE FRANCHISOR (OR ITS AFFILIATES) OF THE PARTNERSHIP OR THIS
OFFERING.
DESCRIPTION OF THE HAMPTON INN HOTEL CONCEPT
Hampton Inn hotels are high quality hotels with limited amenities and
moderate prices. Hampton Inn hotels are designed primarily to accommodate
business travelers with limited expense accounts, non-destination business and
pleasure travelers and value-conscious vacationers. Hampton Inn hotels are
generally two to six stories with 50 to 150 rooms and are located in high
traffic areas, typically near full-service restaurants.
Hampton Inn hotels have a strong commitment to guest satisfaction.
According to Promus Hotel, the Hampton Inn hotel was the first national hotel
chain to offer its guests an unconditional 100% Satisfaction Guarantee. A
toll-free number provides access to a nationwide reservation system. Hampton Inn
hotels offer a national advertising and marketing program and are widely
promoted on television, in magazines and trade publications and through direct
mail, which increases travelers' awareness and trial usage. Major emphasis also
is placed on corporate and travel agent markets.
Hampton Inn hotels offer selected services and amenities, including a
free, self-serve continental breakfast in the lobby, free local telephone calls,
a free in-room movie channel, and senior citizens' and frequent travelers'
discount programs. Most hotels offer a lobby/breakfast area and a variety of
room types: rooms with one or two double beds and rooms with king bed
configurations. Most Hampton Inn hotels offer a swimming pool and a hospitality
suite, a multi-purpose room that doubles as a guest room or a small gathering
facility.
Started in 1984, there were 620 franchised Hampton Inn hotels in
operation at the end of 1996. Promus Hotel has advised the Partnership that
system-wide occupancy rates averaged 72.1% in 1996 as compared to 74.7% in 1995,
with an average daily rate of approximately $60.84 in 1996 as compared to $56.95
in 1995. The Hampton Inn hotel franchise started in the upper economy segment,
but over time, as its average daily rate has crossed over into the mid-scale
segment without food and beverage, the franchise has repeatedly exceeded the
industry averages for the mid-scale segment without food and beverage. For 1996
the mid-scale segment without food and beverage reported an average occupancy
rate of 68.4% and an average daily rate of $56.60.
The Application fee for a Hampton Inn hotel is $450 per guest room,
with a minimum fee of $45,000.
Essex Partners opened its first Hampton Inn hotel in Rochester, New
York in April 1995.
PROMUS HOTEL CORPORATION - LICENSE AGREEMENTS
The following is a summary of some of the principal terms of the
License Agreement currently being used by Promus Hotel.
Under the License Agreement, Promus Hotel provides the Partnership with
certain prototype plans and specifications, operations manuals and consulting
and advisory services in connection with the construction and operation of the
Hotels. The Partnership is also granted a license during the term of such
License Agreement to use the service marks designated by Promus Hotel. The
License Agreement does not grant to the Partnership an exclusive territory.
There can be no assurance, therefore, that Promus Hotel will not operate or
license others to operate one or more competing hotels in the vicinity of either
the Solon Hampton Inn hotel or the Erie Hampton Inn hotel, or both.
In addition to initial license application fees, the Partnership is
required to pay continuing monthly royalty fees of 4%, and marketing fees of 4%
of gross room revenues. The License Agreement requires the Partnership to
maintain certain insurance coverage, to meet certain standards of Promus Hotel
with respect to furniture, fixtures, maintenance and repair and to refurbish and
upgrade the Hotels to conform
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to Promus Hotel's then-current standards. Under the current Hampton Inn License
Agreement, the Partnership is required to purchase and install Promus Hotel's
computer software business system and pay a software license fee of $3,000 plus
$85 per guest room, and monthly maintenance ranging from $300 per month to $450
per month. The fees summarized herein are subject to change by Promus Hotel.
The term of the current Hampton Inn License Agreement is 21 years from
the date of approval (the License Agreement for the Solon Hampton Inn hotel is
20 years from the date of opening), and is not renewable. The License Agreement
may not be voluntarily terminated by the Partnership without incurring
substantial liquidated damages, payable in a lump sum equal to the amount of
monthly fees paid during the preceding 36 months.
All rights of the Partnership under a Promus Hotel License Agreement
automatically terminate upon the happening of certain events, which include (i)
bankruptcy, insolvency or dissolution of the Partnership, (ii) commencement of
an action against the Partnership seeking reorganization, liquidation or
dissolution resulting in the entry of an order for relief that is not fully
stayed within seven business days after entry of the order or which is not
dismissed within 45 days, (iii) loss of possession of the Hotel by the
Partnership, (iv) conviction of a felony by the Partnership or any of its
principals or the maintenance of false books and records by the Partnership or
(v) breach of the provisions in the License Agreement which restrict transfers
of interests in the Partnership (including, a change in the identity of the
General Partner).
Promus Hotel has the option to terminate a License Agreement upon the
happening of certain other events, which include: (i) failing to complete
construction of the Hotel within a specified period after the commencement of
construction; (ii) unauthorized disclosure of Promus Hotel's proprietary
information or the misuse or unauthorized use of Promus Hotel's trademarks;
(iii) failing to pay any amounts due to Promus Hotel; (iv) ceasing to do
business at a Hotel location for any reason, including condemnation, fire or
other casualty (provided that the Partnership shall have a period of 12 months
in which to relocate or reconstruct the Hotel); and (v) failing to comply with
all governmental requirements, failing to pay all taxes, or failing to maintain
all governmental licenses and permits necessary to operate the Hotel.
Upon termination or expiration of a License Agreement the Partnership
is required to immediately cease using Promus Hotel's service marks and all
confidential methods, procedures and techniques provided by Promus Hotel and to
remove and discontinue using all signs, fixtures, advertising materials,
stationery, supplies and other articles which could cause the Hotel to be
associated with Promus Hotel. In addition, if the termination occurs for reasons
other than condemnation, the Partnership may be required to pay a termination
fee in a lump sum equal to the amount of monthly fees paid during the preceding
36 months.
Promus Hotel has historically agreed that the Trustee shall have a
period of 30 days after receipt of notice from such franchisor in which to cure
any default under its License Agreement, and the General Partner believes it
will agree in connection with any additional license granted to the Partnership.
If the Partnership loses possession of a Hotel, however, the License Agreement
will be terminated and the Hotel may no longer be operated as a Hampton Inn
hotel unless the Trustee locates a purchaser and the purchaser applies for and
obtains a new License Agreement (and pays a new initial franchise fee) from
Promus Hotel. The effect of this provision may be to cause the Trustee to delay
commencement of foreclosure proceedings until a qualified purchaser can be
located.
The License Agreement restricts the transfer of any interest in the
License, the Partnership, including the transfer of limited partnership
interests, and the General Partner. The License Agreement does, however, provide
that for "publicly-traded equity interests," no consent of Promus Hotel is
required with respect to any transfers of less than a 25% interest in the
Partnership unless the transferee owns, or would own after the transfer is
completed, an interest in the Partnership of 25% or more. Promus Hotel has
advised the Partnership that, solely for purposes of the License Agreement, the
Units would be considered "publicly-traded equity interests" since they will
have been sold in a large real estate syndication transaction.
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CONSTRUCTION OF THE HOTELS
The Solon Hampton Inn hotel was constructed, and the Erie Hampton Inn
hotel will be constructed, by the Partnership in accordance with plans and
specifications provided by Promus Hotel. The Solon Hampton Inn hotel will
consist of 103 rooms within a four-story, interior corridor building situated on
approximately 2.28 acres. The Solon Hampton Inn hotel was constructed of
reinforced concrete with masonry and metal stud walls, with brick and
stucco-like exterior. It will have 96 standard guest rooms and 7 two-room
suites. The suites will have separate living and sleeping areas and small
kitchen areas. The hotel will have an expanded lobby/breakfast area, where a
daily complimentary continental breakfast will be served, an exercise room, an
indoor pool and two meeting rooms. The total costs of the Solon Hampton Inn
hotel are estimated to be $7 million, or $68,000 per room. The costs of land,
site developments, building construction and fixtures, furniture and equipment,
but exclusive of all soft costs, are estimated to be approximately $5.4 million,
or $52,500 per room.
The Erie Hampton Inn hotel will be constructed and equipped similarly
to the Solon Hampton Inn hotel. It will have 98 rooms within a four-story
building and will be constructed on a parcel of approximately 2.5 acres. Unlike
the Solon Hampton Inn hotel which has a partial brick facade, the Erie Hampton
Inn hotel will only have a stucco-like exterior. The Erie Hampton Inn hotel will
have 96 standard guest rooms and 2 two-room suites. It also will have an
expanded lobby/breakfast area, an exercise room, an indoor pool and two meeting
rooms. Based on the construction of the Solon Hampton Inn hotel, the General
Partner estimates that construction of the Erie Hampton Inn hotel, which is
expected to start in the Fall of 1997, will be completed within seven to nine
months, depending upon, among other things, the weather conditions during the
construction period. The total costs of the Erie Hampton Inn hotel are estimated
to be approximately $7.2 million, or approximately $73.47 per room. The costs of
land, site development, building construction and fixtures, furniture and
equipment, but exclusive of all soft costs, are estimated to be approximately
$5.6 million, or approximately $56.73 per room.
The General Partner intends to hire an unaffiliated construction
manager to provide an on-site supervisor who will be responsible for selecting
and supervising subcontractors to complete various portions of the construction
of the Erie Hampton Inn hotel. It is anticipated that the construction manager
will enter into a standard A.I.A. contract and receive a competitive fee for its
services and may receive additional compensation at stated rates in the event
that additional services are requested by the General Partner. There can be no
assurance that the amount of time actually required to complete construction of
the Erie Hampton Inn hotel or the actual cost of construction will not exceed
the above estimates. See "ESTIMATED USE OF PROCEEDS."
OPERATION OF THE HOTELS
The Partnership has entered into a Management Agreement with respect to
the Solon Hampton Inn hotel, and is expected to enter into a Management
Agreement upon completion of the Erie Hampton Inn hotel, with the Property
Manager, Essex Partners, or its assigns. The Management Agreement will provides
that the Property Manager will investigate, hire, pay, supervise and discharge
the personnel necessary to properly maintain and operate the Hotels. All such
personnel will be employees of the Partnership and compensation of such
personnel will be an expense of the Partnership. After the initial opening of a
Hotel, which will require a significant amount of support from the Property
Manager in connection with the establishment of operating, accounting and
management procedures, it is anticipated that personnel of the Property Manager
will devote approximately 40 hours per week to the management of the Hotels.
The Management Agreement requires the Property Manager to maintain the
building and grounds, to pay insurance premiums with respect to the Hotel, to
apply for, obtain and maintain all required licenses and permits, to pay certain
expenses on behalf of the Partnership, to maintain a comprehensive system of
office records and books and to annually prepare an operating budget. In
addition, the Property Manager has the authority to enter into service contracts
and other contracts reasonably necessary or desirable in connection with the
operation of the Hotels, with the approval of the Partnership in some cases. As
compensation for these services, the Property Manager will receive a fee equal
to 4.5% of the
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gross revenues from the Hotels, consisting of room rentals, telephone charges,
cable charges and any other miscellaneous charges collected from guests. The
Property Manager will also receive an accounting fee equal to $800 per month,
per hotel.
Each Management Agreement has an initial term of five years with a
series of one (1) year renewal terms. The Management Agreement may be earlier
terminated (i) by either the Partnership or the Property Manager in the event of
a default under the Management Agreement which is not cured within 60 days after
written notice thereof, (ii) by the Property Manager, upon the failure of the
Partnership to pay compensation due to the Property Manager, (iii) by either
party upon the bankruptcy or insolvency of the other party, (iv) by either party
upon the Partnership's failure to repair or restore the subject Hotel within 120
days after all or any portion of such Hotel is damaged or destroyed by fire or
other casualty, or (v) by either party if all or any portion of the subject
Hotel is condemned and the remaining facilities are insufficient for the
efficient and profitable operation of such Hotel. During any renewal term the
Management Agreement may be terminated at any time on 120 days written notice.
Each Management Agreement requires the Property Manager to devote such
of its time as it deems necessary to manage the subject Hotel; however, it does
not impose any limitations on the Property Manager's other business activities,
including other commercial and residential real estate ventures which may
compete with such Hotel. Pursuant to the Management Agreement, all expenses
incurred thereunder shall be obligations of the Partnership and the Property
Manager will receive its management fee notwithstanding that the Partnership may
not have earned a profit or may be operating at a loss and that the Limited
Partners may not have received any distributions.
The Partnership has agreed to a broad indemnity of the Property Manager
from liabilities it may incur in connection with its services under the
Management Agreement.
COMPETITION
The operation of hotels/motels is a highly competitive business.
Competition in the lodging industry is primarily based on price, location,
quality of facilities and overall range of services. The Hampton Inn hotel
franchise, with its selected services and amenities, targets the mid-scale
without food and beverage segment of the lodging industry's limited service
sector. Hampton Inn hotels are typically located in areas that contain other
competitive limited service lodging facilities. Competitors in the overall
limited service lodging area include: Fairfield Inn by Marriott, Courtyard by
Marriott, Days Inn, Comfort Inn, Holiday Inns, LaQuinta, Red Roof Inn,
EconoLodge, Super 8, Motel 6 and Travelodge. These national chains have name
recognition and operating advantages like reservation systems, and typically
have significant financial resources; characteristics shared by Hampton Inn
hotels.
Some of these hotels/motels in the limited service segment could have
services and architectural features similar to the Partnership's Hotels, and may
offer rates comparable to or lower than those estimated by the Partnership.
Furthermore, there can be no assurance that, after the construction and
successful operation of a Hotel, competitors will not offer lower room rates or
that additional hotels which offer similar rooms, services and rates in
competition with the Hotels will not be developed near the Hotels and that such
development will not have an adverse effect on occupancy rates and
profitability. See "RISK FACTORS."
THE HOTEL PROPERTIES
SOLON PROPERTY
General. The Partnership acquired the Solon Property in December 1995
and began construction of a 103-room Hampton Inn hotel in the fall of 1996. The
Solon Hampton Inn hotel is expected to open at the end of July 1997 The
Partnership had originally intended to build a Hampton Inn & Suites hotel on the
Solon Property, however, the construction costs associated with a Hampton Inn &
Suites hotel were determined to be too high relative to the room rates that
could be charged in the Solon market. Therefore, based on its knowledge of the
Solon market, the General Partner determined that a Hampton Inn hotel
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could be built and operated more successfully in the Solon market. Accordingly,
the General Partner secured the approval of Promus Hotel to change brand
designations. Total costs associated with the Solon Property were approximately
$7.0 million, including the cost of the land (which was $596,600 (inclusive of
closing costs)), cost of construction, cost of furnishings, construction period
interest, financing costs (debt and equity) and all soft costs, such as
architectural, engineering and franchise fees and working capital.
Solon, Ohio is a southeast suburb of Cleveland, Ohio. Cleveland is
located in northeastern Ohio on the shore of Lake Erie. The city and surrounding
area are served by an extensive transportation network including highway, water,
rail and an international airport. Cleveland is the largest city in Ohio and is
located in the Cleveland/Lorain/Elyria MSA. In 1995 the MSA had a population of
approximately 2.0 million of which 1.4 million resided in Cuyahoga County in
which the Cities of Cleveland and Solon are located. The Cleveland economy has
rebounded from the smoke stack industry decline of the 1970's. Despite problems
which are common to many large urban areas, the Cleveland economy has benefited
from a diversified employment base bolstered by the continuing presence of a
number of Fortune 500 corporations, including Eaton Industries, American
Greetings, Sherwin Williams, Parker Hanefin, NAACO Industries, Ferro Corporation
and Standard Products. The unemployment rate of Cuyahoga County was 4.8% in
1996.
The image of Cleveland and its desirability as a place to visit have
been enhanced by a series of development and redevelopment projects including
the construction of Jacobs Field, the new home of the Cleveland Indians; the
redevelopment of The Flats along the Cuyahoga River into a first class
entertainment district; the redevelopment of the Terminal Tower/ Tower City Rail
Station into The Avenues Shopping Mall which is connected to the Gund Arena,
home of the Cleveland Cavaliers; the Rock and Roll Hall of Fame, which opened in
September 1995; and a number of other projects that are currently underway,
including redevelopment of Cleveland's Warehouse District.
The Solon Property. The Solon Property was acquired form a
non-affiliated limited liability company and contains approximately 2.28 acres.
The purchase price of the Solon Property was $590,600, plus closing costs of
approximately $6,000. The Partnership also acquired legal title to half of a
lake adjacent to the site (approximately 1.25 acres) at no additional cost. The
lake is fed continuously throughout the year by a stream that also serves as a
detention area for storm water run off from the Solon Commons (as herein
described). The Partnership is responsible for half the costs of maintenance of
the lake, however, these costs are not expected to be material.
Financing. On July 7, 1997, GMAC loaned Solon Hotel LLC $4.5 million.
The loan will be advanced in three installments. Approximately $1.0 million was
advanced at the closing of the loan, approximately $2.0 million is expected to
be advanced as a second installment on or about August 1, 1997, and the balance
of the loan proceeds is expected to be advanced in the third installment on or
about August 15, 1997. Solon Hotel LLC was formed in June 1997 as a special
purpose entity as a condition to GMAC's agreement to provide permanent financing
of the construction costs associated with the Solon Hampton Inn hotel. The
GMAC-Solon Loan is secured by, among other things, a first mortgage lien on the
Solon Property and any improvements thereon, including the Solon Hampton Inn
hotel. The term of the first mortgage loan is for a period of four years with a
one year extension upon the payment of an extension fee and the satisfaction of
a specified debt service coverage ratio. Monthly payments of interest only are
required during the first year. Thereafter, monthly payments of principal and
interest are due based on a 25 year amortization and an assumed 10% fixed
interest rate. Interest actually accrues at a rate of 3.25% over the 30-day
LIBOR index. Upon payment of the loan balance in full, whether prior to or at
maturity, Solon Hotel LLC is required to pay a deferred financing fee equal to
1% of the loan balance. The loan may be prepaid in part, in minimum increments
of $100,000, without premium or penalty. Starting in the second year of the
loan, Solon Hotel LLC will be required to maintain a replacement reserve escrow
of 2% of gross revenues, and after the second year that percentage increases to
4% of gross revenues. The General Partner has provided a guaranty of completion,
a guaranty of payment and a guaranty of nonrecourse exceptions in connection
with the loan. The guaranty of payment is reduced to 30% of the principal
balance of the loan upon completion of construction of the Solon Hampton Inn
hotel and will terminate upon the satisfaction of a specified debt-service
coverage ratio by Solon Hotel LLC.
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See "RISK FACTORS." The General Partner and Solon Hotel LLC have also agreed to
indemnify GMAC for any environmental liabilities incurred by GMAC with respect
to the Solon Property. As additional security for the loan, Essex Hotels, the
managing member of Solon Hotel LLC, pledged its membership interest in Solon
Hotel LLC and the Partnership pledged its membership interests in Solon Hotel
LLC and Essex Hotels. The Partnership is also required to pledge its limited
partnership interest in Essex Glenmaura, which it intends to do upon the
approval of the limited partners of Essex Glenmaura owning more than 50% of the
outstanding limited partnership interests in Essex Glenmaura, who are not
affiliated persons. GMAC's final advance of funds is contingent on the
Partnership obtaining the requisite approval of the Essex Glenmaura limited
partners.
The loan documents signed by Solon Hotel LLC and GMAC contain customary
terms and conditions, including limitations on the ability of Solon Hotel LLC to
incur debt, and the loan will be cross-defaulted (and cross-collateralized) to a
loan anticipated to be made by GMAC to Erie Hotel LLC for the construction,
development and operation of the Erie Hampton Inn hotel. See "THE PARTNERSHIP'S
BUSINESS - The Hotel Properties - Erie Property - Financing."
Market and Competition. The Solon Property is located in the City of
Solon, Ohio, which had an estimated population of just under 22,000 in 1995,
which represents an increase from a population of 18,548 in 1990. The Solon
Property is located in the Solon Commons, which is located just south of Route
43. The Solon Commons is less than 1 mile from US Route 422, which is a divided
limited access freeway. US Route 422 terminates approximately 2 miles to the
west at the junction of Route I-480 and Route I-271 and provides primary access
to Solon from Cleveland and other points west. To the east, US Route 422
continues as mostly a four-lane highway to Warren, Ohio. The General Partner has
signage advertising the Solon Hampton Inn hotel on US Route 422. The commercial
area of Solon is located approximately 1 mile to the east and can be easily
accessed by Route 43. Sea World of Ohio and Geauga Lake Amusement Park are
nearby adjacent attractions located approximately 6 miles to the southeast from
the Solon Property on Route 43. Although Sea World is the dominant attraction,
both parks constitute a major regional draw and Route 43 provides the access for
a significant number of motorists en route to the parks. Sea World of Ohio has
been particularly successful. During its months of operations, Sea World of
Ohio's attendance exceeds peak attendance at Sea World of Orlando, Sea World of
San Antonio, and Sea World of San Diego.
The Solon Commons is a 27 acre mixed use development, designed to
service the nearly 2,200 acres of business and industrial park development
surrounding the Solon Commons. The Solon Commons currently has a movie theater
complex, a food court, a Ground Round Restaurant, a Longhorn Steak House, an
office of the Aetna Health Plan, a small retail strip center, a day care center
and a branch bank. One restaurant site remains undeveloped. Only 300 acres of
the 2,200 acres of business and industrial park development surrounding Solon
Commons remain undeveloped. Solon is the United States headquarters for Nestle
and the world headquarters of its Stouffer Foods Subsidiary. Other Solon
headquarters are Agency Rent-A-Car and Renaissance Hotels. Other major employers
include Matrix Essentials, which was recently acquired by Bristol Myers,
Kennametal and Antenna Specialists among others. The City of Solon continues to
aggressively pursue employers and offers a wide range of financial incentives.
An area in the southwest portion of Solon has been designated as an urban job
and enterprise zone by the State of Ohio. In addition to the remaining
undeveloped land in the City of Solon itself, a large area of land zoned for
industrial and business park development and served by the necessary utilities
is located immediately to the south of Solon in Glen Willow less than 2 miles
from the Solon Commons.
In 1994 the City of Solon voted to have all future zoning changes
approved by referendum. The General Partner believes there is no other land in
Solon, other than the Solon Property, that can currently be developed as a
hotel. The only other hotel currently in Solon is a 137-room Days Inn
located near the intersection of US Route 422 and Route 91, which is
approximately 1/2 mile from the Solon Commons. The Days Inn is a recent
conversion by the Midwestern Inn. The Days Inn is a 2- story exterior corridor
motel which is approximately 17 years old and offers an outdoor pool and no meal
service. Its annual occupancy in 1996 ranged between 60-64% with an average
daily rate of between $45 - $49. The majority of the business traveler demand
and also those leisure and group travelers seeking better accommodations,
migrate to Beachwood, Ohio, which is approximately six miles from the Solon
Commons. In Beachwood, at Chagrin Boulevard and I-271, there are four lodging
facilities containing an aggregate
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of 606 rooms with which the Solon Hampton Inn hotel will compete. These lodging
facilities consist of a Travelodge with a 1996 average daily rate of between $40
- - $45, a Radisson Inn with an average daily rate of between $65 - $69, a Holiday
Inn with an average daily rate of between $70 - $74, and a Courtyard by Marriott
hotel with an average daily rate of between $80 - $84. The average occupancy
rates for these hotels in 1996 were estimated in the low 60% range for the
Travelodge and to range between 75% to 89% for the other three hotels. Also
located in the same area are a Marriott Hotel, a newly constructed Residence Inn
by Marriott and an Embassy Suites Hotel, however, none of these lodging
facilities is expected to compete directly with the Partnership's Hotel. The
General Partner is not aware of any additional hotels contemplated for
construction in Beachwood, Ohio or Solon, Ohio. The General Partner anticipates
that the Solon Hampton Inn hotel will achieve a stabilized average daily rate of
$68 expressed in constant 1996 dollars, at an average occupancy rate of 76%.
ERIE PROPERTY
General. The Partnership acquired the Erie Property in June 1997 as a
possible location for the construction and operation of a Hampton Inn hotel. See
"THE PARTNERSHIP'S BUSINESS -- Description of the Hotel Concepts." The Erie
Property is located in the Summit Township, Pennsylvania, which is a small
suburb of Erie, Pennsylvania. Erie is centrally located on the eastern shore of
Lake Erie in northwest Pennsylvania equidistant between Pittsburgh, Buffalo and
Cleveland. The region is served by Interstates 90 and 79, rail service and an
international airport.
Erie is the county seat of Erie County, which also comprises the Erie
Metropolitan Statistical Area (MSA). In 1995 the Erie MSA had a population in
excess of 280,000, of which the Summit Township had a population of slightly
less than 6,000. Projected population growth in the county is estimated to be a
modes 0.1% per year through 2005. The Erie economy has been diversifying from
its manufacturing roots and has become a regional center for distribution,
retail trade and tourism, in addition to maintaining a sizable manufacturing
base. Located equidistant between Chicago and New York on a major cross country
interstate and with easy lake access to Canada, Erie has become a key
distribution point between two of the largest markets in the nation, as well as
an export center to Canada. The services sector recently supplanted
manufacturing as the area's leading industry, representing 27.6% of total jobs
in the Erie MSA. Manufacturing was second with a 26.7% share, followed by retail
and wholesale trade industry with 22.5%. Major employers include General
Electric Company, Saint Vincent Health Center, Hamot Medical Center,
International Paper Company, and local and state government. Erie ranked 12th in
the nation for percentage of fast growing young companies and 39th for overall
job generation. Bush Industries, a major furniture manufacturer, has completed
the first phase of construction of a new major manufacturing complex, and is
expected to add 1,100 new jobs to its state headquarters in Erie.
Travel and tourism is Erie's second largest industry, with recent
estimates placing annual tourist expenditures at more than $173.5 million. Over
four million vacationers are attracted annually to the beaches and other water
activities of Presque Isle State Park; one million more than visit Yellowstone
National Park every year. In addition, the city's waterfront area has been
undergoing revitalization with construction of a Maritime Museum, a 187-foot
observation tower, a new Erie County library and a series of upscale housing
developments. The State of Pennsylvania has no sales tax on clothing and Erie
attracts shoppers from other states and Canada. The 1.5 million sq. ft.
Millcreek Mall, which attracts shoppers from throughout the region, including
Canada, and has announced plans to increase its size by one-third. A new $8
million baseball stadium has bee completed in downtown Erie, and as a result of
the stadium's record setting attendance, Erie has been selected as the home of
one of the new AA league expansion teams that will begin playing in 1999.
City and county unemployment rates historically have remained above the
national trend, which is not unusual in regions where the economy is heavily
reliant on manufacturing. This sector was hit especially hard during the
economic downturn in the early 1990's. In January 1997 the Erie MSA unemployment
rate stood at 6.1%, compared to the national rate of 5.9%. While the General
Partner believes the Erie area economy will continue to strengthen, there can be
no assurance that an economic downturn will not occur, which could negatively
affect the Erie Hampton Inn hotel's performance.
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The Erie Property. In June 1997, the Partnership acquired three
separate parcels of land from non-affiliates containing an aggregate of
approximately 2.5 acres for an aggregate purchase price of $651,000, plus
closing costs of approximately $33,000 and demolition costs of approximately
$15,000. The Partnership has obtained a License Agreement from Promus Hotel to
construct and operate a 100-room Hampton Inn hotel on the Erie Property. The
License Agreement will become effective upon satisfactory completion of
construction and the opening of the hotel by a specified date.
The General Partner has determined that the site is appropriately zoned
for hotel use, and has reached agreement with a church on an adjoining parcel
for an additional access to the Erie Hampton Inn hotel site. The church has
agreed that it will dedicate a 0.7 acre parcel to Summit Township to enable a
reconfiguration of the intersection between Oliver Road and Old Oliver Road. In
exchange, the Partnership will make a $10,000 donation to the church payable
$5,000 upon the opening of the Erie Hampton Inn hotel with the remainder payable
one year thereafter. The Partnership has also agreed to provide the church with
two room nights per week at 50% of the prevailing room rate, subject to
availability, and if obtained by the Partnership, space on a marquee sign at the
intersection of Peach Street and Oliver road for a period not to exceed two
years. The Partnership anticipates that the construction of the Hampton Inn will
begin in October 1997.
Financing. The Gross Offering Proceeds of $7.6 million currently raised
by the Partnership are insufficient to complete construction of the Erie Hampton
Inn hotel. The Partnership must obtain at least an additional $5.1 million to
$5.3 million from a combination of the proceeds of this Offering of Notes and
Units and proceeds from External Financing or a General Partner Loan to
construct and commence operations of the Erie Hampton Inn hotel. Assuming the
Partnership is able to raise the required funds, the Partnership expects to
begin construction of the Erie Hampton Inn in October 1997. So as to enable the
Partnership to pursue favorable External Financing opportunities with respect to
the Erie Property, in June 1997 the Partnership transferred the Erie Property to
Erie Hotel LLC, a single purpose entity. Essex Hotels II is the managing member
of Erie Hotel LLC. The membership interests of the Erie Hotel LLC are owned 99%
by the Partnership and 1% by Essex Hotels II, whose sole member is the
Partnership. The Partnership is currently negotiating with GMAC for a first
mortgage loan in the principal amount of $4.5 million to finance the
construction of the Erie Hampton Inn hotel. Another alternative is for the
Partnership to find a different source of External Financing for the
construction of the Erie Hampton Inn hotel, and negotiate with GMAC to provide
permanent financing at a later date. As of the date of this Prospectus, however,
the Partnership has received no commitment for any financing. There can be no
assurance that the necessary financing will be obtained or, if obtained, that
such financing will be at rates or upon terms and conditions acceptable to the
Partnership.
Market and Competition. The Erie Property is located on the southwest
side of Peach Street (State Route 17) just south of where Peach Street
intersects with Interstate 90 (I-90) at Exit 6. The east-bound ramp for I-90
borders to the north, a service station borders to the east directly on Peach
Street, and a now-closed restaurant borders to the south. A small house, which
is owned by one of the sellers of the Erie Property, is located on the western
boundary, and the General Partner believes that the parcel will be put up for
sale and marketed as a potential restaurant site. Except for a few residences to
the west of the site on Old Oliver Road, the neighborhood surrounding the Erie
Property is primarily commercial with services common for an interstate highway
interchange. Several hotels, restaurants and highway service facilities are
within waking distance, and a larger concentration of retail, restaurant and
entertainment businesses are located on Peach Street along a two mile stretch
north of the Erie Property. Nearly all of the recent retail construction has
occurred in this corridor, and the pace of growth is expected to continue.
Millcreek Mall is located one mile north of the Erie Property. In addition, the
Family First Sports Park, a 100-acre, indoor/outdoor multi-sports complex
located 0.25 miles west of the Erie Property, offers year-round soccer and
basketball leagues, numerous sports camps throughout the year and an
ever-increasing number of regional and collegiate tournaments. It is one of the
largest facilities of its kind in the northeastern United States and is expected
to attract as many as 28,000 players and spectators to two major soccer
tournaments in 1997 and 1998 alone.
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The proposed Erie Hampton Inn hotel would be highly visible from both
Peach Street and I-90. The site has direct access from Peach Street via an
easement between a service station and a restaurant. As described above,
however, the Partnership has secured an alternate access route to the site from
Peach Street by way of Oliver Road to Old Oliver Road, accessing the Erie
Hampton Inn hotel through the back of the hotel, a distance totaling less than
0.4 miles. Because there is a traffic light at Peach Street and Oliver Road,
this route will facilitate ingress and egress to and from the Erie Hampton Inn
hotel. The Partnership has applied for a marquee sign at the corner of Peach
Street and Oliver Road directing guests to the Erie Hampton Inn hotel. An
affiliate of the General Partner has owned and operated a 100-room Microtel
approximately 0.125 miles from the Erie Property on Peach Street since 1994. As
a result, the General Partner has knowledge of the Erie market and local
government, which should prove beneficial to the Partnership in connection with
its proposed construction and operation of the Erie Hampton Inn hotel.
There are seven lodging facilities with a total of 859 guest rooms
located within two miles of the proposed Erie Hampton Inn which would compete
most directly with the hotel. Four are located within 0.5 miles of the Erie
Property at the same exit off of I-90, Exit 6, and three are located
approximately two miles east at Exit 7. The lodging properties located at Exit 6
include the following: a premium quality Comfort Inn with 110 guest rooms and
suites located directly across Peach Street from the Erie Property, which had an
estimated average daily rate of $80-84 in 1996; a 97-room Econo Lodge located
just south of the Erie Property, which had an estimated average daily rate of
$70-74 in 1996; a 111-room poorly performing Howard Johnson Lodge located 0.5
miles northeast of the Erie Hampton Inn hotel, which has an estimated daily rate
of $45-49 in 1996 (this property is being renovated and reflagged as a Motel 6);
and a 100-room Microtel Inn, which is owned by an affiliate of the General
Partner, located 0.125 miles of the proposed Erie Hampton Inn which operated at
an average daily rate of $40.22 in 1996. The lodging properties located at Exit
7 include a 113-room Days Inn, which had an estimated average daily rate of
$55-59 in 1996; a 216-room Holiday Inn in relatively poor condition, which had
an estimated average daily rate of $50-54 in 1996 and a 111-room Red Roof Inn
which had an estimated average daily rate of $45-49 in 1996. The occupancy rates
in 1996 for all these hotels were estimated to range between 45% to 84% with an
overall average of 65%. The five top performers averaged 76% occupancy during
the period. The General Partner anticipates that the Erie Hampton Inn hotel will
open in the spring of 1998 and achieve a stabilized average daily rate of $67
expressed in constant 1996 dollars and an average occupancy rate of 76%.
WARWICK PROPERTY
The Partnership acquired the Warwick Property in December 1995 with the
intention of constructing an 80 to 92 room Homewood Suites hotel. The Warwick
Property is situated on approximately 2.54 acres and is owned in fee by the
Partnership with no encumbrances. The purchase price for the property was
$501,400, plus closing costs of approximately $15,200. The Partnership selected
a general contractor and was prepared to start construction in the fall of 1996.
However, prior to commencing construction, the Partnership learned that
additional hotels were planned for construction near the Warwick Property which
could be competitive with the Partnership's hotel and result in an estimated 57%
potential increase in the number of hotel rooms in the area. The Partnership
elected to postpone commencement of construction until it could better assess
the effect of the additional hotel rooms on the expected performance of the
Partnership's hotel. The Partnership explored its options with respect to the
Warwick Property, including reducing the size and costs of the Homewood suites
hotel, the development of other hotel brands, and possible sale of the property.
The Partnership recently received results of an updated market study which
indicated that the demand for hotel rooms had remained fairly flat in the
Warwick market over the past 18 months. Based on the results of the market
study, the Partnership concluded that the estimated 57% potential increase in
the number of hotel rooms in the area would have a significant negative impact
upon the expected performance of the Partnership's hotel. In light of these
findings and the Partnership's inability to sufficiently reduce total estimated
costs of the hotel, the Partnership elected not to proceed with development of a
hotel on the Warwick Property and is currently pursuing the sale of the Warwick
Property. Although the Partnership has received some interest in the site from
potential buyers, there can be no assurance that the Partnership will sell the
Warwick Property, or that it will be sold at a price sufficient to enable the
Partnership to recover all of the costs and
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expenses incurred by the Partnership with respect to the Warwick Property. In
addition to the purchase price ($501,400) and associated closing costs
($15,200), the Partnership estimates that it has incurred an additional $165,000
in architectural, engineering and franchise fees, and taxes, travel and legal
expenses. The General Partner has returned the Acquisition Fee in the amount of
$110,000 it received with respect to the Warwick Property. See "RISK FACTORS."
THE ESSEX GLENMAURA INVESTMENT
General. Essex Glenmaura is a New York limited partnership formed in
May 1995 for the purpose of acquiring undeveloped land and constructing, owning,
and operating a Courtyard by Marriott hotel. The general partner of Essex
Glenmaura is the General Partner.
In September 1996, Essex Glenmaura completed construction and opened a
120-room, three story Courtyard by Marriott hotel in the Glenmaura Corporate
Center in the Borough of Moosic, Pennsylvania, just southeast of the City of
Scranton. The hotel is being operated under a Courtyard by Marriott franchise.
It has a restaurant which serves a full breakfast and a buffet lunch, two
meeting rooms, a lounge, an indoor pool, a spa, and an exercise room.
Operations of the Courtyard by Marriott hotel owned and operated by
Essex Glenmaura.
LOCATION: Glenmaura Corporate Center, in the Borough
of Moosic, Pennsylvania, just southeast of
the City of Scranton, Pennsylvania.
NUMBER OF
GUEST ROOMS: 120 rooms.
CONSTRUCTED: Construction completed in September 1996.
SCHEDULED RENOVATION
EXPENDITURES: Under the franchise agreement, on the fifth,
tenth and fifteenth anniversary dates of the
hotel opening the franchisor can require
Essex Glenmaura to make such renovations (at
Essex Glenmaura's expense) as the franchisor
deems necessary to upgrade the hotel.
<TABLE>
<S> <C> <C> <C>
Average Occupancy Average Occupancy
Rate for the Fiscal Rate for the Six Months
Year Ended ENDED JUNE 30, 1997: 64.0%
DECEMBER 31, 1996: 41.9%
----------------- -------------------
Average Rental Average Rental Rate
Rate for the Fiscal for the Six Months
Year Ended ENDED JUNE 30, 1997: $67.21
DECEMBER 31, 1996: $65.92
----------------- -------------------
Total Room Revenues Total Room Revenues
Per Available Rooms Per Available Rooms
for the Fiscal Year Ended for the Six Months
DECEMBER 31, 1996: $27.62 ENDED JUNE 30, 1997: $43.01
----------------- -------------------
</TABLE>
Management of Essex Glenmaura. The General Partner is also the general
partner of Essex Glenmaura. See "THE GENERAL PARTNER -- Essex Partners Inc." In
addition to the officers of the General Partner the following individual is also
directly involved in the Essex Glenmaura hotel project:
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Irene K. Doktor, Director of Sales and Marketing - Hotels
Ms. Doktor, age 31, received a BS degree in Hotel Resort Management
from Rochester Institute of Technology in 1989. From 1989 to 1990 she was Senior
Sales Manager at a Radisson Inn. She joined Courtyard by Marriott in 1990 where
she served as Regional Sales Manager and later as Operations Manager. In 1993
she became Manager, Business Travel Sales with a large Marriott Franchisee, E.J.
Delmonte Corporation. She joined Essex in 1994 and directs all sales and
marketing activities of the hotel properties.
Description and Financing of the Hotel Project. The total cost of the
Courtyard by Marriott hotel project was $8.7 million, including the cost of
land, construction, furnishings, construction period interest, financing costs
(debt and equity) and all associated soft costs, including architectural,
engineering and franchise fees and working capital.
The project was funded with $2.3 million of Partner equity, $1.5
million of unsecured notes and a $5.0 million first mortgage loan from GMAC. The
term of the first mortgage loan is for four years with a one year extension
available if the specified debt service coverage is attained. Interest accrues
at a rate of 3% over the LIBOR rate. Monthly payments of interest only are
payable for the first year. Thereafter, principal and interest payments are due
based on a 25 year loan amortization. Starting in the second year of the loan,
the Essex Glenmaura is required to maintain a replacement reserve escrow at 4%
of room revenues.
In 1996, the Partnership acquired 12.5 limited partnership units in
Essex Glenmaura for $1.25 million (100,000 per unit) with proceeds from this
Offering, representing a total interest of 54.3%. As a condition of the
GMAC-Solon Loan, the Partnership was required to reduce its ownership interest
in Essex Glenmaura to below 50%. Accordingly, in June 1997, the Partnership sold
1.05 limited partnership units to the General Partner at a purchase price of
$105,000, which is equal to the purchase price originally paid by the
Partnership for such interests. As a result, the Partnership currently owns a
49.8% interest in Essex Glenmaura.
In addition to the acquisition of the property upon which the Courtyard
by Marriott hotel is constructed, Essex Glenmaura also acquired an option to
purchase approximately 3.1 acres of land adjacent to the hotel property, upon
which a second hotel or restaurant may be built. The option has expired, but
Essex Glenmaura is currently negotiating a new option on the adjacent property.
If Essex Glenmaura is successful in negotiating a new option and elects
to develop the adjacent property, it will need to secure additional sources of
equity and debt financing to fund the acquisition costs, construction costs, and
pay related fees and expenses. The decision of whether to build, and what to
build as, a second project will be in the sole and absolute discretion of Essex
Partners. See "CONFLICTS OF INTEREST -- Potential Conflicts in Making Additional
Investments in Essex Glenmaura." The decision will depend upon a number of
factors, including future market conditions.
If Essex Glenmaura elects to proceed with the second project it may
need additional financing to fund the acquisition of the adjacent parcel,
construct the second project and pay related fees and expenses. Investors in
Essex Glenmaura will own an interest in the second project based on the value of
their interest in the Courtyard by Marriott hotel project, and will have a right
of first refusal to purchase additional units of limited partnership interests
if additional equity is required. The decision as to whether the Partnership
will acquire additional units of limited partnership interests in Essex
Glenmaura will be made by Essex Partners. See "CONFLICTS OF INTEREST --
Potential Conflicts in Making Additional Investments in Essex Glenmaura."
Market and Competition The Scranton/Wilkes-Barre/Hazelton MSA is
located in northeastern Pennsylvania and encompasses a four county region,
including Lackawanna County. Scranton is the county seat for Lackawanna County.
The area is served by four interstate highways and the northeast extension of
the Pennsylvania Turnpike, all providing access to major markets in the United
States and
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Canada. Interstate 84 from the east and the Northeast Extension of the
Pennsylvania Turnpike from Philadelphia both terminate in the Scranton area. New
York City, Philadelphia and Hartford, Connecticut, are less than 2.5 hours away.
The Wilkes-Barre/Scranton International Airport is a full service facility which
provides scheduled service to the regional hubs of most domestic airline
carriers and is located nine miles south of downtown Scranton.
In addition to distribution access to major markets in the northeast,
the Scranton area offers a low cost of living, low wage rates and a highly
skilled and well-trained work force. The population of Lackawanna County in 1994
was estimated at 214,000, a decline of 2.4% since 1990, of which 80,000 lived in
the City of Scranton. Lackawanna County reported an unemployment rate of 7.5% in
1994.
Major employers in Lackawanna County with work forces exceeding 1,000
include, Specialty Records Corporation Division of WEA Manufacturing a division
of Time Warner Company, Mercy Hospital, Community Medical Center, Allied
Services (a not-for-profit health care system and rehabilitation center),
Lackawanna County, Pennsylvania State Offices, Thompson Consumer Electronics,
NatWest Services, Inc., Technagelas, University of Scranton and the U.S.
Government. Some major employment additions include Prudential Asset Management
(500 jobs with plans to expand to 800 jobs) and J.C. Penney Telemarketing (425
jobs).
Glenmaura Community The Courtyard by Marriott hotel is located in the
220-acre Glenmaura Corporate Center, which is part of the Glenmaura Community, a
new 1,028-acre planned mixed use community development. The Glenmaura Community
is located five miles from downtown Scranton on Montage Mountain, just off Exit
51 of Interstate 81, near Montage Mountain Ski Resort and Lackawanna Stadium
which is the home of the Philadelphia Phillies triple A affiliate. The Wilkes-
Barre/Scranton International Airport is four miles south. At Exit 51, I-81 has a
daily count of over 70,000 vehicles. In order to handle the increased activity
at this location, the Exit 51 Interchange will be undergoing major improvements
which will significantly improve Glenmaura's access on and off I- 81.
The Glenmaura Corporate Center, the newest office park in the area, is
to contain a mix of office, hotel, restaurant and limited retail space. It will
be served by modern utility systems, including fiber optic lines, and will be
redundant backup systems for power and telecommunications. It is expected to
attract companies requiring headquarter and back office facilities for credit
card and data processing, telemarketing, and accounting functions. Ultimately,
the Glenmaura Corporate Center is to include 2 million square feet of office
space, in addition to attendant service facilities.
After an extensive national search, National Westminster Bancorp
(NatWest) chose to move its back-office operations from New York and New Jersey
to a 40-acre site in Glenmaura. NatWest was a $24 billion, wholly-owned
subsidiary of National Westminster Bank PLC, a $227 billion, London- based
international banking and financial services organization and one of the largest
financial services institutions in the world. In September, 1995, NatWest took
occupancy of a new $33 million, 300,000 square foot facility in the Glenmaura
Corporate Center. NatWest was subsequently acquired by Fleet Bank which
currently occupies the building. Two office buildings are currently under
construction in the Glenmaura Corporate Center and are expected to open in the
Fall of 1997.
There are five hotels containing an aggregate of approximately 659
rooms within a 12 mile radius of Glenmaura that are considered to be
competitive. These include a 129-room Hampton Inn hotel, which is located
approximately 1/2 mile from the site of the Courtyard by Marriott hotel and is
also accessible by Exit 51 on I-81. This property had an estimated averaged
daily rate in 1996 of $65- $69. Adjacent to the Hampton Inn is a newly opened
Comfort Suites with a total of 100 rooms which has rates ranging from $60 - $83.
There is a 140-room Holiday Inn located less than 5 miles to the north in the
Town of Dunmore, which had an average daily rate in 1996 of $60-$64. In
addition, there is a 148-room Radisson Lackawanna Station Hotel which is located
approximately 5 miles away in downtown Scranton which had average daily rates of
$70-$74 in 1996. There is another lodging facility located further to the north
in Clarks Summit, which is approximately 12 miles from the Courtyard by Marriott
hotel. The Inn at Nichols Village which has 134 rooms and had an average daily
rate in 1996 of $70-$74. With the exception of the Radisson Lackawanna Station
Hotel, all of these properties can be accessed fairly easily from exits on
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I-81. The current average occupancy rates for these hotels are estimated to
range from 68% to 86% with an overall average of 76%.
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SUMMARY OF AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT.
Essex Glenmaura is to continue until December 31, 2045, unless
dissolved earlier under the terms of the limited partnership agreement.
Management of the Essex Glenmaura will be the sole responsibility of Essex
Partners.
Generally, losses of Essex Glenmaura will be allocated among Essex
Partners and limited partners as follows: first, to make the balances in the
partners' capital accounts proportionate to their respective capital
contributions; next, proportionately based on the partners' pro rata interest in
Essex Glenmaura's equity; and finally, to Essex Partners. In general, income of
Essex Glenmaura will be allocated amount the partners first, to eliminate losses
allocated exclusively to Essex Partners; next, proportionately based on the
partners' pro rata share in Essex Glenmaura's equity in an amount equal to any
losses allocated based on Essex Glenmaura's equity in its assets; next, to the
partners with negative capital accounts in order to eliminate the negative
balances; and finally, according to the partners' pro rata shares in Essex
Glenmaura's equity. Distributions of income and loss will be made to the
partners at such times and in such amounts as Essex Partners shall determine.
Distributions, whether from the operations or sale of refinancing of proceeds,
will be made proportionately to the partners based on their respective pro rata
shares in Essex Glenmaura's equity. Essex Partners will receive no carried
interest in Essex Glenmaura.
INVESTMENT OBJECTIVES AND POLICIES
PRINCIPAL INVESTMENT OBJECTIVES
The principal objectives of the Partnership are to: (i) preserve,
protect and return the Partnership's invested capital and to meet debt service
requirements; (ii) provide quarterly distributions of available cash to the
Limited Partners in an aggregate annual amount which will equal or exceed their
Cumulative Return; and (iii) provide appreciation in the market value of the
Hotels which may be realized through their sale or refinancing. The
Partnership's ability to achieve its investment objectives will be subject to
the inherent risks associated with the ownership and operation of the Hotels and
there can be no assurance that all or any of the investment objectives will be
achieved.
ENVIRONMENTAL DUE DILIGENCE
Federal and state environmental laws can impose substantial liability
on owners and lessees of real estate without regard to fault, even when other
parties are or were responsible for the environmental impairment. Although the
Partnership caused an environmental due diligence review to be performed before
the Partnership acquired a given parcel of land, including soil testing, surface
and/or ground water testing and/or other investigations, there can be no
assurance that such activities did not fail to uncover, or that they uncovered
all or any potential environmental liabilities.
Environmental liabilities (including liability under government
programs such as Superfund) could cause the Partnership to incur significant
expenses, including the obligation to remedy or clean up hazardous substances or
other pollutants, regardless of fault. Such liabilities could exceed the
Partnership's cost of acquiring a property and could also require the
Partnership to dispose of a property at a loss, which could be substantial.
Because the Partnership has not yet identified the land which it may purchase
lease or sublease, potential investors will be unable to evaluate for themselves
the environmental risk of the real properties which may be acquired.
CAPITALIZATION AND USE OF INITIAL FUNDS
If the Partnership raises less than the Maximum Offering Amount, it may
not be able to construct and operate the Erie Hampton Inn hotel, the results of
operating and selling a single Hotel will have a greater impact upon the
Partnership and the Partnership will also have paid higher Organizational and
Offering Expenses per Unit than if it receives the Maximum Offering Amount.
Whether or not the Partnership raises the Maximum Offering Amount, it is the
Partnership's intention to seek to obtain the necessary financing for the
construction and development of the Erie Hampton Inn hotel.
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BORROWING POLICIES
The Partnership's objectives are to construct, own and operate the
Solon and Erie hotel properties and maintain its limited partnership interest in
Essex Glenmaura. The General Partner intends to use the proceeds from the sale
of the Notes and Units in combination with External Financing to pursue such
activities.
The Partnership's objective is that the ratio of Gross Offering
Proceeds from the sale of Notes, plus the principal balance of External
Financing and General Partner Loans to the greater of (i) Gross Offering
Proceeds from the sale of Notes and Units, including the principal amount of any
Partner Notes, or (ii) the aggregate fair market value of the Partnership's
Hotels, plus the Partnership's limited partnership interest in Essex Glenmaura,
will not be more than .85 to 1.0.
GENERAL PARTNER LOANS
The Partnership may obtain financing from the General Partner to cover
acquisition, construction, and operation costs. It is anticipated that loans
from the General Partner will be used as bridge financing, until such time as
the Partnership is able to obtain External Financing. General Partner loans will
bear interest at a rate equal to the General Partner's cost of fund, will be
unsecured, and will be due not more than four years after the loan is incurred.
BUSINESS DEVELOPMENT PLAN
A Limited Partner, including the General Partner, its affiliates, and
partners and employees of Harris Beach & Wilcox, LLP, purchasing 20 or more
Units may pay for 50% of the purchase price in cash upon subscription and the
remaining 50% under a non-interest bearing Partner Note. The Partner Note is
payable upon demand by the General Partner, after a period of six months in the
event that the Partnership has a need for additional cash in connection with the
acquisition of a Hotel site or construction of a Hotel. The Partner Note is
payable in any event no later than the earlier of two years after acceptance of
the subscription or three years following the Effective Date of the Registration
Statement. The deferred payments of capital under the Partner Note are intended
to provide a source of funds which bears a reasonable relationship to the
capital needs of the Partnership. The General Partner believes that providing
the deferred payments will assist the Partnership in raising the necessary
equity capital during the early stages of the offering. The Partner Notes are
binding, recourse obligations of the Limited Partners which may not be
discounted or assigned by the Partnership. The form of Partner Note is attached
to the Subscription Agreement, included as EXHIBIT C to this Prospectus. If any
Limited Partner defaults under his or her Partner Note the Partnership may be
unable to obtain sufficient funds from an action against the defaulting Limited
Partners or from the resale of their Partner Notes to meet its obligations. See
"RISK FACTORS Default Under Partner Notes."
MAINTENANCE AND REPAIRS; CAPITAL IMPROVEMENTS
In order to maintain the overall quality of the Hotels and to remain
competitive, each Hotel must be regularly maintained and repaired and
periodically must undergo refurbishings and capital improvements. The General
Partner intends to apply a portion of the proceeds from the operation of the
Hotels to the repair and maintenance of the Hotels and to the periodic
replacement and improvement of furniture, fixtures and equipment and to
establish a reserve for such expenditures from operating revenues. The amount of
such reserve is expected to equal up to 4% of gross receipts from Hotel
operations. In the event that revenues from operations are insufficient to pay
for such expenditures for maintenance and repairs and capital improvements, the
Partnership may be unable to protect its investment in the Hotels unless
additional funds are provided by the Partnership from other sources, such as
borrowing.
SALES AND REFINANCING
The Hotels will be held by the Partnership until the General Partner
determines that a sale or other disposition of any or all of the Hotels would be
advantageous, in light of the Partnership's objectives. In
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deciding whether to sell or refinance any or all of the Hotels, the General
Partner will consider factors such as performance of the Hotels, market
conditions and the federal income tax considerations, including possible adverse
federal income tax consequences to the Limited Partners. The General Partner
currently expects to sell the Hotels before the tenth year following the
completion of construction. The General Partner is not obligated to sell any of
the Hotels at any particular time. Pursuant to the Partnership Agreement, the
General Partner is authorized to sell the Hotels without approval by the Limited
Partners or the Trustee. Neither of the Hotels may be sold, however, without the
consent of Promus Hotel and compliance with certain conditions set forth in the
License Agreements.
In connection with a sale of any or all of the Hotels, the Partnership
may take a purchase money installment obligation as part of the sale proceeds.
To that extent, distributions to Limited Partners of proceeds from the sale may
be delayed and paid over the course of the term of such obligation.
GENERAL RESTRICTIONS
The Partnership will not (i) issue any Units after the termination of
this Offering or in exchange for property, (ii) purchase or lease any real
property from, or sell or lease any real property to the General Partner or its
affiliates except the purchase of one or more Hotel properties from the General
Partner at cost pursuant to Section 4.06(a) of the Partnership Agreement or the
sale of all or substantially all of the assets of the Partnership to an
Affiliated Person, provided that the transaction is fully disclosed to all
Limited Partners and on terms competitive with those which may be obtained from
persons other than Affiliated Persons, or (iii) confer upon the General Partner
or any affiliate of the General Partner an exclusive right to sell or exclusive
employment to sell the Hotels. For a description of additional investment
limitations, see Article IV of the Partnership Agreement.
The Partnership Agreement requires that all real property acquisitions
be supported by an independent land appraisal. Each such appraisal will be
available for inspection and duplication by any Limited Partner. The Partnership
Agreement also requires the General Partner to obtain a written guarantee of
completion or other arrangements satisfactory to the General Partner to provide
assurance that any Hotel being constructed by the Partnership will be completed
at the price contracted.
The Partnership Agreement provides that neither the General Partner nor
its affiliates will receive any kickback or rebate in connection with the
Partnership's operations and that neither the General Partner nor its affiliates
will participate in reciprocal business arrangements that circumvent this
prohibition. The General Partner will not commingle the Partnership's funds with
those of any other person or entity. Notwithstanding the foregoing, the
Partnership may place its funds in a master fiduciary account with a
nonaffiliated financial institution pursuant to which separate subtrust accounts
are established with funds of other persons, including affiliates of the General
Partner; provided, however, that the Partnership's funds are protected from
claims of such other persons or their creditors.
TAX CONSIDERATIONS
The following paragraphs summarize the material Federal income tax
aspects of investing in the Partnership. Although the Partnership has been and
will be advised by professional tax advisors, there can be no assurance that
positions taken by the Partnership will not be challenged by the Internal
Revenue Service (the "IRS").
THE INCOME TAX INFORMATION SET FORTH BELOW IS BASED ON EXISTING
STATUTES. In addition, the Partnership has relied on regulations, including
proposed regulations, rulings, and judicial decisions, any of which could be
changed at any time. Such changes, if they occur, may apply to transactions
entered into or completed prior to the effective date of the change.
The tax consequences of investing in the Partnership will depend on the
actual results of the Partnership. Thus, it is possible to discuss the tax
consequences of these activities only in the abstract.
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The tax consequences will also vary among the Limited Partners and
Holders of Notes depending on their individual tax situations. Those investors
subscribing to purchase only Notes should see "Discussion of Tax Consequences of
Owning Notes" below. Prospective Limited Partners and Holders of Notes should
not invest in the Partnership without analyzing the information summarized
below, and the anticipated tax consequences of an investment in the Partnership.
EACH INVESTOR IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR FOR MORE
DETAILED INFORMATION WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES
OF AN INVESTMENT IN THE PARTNERSHIP.
SUMMARY OF MATERIAL TAX CONSIDERATIONS
Tax Consequences of Owning Notes
- If an investor holds a Note, the interest paid to him or her
will be treated as ordinary interest income for Federal income
tax purposes.
- If an investor disposes of a Note, the investor may recognize
taxable gain or loss on the disposition of the Note. However,
if the investor holds a Note until it is fully paid at
maturity, the investor's only taxable income should be the
interest income the investor received during the term of the
Note.
- Investors will be required to supply a Form W-9 with their tax
identification number. If an investor fails to do this, he or
she may be subject to back-up income tax withholding on the
interest paid on the Note.
- If an investor is subject to income tax imposed by a nation
other than the United States (e.g., he or she is either a
citizen or a resident of another country), he or she should
consider the foreign tax consequences of holding the Note and
how interest will be taxed by the other country.
Tax Consequences of Owning Limited Partnership Units
- The Partnership will obtain an opinion of Harris Beach &
Wilcox, LLP, prior to the effective date of the Registration
Statement, with respect to the material income tax aspects of
purchasing a Note or a Unit.
- The Partnership will be registered as a tax shelter and there
may be a somewhat greater risk of the IRS auditing your income
tax return if you invest in the Partnership.
- It is important from an income tax perspective that the
Partnership be taxed as a partnership and not as a
corporation. Harris Beach & Wilcox, LLP is of the opinion that
the Partnership will be a partnership for federal income tax
purposes. If the Partnership is taxed as a corporation for
Federal income tax purposes, Partnership losses will not flow
through to Partners, Partnership income will be subject to tax
at a corporate level, and any distributions will be taxed
again as dividends, resulting in a higher overall income tax
burden if the Partnership is profitable.
- Partnership income or loss generally will be treated as
passive income or loss for federal income tax purposes.
Therefore, you will not be able to deduct any losses from the
Partnership unless you have an offsetting amount of other
passive income. It is anticipated that most partners will not
be able to deduct currently losses generated by the
Partnership and that Partnership income in later years will be
offset by losses that were suspended as a result of the
passive loss rules. Furthermore, future regulations under the
passive loss rules may recharacterize income attributable to
the Cumulative Return
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as portfolio income, such as interest income and dividends,
which would be taxable to the investor and not reduced by any
losses from the Partnership.
- A significant portion of Partnership tax deductions will be
generated as a result of depreciation deductions claimed by
the Partnership with respect to improvements constructed by
the Partnership. Harris Beach & Wilcox, LLP is of the opinion
that the depreciation lives and methods to be selected by the
Partnership should be respected by the IRS.
- In the event a Partner is able to use losses from the
Partnership under the passive loss rules, that Partner will
also have to be concerned with the at risk rules, which
generally provide that Partners cannot take losses in excess
of the amount they are at risk. Inasmuch as it is expected
that most partners will not be able to take losses, it is not
anticipated that the at risk rules will effect many investors.
For those impacted by the at risk rules, Harris Beach &
Wilcox, LLP is of the opinion that the at risk amount should
include the cash contributed to the Partnership plus the
principal amount of each Partner Note and the Partner's share
of any non-recourse debt. See "TAX CONSIDERATIONS -- At Risk
Rules."
- Interest paid by the Partnership on debt incurred to construct
Partnership properties would generally contribute to the
passive loss of the Partnership and/or reduce the passive
income. In the event the Partnership borrows money to make a
distribution to Partners, Partners need to be concerned with
how they invest or spend distributions. To the extent
distributions are spent on personal items, interest paid by
the Partnership may not be deductible by those Partners. As a
general matter, it will be important for Partners to keep
track of how they spend and/or invest distributions from the
Partnership, to the extent those distributions are paid with
borrowed funds.
- Harris Beach & Wilcox, LLP is of the opinion that the
allocations of income and loss for federal income tax purposes
under the Partnership Agreement have substantial economic
effect and it is not anticipated that the IRS would be
successful in challenging the Partnership's method of
allocating income and loss for Federal income tax purposes.
- As a general matter a Partner cannot deduct losses from the
Partnership or receive tax deferred distributions from the
Partnership in excess of his or her basis in his or her
Partnership Unit. Harris Beach & Wilcox, LLP is of the opinion
that each Limited Partner should be able to include in his or
her tax basis, cash contributed to the Partnership for his or
her Unit plus an appropriate share of any non-recourse debt.
- If the Partnership disposes of its property, either
voluntarily or involuntarily, Partners will realize gain or
loss on the disposition. Taxable gain may be greater than the
cash available for distribution from the Partnership.
- If a Partner disposes of his or her Unit in the Partnership,
the Partner will in most instances recognize gain or loss upon
the disposition.
- Investing in the Partnership may have an impact upon the
alternative minimum tax calculation on an individual Partner's
income tax return.
- The Partnership intends to deduct or amortize a number of fees
and expenses it has incurred in organizing and going forward
with the Partnership. Harris Beach & Wilcox, LLP is of the
opinion that the proposed tax treatment of fees and expenses
is reasonable but has declined to express any opinion on the
amount allocated to each expense because the issue is factual.
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- Each Partner will be required to file state income tax returns
in jurisdictions where the Partnership is doing business. This
will include states where the Partnership owns property as
well as the state where the Partnership's principal place of
business is located. Therefore Partners may be required to
file income tax returns in a number of states in addition to
the state in which they reside.
- The tax treatment of an investment in Partnership Units could
be impacted by Federal or state income tax legislation.
See "TAX CONSIDERATIONS - Discussion of Tax Consequences Of Owning
Notes", and "Discussion of Tax Consequences of Owning Limited Partnership
Units," for a more detailed description of these and other tax considerations.
DISCUSSION OF TAX CONSEQUENCES OF OWNING NOTES
The following discussion is a general summary of the principal Federal
income tax matters of general application expected to apply to the purchase,
ownership and disposition of the Notes. This summary provides general
information only and does not purport to address all of the Federal income tax
consequences which may be applicable to any particular holder. The Federal
income tax treatment of a holder of a Note may vary depending on his particular
situation. Legislative, judicial or administrative changes or interpretations
may be forthcoming that could affect the Federal income tax consequences to
holders of the Notes.
EACH PROSPECTIVE HOLDER OF A NOTE IS URGED TO CONSULT HIS OR HER TAX
ADVISOR WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW AND
ANY OTHER FEDERAL, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE NOTES.
Stated Interest Payments
Interest payments under the Notes will be treated as ordinary interest
income. Each Holder of a Note will receive a Form 1099 for his or her share of
interest income paid by the Partnership.
Disposition of Notes
If an initial Holder of Notes receives cash in payment of a Note at the
stated maturity date, upon the earlier redemption of the Note, or upon an Event
of Default, gain would only be recognized by the Holder to the extent that a
redemption premium is received because the adjusted tax basis of the Note would
be equal to the payment received.
In the event of the sale or other taxable disposition of a Note prior
to the stated maturity date, gain is measured by the excess of the net proceeds
of the sale or other disposition over the Holder's adjusted tax basis. Any gain
on sale will be capital gain if the Note is held as a capital asset.
Loss will be recognized upon disposition of a Note in exchange for an
amount less than the Holder's adjusted basis in the Note. If the Note is held as
a capital asset, the deductibility of the loss may be limited by the rules
contained in the Code relating to restrictions upon the deductibility of capital
loss. In addition, a sale to a related party could result in limitations upon
the deductibility of loss under Section 267 of the Code. For Holders other than
initial holders, gain recognized upon the maturity or earlier disposition of a
Note may be affected by the provisions of the Code governing market discount.
Possible Withholding
Payments of interest and premium, if any, made by the Partnership on a
Note and proceeds from the sale of a Note to or through certain brokers may be
subject to a back-up withholding tax at a rate of
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28%, unless the holder complies with certain reporting and/or certification
procedures. All amounts withheld on such payments will be allowable as a credit
against the holder's Federal income tax liability.
The Partnership will provide each initial holder with a Form W-9 (or a
substitute Form W-9) on which the holder can provide the information required to
avoid back-up withholding.
Tax Treatment of Resident and Nonresident Alien Holders
Notes are not being offered, and it is not expected that Notes will be
issued, to nonresident aliens, but Notes may be issued to resident aliens.
Resident alien individuals should consider the foreign tax consequences of the
purchase, ownership and disposition of the Notes, and the effect on those
foreign tax consequences of a change in status from a resident to a nonresident
alien.
The U.S. income tax consequences of purchasing, owning and disposing of
the Notes by a nonresident alien will vary depending upon the nonresident alien
investor's particular circumstances. In general, interest paid under a Note to a
nonresident alien investor will be subject to United States withholding tax at a
30% rate (or a lower rate as may be prescribed by an applicable tax treaty).
EACH RESIDENT ALIEN AND NONRESIDENT ALIEN INVESTOR IS URGED TO CONSULT
HIS OR HER OWN TAX ADVISOR REGARDING THE UNITED STATES AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
DISCUSSION OF TAX CONSEQUENCES OF OWNING LIMITED PARTNERSHIP UNITS
Opinion of Counsel
The Partnership will not seek a ruling from the IRS with respect to the
material tax issues relating to the proposed operations of the Partnership.
Rather, the Partnership will rely upon the opinion of Harris Beach & Wilcox,
LLP. This opinion will not be binding on the IRS, and the IRS will be free to
challenge it. The opinion represents only counsel's best legal judgment based
upon the law and the facts as they exist at the time the opinion is given and,
unlike a ruling from the IRS has no official status of any kind. No assurance
can be given that the conclusions reached in the opinion will be sustained by a
court, if contested.
IRS Audit of Tax Shelters
Since the Partnership will be registered as a tax shelter, the IRS may
view the Partnership as requiring special scrutiny for audit purposes. If the
Partnership is audited, the information returns filed by the Partnership may
lead to an audit of the individual returns of one or more Limited Partners, and
the audit of a Limited Partner's return may involve issues unrelated to the
Partnership.
Under the rules for the audit of partnership returns, a partnership
must advise each partner of his or her share of the partnership's income, gain,
loss, deductions and credits by furnishing to the partner a report on Form K-1.
Each Partner must then either follow the K-1 prepared by the partnership or
advise the IRS that his or her own income tax return is inconsistent with the
K-1.
If the Partnership is audited, the General Partner is authorized to
take such actions and enter into such agreements with the IRS as it deems to be
in the best interests of the Limited Partners who hold more than 50 percent of
the outstanding Units. If the IRS and the General Partner reach agreement on
adjustments to the Partnership's return, each Partner generally will be bound by
the agreement. However, any Partner may participate in the audit proceeding and
any Partner having at least a one percent interest in the profits of the
Partnership (and any group of Partners having, in the aggregate, at least a five
percent profits interest) are entitled to negotiate their own settlements with
the IRS. The General Partner may bind any Partner with less than a one percent
profits interest in the Partnership to a settlement with the IRS unless the
Partner elects, by filing a statement with the IRS after receiving notice of the
audit, not to give such authority to the General Partner. The General Partner
may seek judicial review (to which all Partners
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are bound) to a final Partnership administrative adjustment and, if the General
Partner fails to seek judicial review, such review may be sought by any Partner
having at least a one percent interest in the profits of the Partnership (and by
any group of Partners having, in the aggregate, at least a five percent profits
interest). Only one judicial proceeding will go forward, however, and each
Partner with an interest in the outcome may participate.
Tax Status of the Partnership
On December 18, 1996 the IRS revised and published in final form the
"Check the Box" regulations. Those regulations were issued in proposed form on
May 13, 1996. See, generally, Treas. Reg. ss.ss.301.7701-1,-2 and -3. The "Check
the Box" regulations were effective as of January 1, 1997 and provide that an
entity shall be a partnership if it: (1) has at least two members; (2) is a
"business entity"; and (3) is not a "corporation."
As of January 1, 1997 the Partnership had more than two members.
A "business entity" is any recognized income tax entity that is not a
trust under Treas. Reg. ss.301.7701-4 and that is not otherwise subject to
special treatment under the Internal Revenue Code of 1986 ("Tax Code"). An
example of an entity subject to special treatment under the Tax Code is a real
estate mortgage investment conduit (or REMIC). Harris Beach & Wilcox, LLP is of
the opinion that the Partnership is a recognized income tax entity, is not
classified as a trust by Treas. Reg. ss.301.7701-4, and is not otherwise subject
to special treatment under the Tax Code. Accordingly, Harris Beach & Wilcox, LLP
is of the opinion that the Partnership is a "business entity."
A "corporation" is a business entity that meets at least one of eight
criteria. The only relevant criterion are: (1) a business entity organized under
a State law and described by the statute as incorporated, a corporation, a
joint-stock company, a joint-stock association, a body corporate, or a body
politic; (2) a business entity that is taxable as a corporation under a
provision of the Tax Code other than section 7701(a)(3); and (3) an
"association" as defined in Treas. Reg. ss.301.7701-3.
The Partnership was formed as a limited partnership under New York law.
Accordingly, it does not meet criteria (1) for treatment as a corporation.
Harris Beach & Wilcox, LLP is of the opinion that the Partnership is not taxable
as a corporation under a provision of the Tax Code other than section
7701(a)(3). Treas. Reg. ss.301.7701-3 provides that the Partnership can elect
(that is, check the box) to be taxed as a corporation but, in the absence of an
election, it shall be taxed as a partnership.
The General Partner has represented that it will not elect to have the
Partnership taxed as a corporation pursuant to Treas. Reg. ss.301-7701-3. Based
on the foregoing analysis and opinions, and the General Partner's
representation, Harris Beach & Wilcox, LLP is of the opinion that the
Partnership is properly classified as a partnership as of the taxable year
commencing January 1, 1997. See "TAX CONSIDERATIONS -- Discussion of Tax
Consequences of Owning Limited Partnership Units -- Tax Status of the
Partnership."
Section 7704 of the Code, which was enacted as part of the Revenue Act
of 1987 (the "1987 Tax Act"), provides that any publicly traded partnership
(with certain exceptions not relevant to the Partnership) will be taxed as a
corporation. A publicly traded partnership is a partnership whose interests are:
(1) traded on an established securities market; or (2) readily tradable on a
secondary market (or the substantial equivalent thereof). Final regulations
under Section 7704 were issued by the IRS on November 29, 1995. These
regulations apply for taxable years of all partnerships beginning after December
31, 1995, except for partnerships that were actively engaging in an activity
before December 4, 1995. Since the Partnership did not actively engage in an
activity until December 29, 1995, the final regulations apply to the
Partnership.
Under the final regulations, interests in a partnership that are not
traded on an established securities market are readily tradable on a secondary
market or the substantial equivalent thereof if, taking into account all the
facts and circumstances, the parties are readily able to buy, sell or exchange
their
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partnership interests in a manner that is comparable economically to trading on
an established securities market. For this purpose interests in a partnership
are readily tradable as a secondary market or the substantial equivalent thereof
if: (i) interests in the partnership are regularly quoted by any person, such as
a broker or dealer, making a market in the interests; (ii) any person regularly
makes available to the public (including customers or subscribers) bid or offer
quotes with respect to interests in the partnership and stands ready to effect
buy or sell transactions at the quoted prices for itself or on behalf of others;
(iii) the holder of an interest in the partnership has a readily available,
regular, and ongoing opportunity to sell or exchange the interest through a
public means of obtaining or providing information of offers to buy, sell, or
exchange interests in the partnership; or (iv) prospective buyers and sellers
otherwise have the opportunity to buy, sell or exchange interests in the
partnership in a time frame and with the regularity and continuity that is
comparable to that described in (i) through (iii) above.
The regulations under Section 7704 of the Code provide certain safe
harbor guidelines defining circumstances in which partnership interests will not
be considered to be readily tradable on a secondary market or the substantial
equivalent thereof. The safe harbor guidelines provide, among other things, that
partnership interests will not be considered readily tradable on a secondary
market or the substantial equivalent thereof for a taxable year of the
partnership if no more than 2 percent of the total interest in partnership
capital or profits are transferred during the taxable year (disregarding the
nontrading transfers described below and also disregarding transfers made
pursuant to a "qualified matching service" or a qualifying "redemption or
repurchase agreement" as those terms are defined in Regulation Section
1.7704-1). For purposes of the 2 percent safe harbor, the following transfers
are not included: (a) transfers in which the basis of the partnership interest
in the hands of the transferee is determined, in whole or in part, by reference
to its basis in the hands of the transferor or is determined under Section 732
of the Code; (b) transfers at death, including transfers from an estate or
testamentary trust; (c) transfers between members of a family (as defined in
Section 267(c)(4) of the Code); (d) transfers involving the issuance of
interests by (or on behalf of) the partnership in exchange for cash, property,
or services; (e) transfers involving distributions from a retirement plan
qualified under Section 401(a) of the Code or an individual retirement account;
(f) transfers by a partner or any related person (within the meaning of Section
267(b) or 707(b)(1) of the Code) in one or more transactions during any 30 day
period of more than two percent of total interests in partnership capital or
profits; (g) transfers pursuant to a plan of redemption or repurchase maintained
by the partnership, under which, upon the death, disability or mental
incompetence of a partner or the retirement or termination of services of an
individual who actively participated in the management of, or performed services
on a full-time basis for, the partnership, partners may tender their partnership
interests for purchase by the partnership, another partner or a related person
(as defined in Section 267(b) or 707(b)(1) of the Code); (h) transfers pursuant
to a closed end redemption plan (as defined in Regulation Section 1.7704-1; (i)
transfers by one or more partners of 50% or more of the total interests in
partnership capital or profits in one transaction or a series of related
transactions; or (j) transferred which are not recognized by the partnership.
In order to comply with the existing and future rules for determining
whether the Partnership is a "publicly traded partnership" for income tax
purposes, the Partnership Agreement allows the General Partner to prohibit any
assignment of one or more Units if: (1) it determines in its sole discretion
that the assignment would create a risk of the Partnership being a "publicly
traded partnership"; (2) the Partnership is unable to satisfy any safe harbor
test existing under then-applicable rules; or (3) the Partnership is unable to
obtain an opinion of counsel or an IRS ruling that the assignment will not
result in the Partnership being classified as a publicly traded partnership
within the meaning of Section 7704 of the Code. In addition, the General Partner
has agreed in the Partnership Agreement to take all actions reasonably available
(and the Partnership Agreement grants broad authority to the General Partner) to
prevent the trading of Partnership interests by third parties on an established
securities market or a secondary market (or the substantial equivalent thereof)
and to ensure that safe harbor guidelines are met. Based upon the foregoing, the
General Partner does not anticipate that interests in the Partnership will be
traded on an established securities market or be readily tradable on a secondary
market or the substantial equivalent thereof.
Assuming that the Partnership complies with the above-described
provisions of the Partnership Agreement at all times during the existence of the
Partnership, and relying upon representations of the
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General Partner that no publicly available market now exists for interests in
the Partnership under which offers to buy or sell Partnership interests would be
accepted in a time frame comparable to that available in a secondary market,
Harris Beach & Wilcox, LLP is of the opinion that the Partnership is not a
publicly traded partnership for purposes of Section 7704 of the Code. There can
be no assurance, however, that a person other than the Partnership or the
General Partner will not act subsequent to this offering of the Units, in
violation of the Partnership Agreement, to create, facilitate or recognize the
trading of Units on a secondary market or the substantial equivalent thereof, or
that some other action or event beyond the control of the Partnership and the
General Partners would not otherwise cause the Partnership to be treated as a
publicly traded partnership for purposes of Section 7704 of the Code. In any
such event, the Partnership would be classified as an association taxable as a
corporation and, as a result, would be taxed as a corporation for federal income
tax purposes.
Assuming that the Partnership is taxed as a partnership for Federal
income tax purposes, each Partner will be required to report on his or her own
return for his or her taxable year, with or within which the Partnership's
taxable year ends, his or her share of the income or loss of the Partnership for
the Partnership's taxable year. The amount of income or loss reported by a
Partner with respect to the Partnership will depend upon his or her allocated
share of Partnership income and not upon the presence or absence of cash
distributions by the Partnership. Thus, cash distributions made in years when
the Partnership sustains losses will not be taxable to a Partner. Likewise, in
years when the Partnership generates taxable income, Partners will be taxed on
their share of such income even though cash distributions may be less than the
amount of income that is taxed to them.
Tax Status of Solon Hotel LLC and Erie Hotel LLC
Under the "Check the Box" tax regulations (see discussion above in "Tax
Status of Partnership"), a business entity which (i) is not a corporation, (ii)
is not subject to special treatment under the Tax Code, and (iii) only has one
owner or member will either be classified corporation for tax purposes, if such
entity makes an affirmative election for such classification, or be disregarded.
If a business entity is disregarded for tax purposes and its sole member is a
partnership, its activities are treated in the same manner as a branch or
division of such partnership.
Harris Beach & Wilcox, LLP is of the opinion that each of Solon Hotel
LLC and Erie Hotel LLC will be treated for tax purposes as having one member,
because each entity's managing member (Essex Hotels and Essex Hotels II,
respectively) is 100% owned by the Partnership, is not a corporation, is not
subject to special treatment under the Tax Law and, based upon representations
made by the General Partner, will not file an election to be classified as a
corporation for tax purposes. Thus, Essex Hotels and Essex Hotels II will be
disregarded for tax purposes and the Partnership will be considered to own 100%
of each of Solon Hotel LLC and Erie Hotel LLC.
Harris Beach & Wilcox, LLP is further of the opinion that Solon Hotel
LLC and Erie Hotel LLC will be disregarded for tax purposes, since neither
entity is a corporation or is subject to special tax treatment under the Tax
Code, and the General Partner has represented that neither entity will file an
election to be classified as a corporation for federal tax purposes. Thus, Solon
Hotel LLC and Erie Hotel LLC will each be considered for federal tax purposes to
be a division or branch of the Partnership and the assets owned and activities
conduced by each entity will be considered owned and conducted by the
Partnership.
The Passive Loss Rule
Under Section 469 of the Code, losses from passive activities generally
are suspended to the extent that they exceed income from passive activities
(exclusive of portfolio income, as that term is described below). Suspended
losses may be carried forward (but not back) and treated as deductions from
passive activities in the next taxable year.
Even if the underlying activity with respect to a particular investment
involves the conduct of an active trade or business, the activity will be
treated as a passive activity if an investor does not materially participate in
the activity. Except for very limited circumstances, limited partners do not
materially
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participate in a partnership's underlying activities. When a taxpayer disposes
of his or her entire interest in a passive activity in a fully-taxable
disposition, any suspended loss from the activity is allowable in full.
Any interest expense that is taken into account in determining a
taxpayer's income and loss from passive activities is treated as passive and is
not treated as investment interest for purposes of the investment interest
limitations. Similarly, income and loss from passive activities generally are
not treated as investment income and loss in calculating the amount of the
investment interest limitation.
A Limited Partner's interest in the Partnership will be treated as a
passive activity for purposes of the passive loss rule. Thus, all Partnership
taxable losses are expected to be treated as passive losses subject to the above
restrictions. Deduction by a Limited Partner of interest expenses allocated to
him by the Partnership is subject to limitation under the passive loss rule, and
not under the investment interest rule. In addition, interest paid by a Limited
Partner on any amounts borrowed to purchase a Unit (other than amounts borrowed
under a loan which would be treated as home equity indebtedness within the
meaning of Section 163(h) (3) of the Code) will be subject to the passive loss
rule.
Although interest expense generally will be treated as passive,
interest income earned by the Partnership generally will be treated as
portfolio, not passive, income. For example, interest earned on any Partnership
bank account will give rise to portfolio income. Further, any imputed interest
income received by the Partnership will give rise to portfolio income. See
"Interest" below. A proportionate share of the Partnership's portfolio income
will be separately allocated to each Limited Partner and must be reported as
portfolio income. Thus, a Partner may have tax due on portfolio income generated
by the Partnership during a Fiscal Period even though the Partnership also
generated net passive losses during the same Fiscal Period. Except for interest
income paid to persons holding Notes, it is expected that portfolio income
generated by the Partnership will be minimal.
The Partnership will incur interest expense on the Notes, and that
interest expense must be allocated in accordance with the use of the proceeds of
the Notes. The Partnership will expend its debt proceeds attributable to the
Notes, and any other debt primarily in the acquisition of property for the
Hotels, in the construction and holding of the Hotels, and possibly for the
servicing of the Notes. Accordingly, the bulk of the interest expense on the
Notes will be allocable to the Hotel activity, which will reduce any net income
from a passive activity.
A Limited Partner who also holds one or more Notes will be required to
include in income interest paid to him on the Note. Except as discussed below,
this income will be treated entirely as portfolio income. The Treasury
Department has issued proposed regulations which address the appropriate
treatment of a taxpayer's interest income under the passive loss rules when the
income is derived from a loan to a pass through entity (such as a partnership)
which must treat the corresponding interest expense as a passive activity
deduction (the "Self-Charged Interest Rule"). In general, the proposed
regulations permit a lending partner to recharacterize as passive income that
amount of the interest paid to him which is not in excess of his distributive
share of that amount of the interest paid to all partners which is treated as a
passive activity deduction by the partnership. An investor may invest
selectively in either Units or Notes and is not required to invest in both. The
selection of an investment in either Notes or Units, or any sale or other
transfer of Notes by a Limited Partner to a non-partner, will affect the amount
of interest income from the Notes that may be recharacterized as passive income.
Accordingly, application of the Self-Charged Interest Rule to a Limited Partner
who also holds Notes is uncertain.
There is some doubt as to whether the existence of the Cumulative
Return to the Limited Partners will result in a recharacterization of income
attributable to the Cumulative Return or to income arising from the preferred
return of the Limited Partners' capital contributions as portfolio income rather
than passive income. The Regulations do not presently contain any such
recharacterization rules. In a preamble to the Regulations, however, the IRS
disclosed that it may issue regulations in the future which would recharacterize
as portfolio income a limited partner's gross income attributable to a preferred
return. The IRS has stated that such regulations might apply retroactively,
regardless of when the investment was made, to income generated after the
effective date of the Regulations. The effect of such recharacterization would
be to prevent the utilization of Partnership deductions or losses against that
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portion of a Limited Partner's gross income that is treated as portfolio income.
This could cause a negative impact on the Limited Partner's return on his
investment in the Partnership by delaying the utilization by the Limited Partner
of deductions or losses, but would not prevent the eventual use of such
deductions and losses against Partnership passive income from operations or
sale.
Harris Beach & Wilcox, LLP is of the opinion that under present law the
taxable income to be generated by the Partnership, other than that derived from
interest, dividends and other types of portfolio income, will be passive income.
DUE TO THE DIFFERING TAX CONSEQUENCES THAT INDIVIDUAL INVESTORS MAY
EXPERIENCE UNDER THE PASSIVE LOSS RULE AS A RESULT OF THEIR PARTICULAR
CIRCUMSTANCES, INVESTORS ARE STRONGLY ADVISED TO CONSULT WITH THEIR TAX ADVISORS
ON THIS MATTER.
Allocations of Income and Loss
In general, the Code provides that a Partner's allocable share of
income, gain, loss, deduction or credit is determined by the Partnership
Agreement. However Section 704(b) of the Code provides that an allocation will
be respected only if it either has "substantial economic effect" or is in
accordance with the Partner's "interest in the Partnership." To the extent an
allocation of income, gain, loss, deduction or credit contained in the
Partnership Agreement does not have substantial economic effect or is not in
accordance with the Partners' interests in the Partnership, the tax items will
be reallocated by the IRS in accordance with such interests, taking into account
all relevant facts and circumstances.
Section 3.01 through 3.04 of the Partnership Agreement govern
allocations of taxable income and loss to the Partners. Section 3.05 governs
distributions of cash. In general, both allocations of taxable income and loss
and distributions are divided between operation of the Hotels, on the one hand,
and Distributions from a Sale or Refinance of Hotels, on the other.
Operating cash is distributed 99 percent to the Limited Partners and
one percent to the General Partner until the Limited Partners receive their
aggregate Cumulative Return. Thereafter, operating cash is distributed 80
percent to the Limited Partners and 20 percent to the General Partner.
Distributions from a Sale or Refinance of Hotels are paid 99 percent to the
Limited Partners until they have received a return of their capital investment
($1,000 per Unit) plus their Cumulative Return. Thereafter 80 percent of the
Distributions from a Sale or Refinance of Hotels are paid to the Limited
Partners. The General Partner receives the remaining cash.
Allocations of taxable income and loss generally follow the rules for
distributing cash. Under Section 3.01, operating income is first allocated 99
percent to the Limited Partners and 1 percent to the General Partner in the
amounts, and in the relative proportions, necessary to reverse any loss from
operations allocated under the final operating loss allocation rule described
below. Thereafter, operating income is allocated 99 percent to the Limited
Partners (in proportion to their respective unpaid Cumulative Returns) and 1
percent to the General Partner until the amount allocated to the Limited
Partners under this rule equals the cumulative amount distributed, or accrued
but not yet distributed, to the Limited Partners as their respective Cumulative
Returns. Any remaining income from operations is allocated 80 percent to the
Limited Partners in accordance with each Limited Partner's Pro Rata Share and 20
percent to the General Partner.
Taxable income on the sale of any or all of the Hotels (including
income from the sale of hotel properties of Essex Glenmaura) is allocated 99
percent to the Limited Partners until each Limited Partner has been allocated
income in an amount equal to his or her pro rata share of the nondeductible
Syndication Expenses and Sales Commissions. Thereafter income on the sale of any
or all the Hotels (including income from the sale of hotel properties of Essex
Glenmaura) is allocated in the same manner as operating income.
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Any tax loss from Partnership operations is first allocated 80 percent
to the Limited Partners and 20 percent to the General Partner in the amounts,
and in the relative proportions, necessary to offset all Income which was
allocated 80 percent to the Limited Partners. Thereafter operating losses are
allocated 99 percent to the Limited Partners and 1 percent to the General
Partner. Tax loss on the sale of any or all of the Hotels (including loss on the
sale of hotel properties of Essex Glenmaura) is first allocated in the manner
described above with respect to allocations of loss from Partnership operations,
except that allocations on the sale of Hotels (including loss on the sale of
hotel properties of Essex Glenmaura) will be made prior to allocations of income
from operations. All other loss is allocated 99 percent to the Limited Partners
and 1 percent to the General Partners in proportion to the Partners' respective
capital contributions (taking into account for this purpose the face amount of
any Partner Note).
The Partnership Agreement contains many complex exceptions to the
general allocation rules summarized above, many of which are required by the
Regulations. The exceptions contained in Section 3.02 of the Partnership
Agreement include a partnership minimum gain chargeback, a partner minimum gain
chargeback, and a qualified income offset provision, each of which are drafted
to comply with the Regulations and are described in more detail below in
connection with the discussion of the Regulations. As required in the
Regulations, partnership nonrecourse deductions (as described below and defined
in the Partnership Agreement) are allocated 99 percent to the Limited Partners
in accordance with each Limited Partner's Pro Rata Share and 1 percent to the
General Partner and partner nonrecourse deductions are allocated to the Partner
or Partners who bear the economic risk of loss with respect to the partner
nonrecourse debt to which such deductions are attributable. As required by
Treas. Reg. ss.1.704-1(b)(2)(ii)(d), allocations of loss or deduction to a
Limited Partner are not allowed to the extent such allocations would cause or
increase a deficit balance in the Limited Partner's capital account (after the
making of certain adjustments) in excess of the amount which the Limited Partner
is, or is deemed to be, required to restore. If, notwithstanding this limit on
loss allocations, an excess deficit capital account balance is created for any
reason, items of gross income are allocated to the Limited Partner in order to
eliminate the excess deficit balance as quickly as possible. Finally, in Section
3.03 of the Partnership Agreement, the General Partner is given authority to
allocate items of income and loss subsequent to the making of the allocations
described in this paragraph and required by the Regulations (the "Regulatory
Allocations"), to the extent possible, to cause aggregate distributions to the
Partners to be made in accordance with the rules of Section 3.05 of the
Partnership Agreement without giving effect to the Regulatory Allocations.
Four additional exceptions to the above general allocation rules are
that: (1) income or loss for any fiscal period during which an interest in the
Partnership is transferred or a Partner is admitted to the Partnership will be
allocated among the Partners to reflect their varying interests during that
fiscal period; (2) income will be allocated to the General Partner or to any
other Partner in an amount equal to the fees or other amounts paid to the
General Partner or to any other Partner that are determined to be a distribution
of profits from the Partnership for Federal income tax purposes, and loss will
be allocated to the General Partner (or its allocated share of income reduced)
in an amount equal to the amount of any Distribution that is determined for
Federal income tax purposes to be a fee paid to the General Partner; (3) in
accordance with Section 704(c) of the Code, income or loss with respect to any
asset contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners to take account of any variation
between the adjusted basis of the property to the Partnership and its fair
market value at the time of contribution; and (4) to the extent any
discrepancies in Capital Account balances (as determined on a per Unit basis)
exist among the Limited Partners as a result of the volume discounts described
in this Prospectus (see "THE OFFERING - Volume Discounts"), items of partnership
gross income and gain will be allocated to Limited Partners who are granted
volume discounts, generally in the year of the liquidation of the Partnership,
in the amount of such volume discounts in order to equalize the Capital Accounts
of the Limited Partners on a per Unit basis.
The Regulations under Section 704(b) of the Code contain guidelines as
to whether partnership allocations have substantial economic effect. The
Regulations provide that an allocation to a partner generally has economic
effect only if: (1) a partner's capital account is maintained in accordance with
the prescribed set of guidelines contained in the Regulations; (2) liquidating
distributions are, throughout the term of the partnership, to be made in
accordance with the partner's capital account balance; and (3) the
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partnership agreement contains a requirement that any partner with a deficit
balance in his or her capital account following the liquidation of his or her
interest in the partnership or the distribution of liquidation proceeds restore
the amount of such deficit to the partnership, which amount shall be distributed
to partners in accordance with their positive account balances or paid to
creditors. If requirements (1) and (2) are met but requirement (3) is not, an
allocation to a partner may nevertheless have economic effect to the extent the
allocation does not cause or increase a deficit in the partner's capital account
in excess of the amount, if any, which he or she is or is considered obligated
to restore, provided that the partnership agreement contains a "qualified income
offset" provision. A "qualified income offset" provision causes a partner to be
allocated items of gross income where and to the extent by reason of a
distribution or certain other factors, a deficit balance in his or her capital
account has been created or increased beyond the amount, if any, which he or she
is or is considered to be obligated to restore.
Under the Regulations, allocations contained in the Partnership
Agreement which satisfy the requirements of the preceding paragraph, and thus
have economic effect, will nonetheless not be respected if they fail to satisfy
the substantiality test contained in the Regulations. In determining whether the
economic effect of an allocation is substantial, the magnitude of the shift in
the economic consequences to a partner must be weighed against the shifting of
tax consequences resulting from the allocation. Thus, for example, an allocation
that may improve the after-tax economic position of one partner, but with
respect to which there is a strong likelihood, in present value terms, that the
after-tax consequences to no partners will be substantially diminished would not
be substantial.
The Regulations specifically provide that allocations of loss or
deduction attributable to nonrecourse debt do not have economic effect because,
in the event there is an economic burden which corresponds to them, this burden
is borne solely by the lender. Nevertheless, allocations attributable to
nonrecourse debt will be deemed to be in accordance with the partners' interests
in the partnership if, in addition to the requirements listed above: (1) the
partnership agreement provides for allocations of nonrecourse deductions among
the partners in a manner that is reasonably consistent with allocations which
relate to significant items attributable to the property securing the
nonrecourse liabilities and which have substantial economic effect; (2) the
partnership agreement contains the "minimum gain chargeback" provisions
described below; and (3) all other material allocations and capital account
adjustments under the partnership agreement are made in accordance with the
Regulations. The concept of partnership "minimum gain" -- that is, gain which
will be recognized by a partnership upon a disposition of its assets because the
nonrecourse debt secured by the assets exceeds the basis of the assets -- is key
to these regulations. Minimum gain may arise if: (1) there is an increase in the
amount of nonrecourse debt secured by a partnership asset; or (2) the basis of
an asset securing nonrecourse debt is reduced, for example, by depreciation.
Under the Regulations, all increases in partnership minimum gain for any Fiscal
Period (reduced by the amount of the proceeds of a nonrecourse debt which are
distributed to the partners in such Fiscal Period) will be associated with an
equivalent amount of the partnership's deductions. The Regulations require that
these deductions (known as nonrecourse deductions) be allocated among the
partners consistently with allocations of other items which have substantial
economic effect.
To the extent partners are allocated nonrecourse deductions, the
corresponding minimum gain is also in effect earmarked and each partner is
allocated income or gain equal to his or her share of the net decrease in
partnership minimum gain in future years. The Regulations are intended to assure
that each partner is eventually taxed on his or her share of partnership minimum
gain.
The Regulations also address the treatment of deductions and
distributions attributable to debt which is nonrecourse to the partnership but
recourse to one or more partners. Such debt, which the Regulations term "partner
nonrecourse debt," may involve, for example, a nonrecourse debt loaned to the
partnership by a partner or by person related to a partner. The Regulations
provide, in the case of partner nonrecourse debt, a set of rules comparable to
those which apply to partnership minimum gain. Deductions and distributions
corresponding to partner nonrecourse debt result in earmarked minimum gain, and
net decreases in minimum gain attributable to partner nonrecourse debt trigger a
minimum gain chargeback provision. Minimum gain attributable to partner
nonrecourse debt is separate from partnership minimum gain, and an event which
causes one to increase may cause the other to decrease. The Regulations are
intended to ensure that losses and deductions attributable to partner
nonrecourse debt,
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as well as the corresponding partner minimum gain, are allocated to the partner
who bears the economic risk of loss with respect to the debt.
In general, for purposes of the foregoing rules, the Notes will be
treated as: (1) partnership Nonrecourse Debt when held by a person who is not a
Limited Partner (or an affiliate or related person); and (2) partner nonrecourse
debt, when held by a Limited Partner (or an affiliate or related person).
thereof.
The Partnership Agreement contains a qualified income offset provision
and minimum gain chargeback provisions, and allocates nonrecourse deductions and
partner nonrecourse deductions in the manner prescribed in the Regulations.
Furthermore, the Partnership Agreement requires that liquidating distributions
be made in accordance with each Partner's Capital Account balance. In the
opinion of Harris Beach & Wilcox, LLP it is more likely than not that the
Partnership Agreement complies with the safe harbor provisions in the
Regulations under Section 704(b) of the Code and that all material allocations
thereunder will be respected. The Regulations are extremely complex and subject
to varying interpretations. Thus, there can be no assurance that the IRS will
not assert that the Partnership Agreement is not in compliance with the
Regulations and that its allocations do not have substantial economic effect and
are not in accordance with the Partners' interests in the Partnership.
Depreciation
The Code generally allows an owner of depreciable property to take
depreciation deductions based on the entire cost of the property and any
improvements to the property, even though the property and improvements are
financed in part with borrowed money. For convenience of reference and to avoid
confusion, the term "depreciation" as used throughout this Prospectus refers to
the deductions allowable under the Modified Accelerated Cost Recovery System
("MACRS") established by Section 168 of the Code. A lessee of property is
entitled to claim depreciation with respect to buildings constructed or other
permanent improvements made by a lessee on leased property provided that the
depreciable life of the improvements is equal to or shorter than the remaining
term of the lease. The General Partner anticipates that, if the land upon which
one or more of the Hotels is constructed is leased rather than purchased, the
term of the lease will be at least equal to the depreciable life of the Hotel
and other improvements made by the Partnership on the leased property.
The Partnership intends to depreciate the costs of construction
attributable to the Hotel building or buildings to be constructed (including
professional fees and construction period interest attributable to the
construction of the building) over a 39-year life using straight-line
depreciation. Also to be included in the basis of a Hotel are any architectural
and engineering fees attributable to the construction of the Hotel, the
development fee, and the construction management fee paid or accrued with
respect to the Hotel. The Partnership intends to depreciate the cost of certain
land improvements made as part of the Hotels (including roadways, curbs,
sidewalks and parking areas) over a 15-year period, and to depreciate the cost
of furniture and fixtures to be used in the Hotels over a 7-year period.
Harris Beach & Wilcox, LLP is of the opinion that a Hotel building
should qualify for 39-year straight-line depreciation, the land improvements in
connection with the Hotel should qualify for 15-year straight-line depreciation,
and the furniture and fixtures purchased for use in the Hotel should qualify for
7-year straight-line depreciation. Harris Beach & Wilcox, LLP expresses no
opinion on any allocation of costs between or among the land, the Hotel
buildings and other improvements since the issue is factual.
At Risk Rules
Section 465 of the Code precludes individual taxpayers and certain
closely-held corporations from deducting losses from certain activities in
excess of amounts "at risk" in the activity. The passive activity loss
limitations (see "The Passive Loss Rules," above) are applied to a Limited
Partner's share of Partnership losses for a taxable year only after determining
that the Partnership losses in question satisfy the applicable "at risk"
limitations.
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A Limited Partner will not be able to deduct taxable losses
attributable to the Hotels (or to any improvements or other real property that
the Partnership may subsequently acquire) in excess of that Partner's investment
in the property (the amount "at risk"). Generally, a Partner's investment in
real property will include the cash invested in the Partnership, amounts
borrowed with respect to real property for which the Partner is personally
liable, and the Partner's proportionate share of the Partnership's "qualified
nonrecourse financing." Qualified nonrecourse financing includes a loan made by
a bank or any other person actively and regularly engaged in the business of
lending money which is secured by real property used in the activity, provided
that no person is personally liable for repayment of the loan. The Notes
generally will not constitute qualified nonrecourse financing.
The construction costs of the Hampton Inn built on the Solon Property
were financed, in part, by a $4.5 million first mortgage loan from GMAC
Commercial Mortgage Corporation (the "Solon-GMAC Loan"). In connection with the
Solon-GMAC Loan, the General Partner has provided a guaranty of payment. The
guaranty of payment is reduced to 30% of the principal balance of the loan upon
completion of construction of the Solon Hampton Inn hotel and will terminate
upon achievement of certain debt-service coverage ratios by Solon Hotel LLC.
Upon termination of the guaranty of payment the Solon-GMAC Loan allows the
lender only limited recourse against the General Partner and no recourse against
the Limited Partners.
Further, Essex Glenmaura, financed the Courtyard by Marriott hotel with
a $5.0 million first mortgage loan from GMAC Commercial Mortgage Corporation
(the "Glenmaura-GMAC Loan") and the Glenmaura Notes. The terms of the Glenmaura
Notes are similar to the terms of the Notes. The Glenmaura-GMAC Loan allows the
lender only limited recourse against the General Partner and no recourse against
the Limited Partners. The Partnership currently owns 49.8% of Essex Glenmaura.
The IRS has issued proposed regulations which provide that the amount
at risk for a Limited Partner who lends the Partnership money will be increased
by the amount by which the Limited Partner's basis in the Partnership is
increased under the tax basis rules of Section 752 of the Code. As described
below, a Limited Partner's tax basis in his Unit generally will increase by the
amount of the Notes held by such Partner. See "Tax Basis in Units" below.
Accordingly, a Limited Partner's amount at risk generally will increase by the
same amount.
The IRS has issued proposed regulations which provide that a partner's
amount at risk is not increased by a recourse note payable to a partnership
until the proceeds of the note are actually used in the partnership's business.
Accordingly, the IRS may assert that a Limited Partner's obligation to pay a
Partner Note will not increase his or her amount at risk until the Partnership
uses the proceeds in its Hotel business. However, case law indicates that an
obligation by a partner to make additional capital contributions to a
partnership will increase the partner's amount at risk if the obligation is not
contingent and illusory. Harris Beach & Wilcox, LLP is of the opinion that a
obligation of a Limited Partner to pay a Partner Note is neither contingent nor
illusory since the Partner Note must be satisfied with payments of principal no
later than two years from the date that the Limited Partner is admitted as a
Limited Partner or three year's from the Effective Date of the Registration
Statement. See "INVESTMENT OBJECTIVES AND POLICIES - Business Development Plan."
A taxpayer's amount at risk with respect to an activity is increased by
net income from the activity and is reduced by deductions of net losses and by
distributions from the Partnership. Losses not deductible because of the at-risk
limitation may be carried forward to succeeding years. In addition, if a Partner
has deducted net losses and his or her amount at risk is subsequently reduced to
less than zero (e.g., by distributions of cash from the activity in excess of
income), the Partner must "recapture" as income an amount equal to the lesser of
the previously allowable losses or the amount by which the at-risk amount is
negative.
Harris Beach & Wilcox, LLP is of the opinion that a Limited Partner's
amount at risk includes: (1) the amount contributed by such Limited Partner to
the Partnership; (2) the amount by which the tax basis of such Limited Partner's
Unit is increased by reason of holding a Note; and (3) the principal amount of a
Limited Partner's Partner Note.
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Harris Beach & Wilcox, LLP is further of the opinion that (i) the
portion of the Solon-GMAC Loan not subject to the payment guaranty of the
General Partner (the "Non-Guaranteed Portion of the Solon-GMAC Loan") and the
Glenmaura-GMAC Loan more likely than not are without recourse to the General
Partner, (ii) GMAC is actively engaged the business of lending money, and (iii)
a Limited Partner's amount at risk includes his or her pro rata share of the
Non-Guaranteed Portion of the Solon- GMAC Loan and of the Partnership's 49.8%
interest in the Glenmaura-GMAC Loan. Because it is not presently known what will
be the respective principal amounts of the Notes acquired by Holders, the
General Partner Loan or the External Financing, and on what basis any of such
debts (other than the Notes) will be incurred, it is not possible to predict to
what extent a Limited Partner's amount at risk will be increased by a portion of
such indebtedness.
Interest
Section 163 of the Code allows a deduction for all interest paid or
accrued within a taxable year on indebtedness incurred in conducting a trade or
business. Except for construction period interest, the Partnership intends to
deduct all interest incurred by the Partnership in connection with the financing
of the Hotels, including interest attributable to the Notes. Harris Beach &
Wilcox, LLP is of the opinion that this interest cost should be deductible for
Federal income tax purposes, subject to the passive loss limitation. See "The
Passive Loss Rules" above.
The 1986 Tax Act limits the deduction of interest expense on debt
incurred by individuals for personal expenditures. Since the enactment of the
1986 Tax Act, the IRS has issued temporary regulations and three notices which
deal with the treatment of debt incurred by a partnership to make distributions.
Although the matter is not entirely clear, the Partnership may be required to
separately state interest on the portion of the refinancing debt incurred to
make distributions to the Partners. The Partnership will attempt to make
elections necessary to minimize the amount of interest that must be separately
stated. If interest is separately stated, Limited Partners will be required to
identify how they spent distributions of refinancing proceeds when determining
whether the interest is deductible. For example, if the proceeds of a
distribution were spent by a Limited Partner on personal items, the interest
incurred to make this distribution would be personal interest to that Partner.
However, if the proceeds of a distribution were spent for investment activity,
the interest will be deductible subject to the limitations on deduction of
investment interest or to the applicable limitations on deductibility of passive
losses.
In addition, a Limited Partner may choose to finance the purchase of
his or her interest in the Partnership. Harris Beach & Wilcox, LLP is of the
opinion that interest paid by a Limited Partner on a loan incurred to purchase
his or her interest in the Partnership should be deductible for federal income
tax purposes, subject to the passive loss limitation (except for of certain home
equity indebtedness). See "The Passive Loss Rules" above.
Limited Partners purchasing 20 or more Units may execute a Partner Note
reflecting the obligation to make future capital contributions to the
Partnership. The Partner Notes are non-interest bearing. If a Partner Note is
treated by the IRS as property given in exchange for a Unit, the imputed
interest and original issue discount rules of Sections 483, 1274 or 7872 of the
Code may apply. If Section 483 applies, a portion of each payment on a Partner
Note will be treated as imputed interest and the remainder will be treated as
imputed principal. If either Section 1274 or 7872 applies, the Partnership will
recognize original issue discount income with respect to the Partner Notes. In
general, original issue discount is the amount by which the principal amount of
a debt obligation exceeds its issue price. The amounts of imputed interest and
original issue discount with respect to the Partner Notes will be income of the
Partnership. The Partnership Agreement provides that the total amount of any
imputed interest and original issue discount be specially allocated to the
Limited Partners issuing Partner Notes in accordance with the ratio that the
imputed interest income and original issue discount attributable to each
Partner's Partner Note bears to the total amount of imputed interest and
original issue discount recognized by the Partnership and attributable to all
Partners' Partner Notes. Accordingly, it is intended that any deduction to which
a Limited Partner issuing a Partner Note is entitled that is attributable to
imputed interest and original issue discount under a Partner Note be offset with
a matching amount of imputed interest and original issue discount, subject to
the applicable limitations on deductibility of passive losses. It is possible
that, due to the
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passive loss rules, a Limited Partner issuing a Partner Note would be allocated
imputed interest or original issue discount income that is treated as portfolio
income which could not be offset by the Limited Partner's passive activity
deduction attributable to imputed interest or original issue discount, and that
the portfolio income could exceed any cash distributions to the Limited Partner
in the Fiscal Period.
Section 267(a)(2) of the Code provides that an accrual basis
partnership, such as the Partnership, may not deduct amounts owed to a cash
basis partner or an affiliate or related person thereof until actual payment is
made. Accordingly, absent evidence that Notes are held by a non- partner or an
unrelated party, the Partnership will not deduct interest on the Notes until
actual payment is made.
Volume and Timing Discounts
The selling commissions payable to the Managing Dealer by purchasers of
30 or more Units will be reduced and the reduction credited to the purchaser (by
reducing the Unit purchase price). The proceeds to the Partnership per Unit will
not be affected by volume discounts. The per Unit discount is $10 for investors
purchasing between 30 and 59 Units and $20 for investors purchasing 60 or more
Units.
The price of Units purchased on or prior to December 31, 1996 was
reduced. The per Unit reduction was $50 for investors that purchased Units on or
before the First Closing, $40 for investors that purchased Units on or before
March 31, 1996, $30 for investors that purchased Units on or before June 30,
1996, $20 for investors that purchased Units on or before September 30, 1996,
and $10 for investors that purchased Units on or before December 31, 1996. The
commissions payable to the Managing Dealer were 8% of the net purchase price of
the Unit after deducting the timing reduction. Thus, 92% of any reduction
reduced the proceeds payable to the Partnership.
All investors will be deemed to have contributed the same amount per
Unit to the Partnership for purposes of determining a Limited Partner's Pro Rata
Share. Most tax allocations and distributions (including the Cumulative Return)
are based on a Limited Partner's Pro Rata Share. If the Partnership is
profitable, an investor qualifying for a volume or timing discount will receive
a slightly higher return on his or her investment in the Partnership than
investors who do not qualify for discounts. Investors receiving Units subject to
volume or timing discounts will also be specially allocated taxable income in
the amount of the timing or volume discounts in order to equalize the Capital
Accounts of the investors on a per Unit basis. The special allocation will
generally occur in the year the liquidation of the Partnership occurs or the
year the partner's interest in the Partnership is redeemed, whichever occurs
earlier. If the Partnership is not profitable, an investor qualifying for a
volume or timing discount may receive slightly more losses than other investors.
These losses would slightly reduce the amount of cash the investors receive at
the liquidation of the Partnership.
Tax Basis in Units
A Limited Partner may not deduct losses from the Partnership in excess
of the Partner's tax basis. The Limited Partner may carry forward any excess
loss to such time, if any, as the Limited Partner's tax basis is sufficient to
absorb the loss. Distributions to a Limited Partner by the Partnership will not
be taxable to the Limited Partner except to the extent distributions exceed the
Limited Partner's tax basis.
The initial tax basis of a Limited Partner's Unit is the cash
contributed to the Partnership plus the Partner's share of the liabilities of
the Partnership. This share includes his or her share of any Partnership debts
with respect to which no Partner bears the economic risk of loss (the
"Partnership Nonrecourse Debt"). Under regulations issued by the IRS, a
Partner's share of the Partnership Nonrecourse Debt generally equals that
Partner's percentage interest in the Partnership's profits, as determined by
taking into account all facts and circumstances relating to the economic
arrangements between the Partners. The Regulations further provide that the
Partnership Agreement may specify each Partner's interest in Partnership profits
solely for purposes of determining the Partners' proportionate shares of the
Nonrecourse Debt of the Partnership, and provides that such specification will
be respected so long as it is reasonably consistent with allocations (that have
substantial economic effect under the Section 704(b) Regulations) of some other
significant item of partnership income or gain. In accordance with this
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regulation, Section 3.04(e) of the Partnership Agreement provides that, solely
for purposes of determining the Partners' proportionate shares of the
Partnership Nonrecourse Debt, the Partners' interests in Partnership profits are
as follows: 99 percent to the Limited Partners in accordance with each Limited
Partner's Pro Rata Share and 1 percent to the General Partner.
A Limited Partner's share of the liabilities of the Partnership also
includes the portion of any Partnership debts for which the Limited Partner
bears the economic risk of loss (the "Partner Nonrecourse Debt"). A Partner
generally bears the economic risk of loss for a Partner Nonrecourse Debt to the
extent that the Partner (or an affiliate or a person related to the Partner)
makes a nonrecourse loan to the Partnership and the economic risk of loss is not
borne by another Partner.
In general, for purposes of the foregoing rules, the Notes will be
treated as: (1) Partnership Nonrecourse Debt when held by a person who is not a
Limited Partner (or an affiliate or related person); and (2) Partner Nonrecourse
Debt when held by a Limited Partner (or an affiliate or related person).
A Limited Partner purchasing 20 or more Units will be entitled to
increase the tax basis of his or her Units by principal paid on each Partner
Note. However, part of the payments made to the Partnership with respect to a
Partner Note may be treated by the IRS as imputed interest or original issue
discount (with only the remainder treated as principal). See "Interest" above.
In such an event, only the portion of the payment treated as imputed principal
will increase the basis of a Limited Partner's Unit.
Each year, a Limited Partner's tax basis in his Unit increases by his
or her allocable share of the Partnership's taxable income for the year and
decreases by his or her allocable share of the Partnership's taxable loss for,
and any cash distributions during, the year. If a Limited Partner's tax basis in
his or her Unit is reduced to zero, any cash distribution to the Partner (and
any reduction in a Partner's share of Partnership liabilities) in excess of the
Partner's share of the income of the Partnership for a year will be taxable to
the Partner in the same manner as a sale of the Unit. See "Tax Treatment on
Disposition of Units" below.
Harris Beach & Wilcox, LLP is of the opinion that each Limited Partner
should include in the tax basis of his or her Units the cash contributed to the
Partnership in exchange for his or her Units, and, with respect to a Limited
Partner purchasing 20 or more Units, payments of principal on a Partner Note.
This amount would be increased by the Limited Partner's share (determined as
described above) of any Partnership Nonrecourse Debt (including the
Non-Guaranteed Portion of the Solon GMAC Loan and the Partnership's interest in
the Glenmaura GMAC Loan) and Partner Nonrecourse Debt. Because it is not
presently known what will be the amount of Notes acquired by Holders, the
principal amount of the General Partner Loan, if any, or the principal amount of
any External Financing obtained in connection with the construction of the Erie
Hampton Inn hotel or on what terms such debt (other than the Notes) might be
incurred, it is impossible to determine whether a Partner's tax basis in his or
her Unit may be increased by a portion of such debt. Each Limited Partner's
actual basis is a factual matter as to which Harris Beach & Wilcox, LLP
expresses no opinion.
Tax Treatment of Sale of Partnership Property
If the Partnership sells any or all of the Hotels or if one or more of
the Hotels is destroyed by a casualty (and the insurance proceeds are not
re-invested in a replacement property), the Partnership will realize gain or
loss equal to the difference between the amount realized and the Partnership's
tax basis in the Hotels sold or destroyed. The amount realized will include any
indebtedness to which the Hotel is subject. The foreclosure of a mortgage on one
or more of the Hotels will also be treated as a sale, and the amount realized
will be the amount of the indebtedness to which the Hotel is subject at the time
of foreclosure.
If the amount realized on the sale, casualty or foreclosure exceeds the
Partnership's tax basis in the Hotel, the resulting gain will generally be
treated as long-term capital gain under Section 1231 of the Code. If the amount
realized on the sale, casualty or foreclosure is less than the Partnership's tax
basis in the Hotel, the resulting loss will generally be deductible as a Section
1231 loss.
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Long-term capital gain is currently subject to a maximum 28 percent
effective marginal rate. However, a substantial gain allocated to a Partner may
result in the phase-out of certain exemptions and deductions which would
increase the effective income tax rate on the Partner's ordinary income.
Proposals are pending in the Congress that would reduce the maximum marginal tax
rate on long-term capital gains to 20 percent.
Tax Treatment of Disposition of Units
Section 5.04 of the Partnership Agreement places certain restrictions
on the transfer of Limited Partnership Units. See "SUMMARY OF THE PARTNERSHIP
AGREEMENT - Restrictions on Transfer of Units." Even if these restrictions are
satisfied, the General Partners believe that it is unlikely that a market for
the Units will develop. Gain or loss on a sale or exchange will be based on the
difference between the amount realized (which would include the Partner's share
of the debt of the Partnership determined in the manner described above under
the heading "Tax Basis in Units") and the Limited Partner's tax basis in the
Unit. Based upon present law, the resulting gain will be capital gain which
would be taxed at the maximum 28 percent effective marginal rate. However, a
substantial gain allocated to a Partner may result in the phase-out of certain
exemptions and deductions which would increase the effective income tax rate on
the Partner's ordinary income. Because of earlier cash distributions and
deductions previously taken for interest and depreciation, it is possible that
the tax imposed on the sale or exchange will exceed the cash proceeds realized.
On the transfer of a Unit, the Partnership may, but is not obligated
to, adjust the basis of its properties as provided in Section 754 of the Code.
Once the Section 754 election is made, it will apply to all subsequent transfers
of Units by sale, exchange or death, even if the effect of the election is to
decrease the basis of Partnership property with respect to a transferee Limited
Partner.
The Section 754 election requires the Partnership to adjust the basis
of its property (with respect only to the transferee Partner) so that the
transferee Partner's proportionate share of the adjusted basis of the
Partnership property equals the basis of his Partnership interest. As a result,
if a transferee acquires his interest at a cost greater than the transferor's
share of the Partnership's basis in its property, and the Section 754 election
is made, the transferee Partner will generally recognize less income (or more
loss) on the sale of the Partnership property than if the election were not
made. The transferee Partner may also be entitled to larger depreciation
deductions each year than the Partner would be entitled to if the election were
not made. On the other hand, if a transferee Partner acquires his interest at a
cost less than the transferor's share of the Partnership's basis in the
property, the transferee Partner will generally recognize more income or less
loss on the sale of Partnership property than if the election were not made.
Furthermore, the transferee Partner may be entitled to smaller depreciation
deductions than he would be entitled to if the election were not made.
AS A RESULT OF THE COMPLEXITIES AND ADDED EXPENSE OF THE TAX ACCOUNTING
REQUIRED TO IMPLEMENT A SECTION 754 ELECTION, THE GENERAL PARTNER DOES NOT
ANTICIPATE MAKING A 754 ELECTION. See the definition of "Income or Loss" in
Article I of the Partnership Agreement.
Alternative Minimum Tax
The Code contains an alternative minimum tax on individuals of up to
28% of alternative minimum taxable income ("AMTI") in excess of certain
exemption amounts. This tax may reduce the benefit to a particular Limited
Partner from an investment in the Partnership. The alternative minimum tax is
payable to the extent that it exceeds the "regular" Federal income tax payable
for that year. No credits other than the foreign tax credit may be applied
against the alternative minimum tax.
AMTI generally is computed by adding specified tax preference items to
adjusted gross income and subtracting specified deductions. In determining
adjusted gross income for AMTI purposes, a less beneficial, alternative method
of depreciation must be used for certain property. Furniture and fixtures are
depreciated for AMTI purposes using the 150% declining balance method switching
to the straight-line method over the asset's class life. The Hotels must be
depreciated using the straight line method over
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40 years. Certain deductions permitted for regular tax purposes are not
permitted in calculating AMTI. For example, state and local income tax and some
other itemized deductions do not reduce a taxpayer's AMTI.
The interaction of the alternative minimum tax rules with the passive
activity loss rules is complex. The alternative minimum tax provisions require
the application of the passive activity loss rules when determining AMTI, except
that in determining the amount of income and losses for AMTI purposes, the
minimum tax rules are applied. This required recomputation may, with respect to
each activity: (1) decrease the amount of loss generated for AMTI purposes; (2)
create income for AMTI purposes where there were losses for regular tax
purposes; or (3) increase the amount of income for AMTI purposes. The General
Partner anticipates that the interaction of the AMTI rules and the passive
activity loss rules will not be significant if a Limited Partner uses any losses
allocated to him or her from the Partnership only against future Partnership
income.
If a taxpayer pays alternative minimum tax, the excess of the tax over
his or her regular tax liability (except to the extent attributable to exclusion
preferences such as tax-exempt interest) may be carried forward as a credit
against any subsequent-year regular tax in excess of minimum tax.
The amount of alternative minimum tax imposed depends upon factors
particular to each taxpayer and the extent, if any, to which this tax may
adversely affect any Limited Partner cannot be predicted. Each prospective
Limited Partner should consult his or her tax advisor to determine whether an
investment in the Partnership might cause or increase his or her liability for
alternative minimum tax. It should be noted that some states also impose a
minimum tax on items of tax preference.
Tax Treatment of Fees and Related Expenditures
The Partnership will pay fees, commissions, and other items to the
General Partner and others in connection with this offering. See "ESTIMATED USE
OF PROCEEDS" and "COMPENSATION OF GENERAL PARTNER AND MANAGING DEALER."
Section 707(a) of the Code provides that, if a partner engages in a
transaction with a partnership other than in his capacity as a member of the
partnership, the transaction is considered as occurring between the partnership
and one who is not a partner. Section 707(c) of the Code permits a partnership
to deduct payments to a partner for services or the use of capital to the extent
the payments are made without regard to the income of the partnership and would
be deductible if made to a non-partner.
The Partnership will neither deduct nor amortize the Selling
Commissions (up to $80 per Unit and $55 per $1,000 Note sold), Investor
Relations Fee, any other expenditures connected with the issuing and marketing
of interests in the Partnership (including the Organization and Offering
Management Fee to Essex Partners (3.4% of Gross Offering Proceeds)) or those
portions of the legal fees for securities and tax advice and the accounting fees
that are attributed to sale of partnership interests, because Section 709 of the
Code prohibits a deduction for amounts paid in connection with the sale of
partnership interests. However, the IRS may take the position that the amounts
allocated to these services are unreasonably low and should be increased. If so,
the portion of the total fees that is neither deductible nor amortizable would
be increased.
Section 709 of the Code allows the Partnership to amortize partnership
organization expenses over a period no shorter than 60 months, beginning with
the month in which the partnership begins business. The Partnership intends to
amortize the costs and fees incurred in connection with the organization of the
Partnership, a portion of the Organization and Offering Management Fee and
portions of the legal fees for partnership organization.
The cost of architectural and engineering services for the Hotels, the
Development Fees ($160,000 per Hotel, increased by 5% of total construction,
site development and furniture, fixtures and equipment costs in excess of $2.7
million, but not to exceed $325,000 per Hotel), the construction management fees
and the legal fees related to the purchase of the Hotels will be added to the
Partnership's cost basis in
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the Hotels and depreciated over a 39-year period. The Acquisition Fee ($110,000
per Hotel) will be added to the Partnership's basis in the land, or in any lease
of the land, on which the Hotels are located, and thus will not be depreciated.
The Partnership intends to amortize any refinancing fee paid to the General
Partner for the refinancing of any debt attributable to a Hotel (1% of the gross
proceeds of any refinancing) over the term of the refinanced debt.
The Partnership intends to treat the property management fee payable to
Essex Partners (4.5% of the gross operating revenues from each Hotel) and the
Partnership Management Fee payable to Essex Partners (3/4 of 1% of the gross
operating revenues from each Hotel) as ordinary business expenses in the year
they are incurred. The Partnership intends to amortize the Franchise Fees over
15 years as required by Section 197 of the Code.
Any sales fee paid to the General Partner (up to 3% of the gross sales
price of each Hotel) will be added to the Partnership's basis in the Hotel sold.
See "Tax Treatment of Sale of Partnership Property" above.
The IRS could challenge the treatment of a Partnership expense on the
grounds that the amount of an expense is unreasonable in relation to the value
of the services performed. The IRS could similarly assert that a fee or other
item should be excluded from the depreciable base of the Hotels because it is
unreasonable. If the deduction or amortization of part or all of any fee were
disallowed, there could be an increase in the amount of taxable income or a
decrease in the amount of taxable loss allocable to the Limited Partners.
Harris Beach & Wilcox, LLP believes that the Partnership's proposed tax
treatment of fees and related expenses is reasonable. However, it will express
no opinion whether the amount indicated for each item is appropriate because
that determination is factual.
State and Local Taxes
In addition to the Federal income tax consequences described above,
prospective Limited Partners should consider potential state and local tax
consequences of an investment in the Partnership. Some states may impose a tax
on nonresident as well as resident Limited Partners based on their allocable
shares of Partnership income derived from property located in those states.
Partners may be subject to filing obligations and income, franchise, estate,
inheritance or other taxes in the states and localities where the Hotels are
situated, as well as in their own places of residence or domicile. EACH INVESTOR
IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
AN INVESTMENT IN THE PARTNERSHIP IN HIS OR HER OWN STATE.
Tax Treatment of Resident and Nonresident Alien Investors
Units are not being offered, and it is not expected that Units will be
sold, to nonresident aliens, but Units may be sold to resident aliens (i.e.,
United States residents who are not United States citizens). Resident alien
individuals should consider the foreign tax consequences of an investment in
Units, and the effect on those foreign tax consequences of a change in status
from a resident to a nonresident alien.
The U.S. income tax consequences of an investment in Units by a
nonresident alien will vary depending upon the nonresident alien investor's
particular circumstances. In any event, a nonresident alien who owns Units would
be subject to U.S. income tax on his or her distributive share of Partnership
income (subject to any applicable income tax treaty) and may in certain
circumstances be subject to U.S. withholding tax on his or her share of
Partnership income and distributions.
EACH RESIDENT ALIEN AND NONRESIDENT ALIEN INVESTOR IS URGED TO CONSULT
HIS OR HER OWN TAX ADVISOR REGARDING THE UNITED STATES AND FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN UNITS.
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Gift Taxes
The transfer by gift of a Unit may be subject to Federal gift tax. If
property is transferred by gift, the recipient of the gift receives a basis
equal to the donor's basis in the property (if the fair market value of the
property equals or exceeds its basis). If the basis of the property exceeds its
fair market value, the recipient generally receives a basis equal to the donor's
basis (except that the recipient receives a basis equal to the property's fair
market value for purposes of determining loss).
A Limited Partner will generally be entitled to a Federal income tax
deduction in the case of a charitable gift of a Unit. The amount of the
deduction will generally be the fair market value of the Unit at the time of the
gift to charity.
A gift of a Unit to a charitable organization will be treated as a
bargain sale to the charity. Rev. Rul. 75-194, 1975-1 C.B. 80. The donor Limited
Partner will be deemed to have received consideration in the amount of his share
of Partnership liabilities. The Limited Partner's tax basis in the Unit for the
purposes of determining gain on the bargain sale will be equal to his basis in
the Unit multiplied by the ratio of the Limited Partner's portion of the
Partnership's liabilities to the fair market value of his or her Unit.
Harris Beach & Wilcox, LLP expresses no opinion as to the tax
consequences of a charitable gift of a Partnership Unit because the tax
consequences of a charitable gift will vary depending on the particular facts
involved. INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS IN CONNECTION WITH
MATTERS RELATING TO A CHARITABLE GIFT OF A UNIT.
Estate Taxes
The property of a decedent is valued at its fair market value on either
the date of death or the alternate valuation date, whichever is applicable. The
basis of estate assets is "stepped up" (or stepped down) to the fair market
value of the assets, except to the extent the fair market value is attributable
to an item of income in respect of a decedent. Items of income in respect of a
decedent may include earned but undistributed ordinary income and certain
unrealized capital gains on installment sales. Under the partnership provisions
of the Code, the estate is permitted to include its share of partnership
liabilities in the basis of its partnership interest. The fair market value of a
Limited Partner's interest will be included in his or her gross estate for
Federal estate tax purposes and will be subject to Federal estate tax, which tax
must be paid by the Limited Partner's estate. In addition, some state estate
taxes, which are not discussed in this Prospectus, may also be due and payable.
If an estate or beneficiary holds a deceased Limited Partner's Unit,
the estate or beneficiary will be required to report income or loss from the
Partnership in the same manner as would the Limited Partner if he or she were
still alive and holding the Unit. INVESTORS SHOULD CONSULT WITH THEIR ESTATE
PLANNING ADVISORS IN CONNECTION WITH MATTERS RELATING TO THE EFFECT OF AN
INVESTMENT IN THE PARTNERSHIP ON THEIR PERSONAL ESTATE PLANNING.
Possible Changes in Law
Future changes in the tax laws and their interpretation may have an
adverse impact on the tax liabilities of Limited Partners. For example, if a
Limited Partner is able to currently utilize passive losses generated by the
Partnership and if marginal tax rates increase, the Limited Partners may suffer
an adverse impact if the Partnership later generates taxable income.
THE FOREGOING DISCUSSION OF THE MATERIAL TAX CONSEQUENCES AFFECTING THE
PARTNERSHIP AND THE LIMITED PARTNERS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL
TAX PLANNING, PARTICULARLY SINCE THE TAX CONSEQUENCES OF AN INVESTMENT IN THE
PARTNERSHIP ARE COMPLEX AND NOT THE SAME FOR ALL TAXPAYERS. ACCORDINGLY,
PROSPECTIVE PURCHASERS OF UNITS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS
AND/OR PURCHASER REPRESENTATIVES WITH SPECIFIC REFERENCE TO THEIR OWN SITUATIONS
AND RECENT OR POTENTIAL CHANGES IN THE TAX LAWS.
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SPECIAL CONSIDERATIONS FOR TAX EXEMPT INVESTORS
UNRELATED BUSINESS INCOME TAX CONSIDERATIONS
Tax exempt investors, including employee pension and profit sharing and
Keogh plan trusts exempt from income tax under Section 401(a) of the Code and
individual retirement accounts ("IRAs") exempt from income tax under Section 408
of the Code, are subject to tax under Section 511 of the Code on their unrelated
business taxable income ("UBTI") in excess of $1,000 per year. Trusts and IRAs
are taxed at rates ordinarily applicable to trusts; other tax exempt investors
are taxed at corporate rates.
UBTI is defined in Section 512 of the Code to include income which is
earned from the active conduct, by an otherwise tax exempt organization, of a
trade or business which is unrelated to its exempt purpose. In the case of a tax
exempt organization investing as a limited partner, the determination of whether
the investment constitutes an unrelated trade or business is made at the
partnership level. That is, to the extent the activities of the partnership
would constitute an unrelated trade or business if carried on directly by the
partner, the income and deductions of the partnership allocated to the partner
will be items of unrelated business income to that partner.
Certain types of income are specifically excluded from UBTI. The types
of income excluded from UBTI include all interest, dividends, rental payments
attributable to real property, and gain from the sale or other disposition of
property (other than inventory). Payments for the use or occupancy of rooms and
other space where services are also rendered to the occupant, such as for the
use or occupancy of rooms in motels, motor courts and hotels, do not constitute
rental payments attributable to real property. Since virtually all of the
Partnership's operating income will be derived from rental payments received for
the use of motel rooms, operating income of the Partnership is not expected to
qualify for the exclusion from UBTI for rental payments attributable to real
property. Therefore, the General Partner expects that a tax exempt entity owning
Units will be subject to tax on income allocable to its interest in the
Partnership.
Section 512 of the Code, however, generally excludes interest income
from the definition of unrelated business taxable income. Therefore, income
derived by a tax exempt investor's ownership of Notes will not be treated as
unrelated business taxable income, except to the extent it is attributable to
debt-financed property (within the meaning of Section 514 of the Code).
Similarly, gain from the sale of the Notes held by a tax exempt investor will
not be treated as unrelated business taxable income, except to the extent it is
attributable to debt-financed property or to the extent the tax exempt investor
is a dealer.
The tax on UBTI is imposed directly on and paid out of the assets of
the plan or other tax exempt entity. If the gross unrelated business income does
not exceed $1,000 per year, it is neither taxable nor reportable for federal
income tax purposes.
Even though a portion of the income of a tax exempt entity is UBTI,
income from other investments that is not UBTI will continue to be exempt from
federal income tax. Thus, the receipt of UBTI generally will not affect the tax
exempt status of Limited Partners which are tax exempt entities. For certain
types of tax exempt entities, however, the receipt of any unrelated business
income may have extremely adverse consequences. For example, if a charitable
remainder annuity trust or a charitable remainder unitrust (as defined in
Section 664 of the Code) receives UBTI during the year, all of its income from
all sources in that year will be taxable. In addition to possible federal income
taxation, any UBTI may be subject to state and local income taxation, which may
differ in method of computation and amount from the federal tax.
EMPLOYEE BENEFIT PLANS, IRAS AND OTHER TAX EXEMPT ORGANIZATIONS ARE
STRONGLY URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE POSSIBLE
APPLICATION OF UNRELATED BUSINESS INCOME TAX AND THE FILING AND REPORTING
REQUIREMENTS THAT MAY APPLY TO THEM.
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ERISA CONSIDERATIONS
Fiduciaries of pension, profit-sharing, and stock bonus plans or other
plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA")
are required by ERISA to consider: (a) whether the investment is permitted under
the governing instrument for the plan and is an appropriate investment for the
plan, based on examination of its overall investment portfolio; (b) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA; (c) whether the investment is prudent; (d) whether the investment is for
the exclusive purpose of providing benefits to participants; and (e) whether the
investment is made solely in the interests of the participants. Fiduciaries
should be aware that ERISA requires that assets of a plan be revalued at least
once each plan year, and that valuation of partnership interests may be
difficult because of the lack of a resale market.
Section 406 of ERISA and Section 4975 of the Code provide that the
fiduciary of a plan governed by ERISA (including IRAs and Keogh plans) may not
cause the plan to become involved in a "prohibited transaction." The fiduciary
must ensure that the General Partner and its affiliates are not "parties in
interest" with respect to the plan before investing in a partnership. This
determination includes insuring that members of the family of persons acting in
a fiduciary capacity with respect to the plan, as well as businesses and trusts
associated with such fiduciaries, are not closely related by business or family
ties to the General Partner or its affiliates.
A "prohibited transaction" includes a transaction in which a plan lends
money to a "party in interest." A "party in interest" is broadly defined to
include parties such as plan fiduciaries, plan beneficiaries, persons providing
services to the plan, and businesses, affiliates and relatives of such parties.
A "prohibited transaction" could arise if an individual purchased Notes through
his pension, profit-sharing or other plan when the individual also owned an
equity interest in the Partnership. Additionally, if a plan purchased Notes when
the plan fiduciary owned an interest in the Partnership, this purchase could
also result in "prohibited transaction." Section 4975 of the Code imposes a tax
on "prohibited transactions."
Those persons proposing to purchase Units on behalf of plans governed
by ERISA should also consider whether a purchase of one or more Units will cause
the Partnership's assets to be deemed to be "plan assets" for purposes of the
fiduciary responsibility and the prohibited transaction provisions of ERISA and
the Code. Neither ERISA nor the Code defines "plan assets," however, the
Department of Labor's regulations relating to the definition of "plan assets"
require that the assets of certain pooled investment vehicles, including certain
partnerships, be treated as "plan assets." If the assets of the Partnership were
deemed to be "plan assets" of an employee benefit plan the General Partner (and
any other entity with discretion over the Partnership's assets') is treated as a
fiduciary of that employee benefit plan. This increases the risk that
transactions involving the assets of the Partnership and "parties in interest"
or "disqualified persons" with respect to such plans might be prohibited under
Section 406 of ERISA and Section 4975 of the Code. A "prohibited transaction"
imposes personal liability upon fiduciaries of an ERISA plan, and results in the
imposition of an excise tax under Section 4975 of the Code.
The Partnership's assets will not be categorized as plan assets if the
Partnership is a "real estate operating company," as that term is defined in the
Department of Labor regulations. In order to constitute such an operating
company, 50% of the Partnership's assets (except assets held in short-term
investments pending long-term commitment) must be invested in real estate. This
50% requirement is tested at specific points in time on an annual basis. It is
the General Partner's intent that this 50% requirement will be met within the
time frames set out in the regulations, both for the initial determination of
real estate operating company status and for subsequent annual determinations.
The 50% requirement may not be satisfied at the time of the Partnership's
initial investment in other than short-term investments pending long-term
commitment. In addition to the 50% requirement, the Partnership must also
satisfy a management requirement. During each annual determination period, the
Partnership must, in the ordinary course of its business, engage directly in
real estate management or development activities. The General Partner intends to
satisfy this management requirement through its Management Agreement with the
Partnership under which the General Partner will directly manage the
Partnership's real estate. While the General Partner intends to satisfy both the
50% requirement and the management requirement,
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subsequent developments could prevent the General Partner from doing so and
could preclude characterization of the Partnership as a real estate operating
company.
If the Partnership fails to attain real estate operating company
status, the Partnership's assets will escape plan asset characterization if the
Partnership and the Units qualify for the "publicly offered security" exemption.
An entity will qualify for this exemption if the security is: (i) part of a
class of securities which are registered under the Securities Exchange Act of
1934, as amended, or sold as part of an offering pursuant to an effective
registration statement so long as the securities are subsequently registered
within the designated time frame; (ii) widely held; and (iii) freely
transferable. Under the Department of Labor's regulations, a class of securities
will be considered widely held if it is owned by 100 or more investors who are
independent of the issuer and of each other. Although the determination of
whether a class of securities is considered freely transferable is based on all
of the facts and circumstances of the situation, the Department of Labor has
indicated that so long as the minimum investment is $10,000 or less the
existence of certain restrictions (similar to the restrictions on transfer in
5.04 of the Partnership Agreement) will not prevent a security from being
considered freely transferable. The General Partner has represented that it is
likely that there will be 100 or more independent investors and that it will use
its best efforts to insure that there will be the requisite number of
independent investors. Based on this representation, the other facts surrounding
the situation and the assumption that there will be 100 or more independent
investors, and if the Partnership registers under the Securities Act of 1934, as
amended, Harris Beach & Wilcox, LLP is of the opinion that the Partnership would
more likely than not meet the publicly offered security exemption.
If the Partnership fails to attain real estate operating company status
or to obtain 100 or more independent investors (or otherwise fails to qualify
for the publicly offered security exemption), the Partnership could still
qualify for exemption from plan asset characterization if the total investment
by "benefit plan investors" is not "significant." Under the Department of Labor
regulations, the total investment will be significant if at any time after the
acquisition of equity interests in the Partnership, benefit plan investors own
25% or more of the value of any class of equity security. Because the
availability of this exemption involves a factual question which cannot be
determined at this time, this exemption cannot be relied upon to prevent plan
asset status, although the General Partner represents that, if no other
exemption is available, it will attempt to structure the sales of the Units to
meet this exemption by limiting or delaying sales to benefit plan investors.
ALL FIDUCIARIES ARE ENCOURAGED TO CONSULT THEIR TAX AND LEGAL ADVISORS
FOR THE IRAS AND BENEFIT PLANS THEY REPRESENT TO INSURE THAT AN INVESTMENT IN
THE PARTNERSHIP IS APPROPRIATE.
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture dated as of November 1,
1995 between the Partnership and Manufacturers and Traders Trust Company, as
Trustee (the "Indenture") the form of which has been filed as exhibits to the
Registration Statement. See "RISK FACTORS -- Conflicts of Interest." The
following summaries of certain provisions of the Notes and Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Notes and Indenture, including the
definitions therein of certain terms. Wherever particular Sections or defined
terms of the Notes and Indenture are referred to, they are incorporated herein
by reference.
SUBORDINATED NOTES
GENERAL
The aggregate principal amount of the Notes will be not more than $6.0
million. The Notes will bear interest at the rate of 10.5% per annum (computed
on the basis of a 360-day year and twelve 30- day months), accruing from the
date that subscription proceeds are released to the Partnership from escrow on
the Closing Date. Interest will be payable monthly in arrears beginning on the
first day of the second complete calendar month following the subscriber's
Closing Date.
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The principal amount of the Notes will not be payable until maturity.
The Notes mature on December 31, 2001 unless extended by the Partnership for up
to one year thereafter. Written notice of any extension shall be mailed by the
Partnership to the Trustee and each Holder at least 30 days before the scheduled
maturity date. The Partnership is required to pay a fee of .5% of the principal
amount of the Notes then outstanding to extend the maturity date to December 31,
2002.
The Partnership intends to pay interest payable on the Notes from
operating income, and to pay the principal amount of the Notes at maturity from
proceeds realized on the sale or refinancing of the Hotels. The Notes will not
be entitled to the benefit of any sinking or similar fund.
Principal of, premium, if any, and interest on the Notes will be
payable by the Trustee. Payments of interest will be mailed by the Trustee to
the address of the Holder set forth in his or her Note or such other address as
the Holder may in writing designate by notice to the Trustee at least 10 days
before interest is due. If payment to the Trustee is overdue in excess of 15
days, a late charge of $.04 of each $1.00 overdue will be payable by the
Partnership.
REDEMPTION PROVISIONS
The Notes are redeemable at the Partnership's option, in whole or in
part, without payment of any premium or penalty, together with accrued interest
to the redemption date.
Prior to the redemption date, the Partnership is required to deposit
with the Trustee money sufficient to pay the redemption price of and accrued
interest on all Notes to be redeemed on that date. Provided that notice of
redemption has been given as provided in the Indenture and such deposit has been
made, the Notes will cease to bear interest on and after the date fixed for
redemption. Upon surrender of the Notes to the Trustee on or after the
redemption date, the redemption price plus accrued interest to the redemption
date will be payable to the Holder by the Trustee.
If a partial redemption is made, the Trustee shall select the Notes to
be redeemed so as to maintain the pro rata principal amount holdings of Holders
of like Notes. Upon surrender of a Note that is redeemed in part only, the
Partnership will issue to the Holder a new Note equal in principal amount to the
unredeemed portion of the Note surrendered.
SUBORDINATION. The Notes are general unsecured obligations of the
Partnership limited to $6.0 million principal amount. The Notes will be
subordinated in payment of principal and interest to all Senior Indebtedness.
The term "Senior Indebtedness" is defined in the Indenture governing the Notes
to mean all indebtedness of the Partnership, whether outstanding on the date of
the Indenture or thereafter created or arises as a result of External Financing.
There is no limitation or restriction in the Notes or the Indenture governing
the Notes on the creation of Senior Indebtedness by the Partnership or on the
amount of such Senior Indebtedness to which the Notes may be subordinated. There
is also no limitation on the creation or amount of indebtedness which is pari
passu with (i.e. having no priority of payment over and not subordinated in
right of payment to the Notes)("Pari Passu Indebtedness").
Upon any distribution of assets of the Partnership in connection with
any dissolution, winding up, liquidation or reorganization of the Partnership,
the holders of all Senior Indebtedness will first be entitled to receive payment
in full of the principal and premium, if any, thereof and any interest due
thereon, before the Holders of the Notes are entitled to receive any payment
upon the principal of or interest on the Notes, and thereafter payments to
Holders of Notes will be pro rata with payments to holders of Pari Passu
Indebtedness. In the absence of any such events, the Partnership is obligated to
pay principal of and interest on the Notes in accordance with their terms.
NON-RECOURSE OBLIGATIONS
The Notes are non-recourse obligations of the General Partner.
Therefore, the General Partner is not liable to the Trustee or the Holder of any
Note for repayment of any amounts payable under the Notes. Upon an Event of
Default, any recovery by the Trustee or the Holders of the Notes will be limited
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to an action against the Partnership. No deficiency judgment will be available
against the General Partner in any foreclosure or other actions.
COVENANTS
The Notes provide that the Partnership will not make any distribution
to its Partners while the Notes are outstanding unless (i) no Event of Default
(as defined in the Notes) has occurred and is continuing and (ii) the
Partnership has established an adequate reserve to pay any amounts payable under
the Notes during the month in which any such proposed distribution is to occur.
The General Partner has the right to sell the Hotels to an affiliate without
obtaining the consent of the Limited Partners or the Trustee, provided that the
terms of such transaction are fully disclosed and competitive with those which
could be obtained from a third party.
The Partnership has agreed to deliver audited financial statements to
the Holders of the Notes within 150 days after the end of each fiscal year
accompanied by a statement of the General Partner advising whether any Event of
Default exists, or whether any event has occurred which would constitute an
Event of Default with the giving of notice or lapse of time, or both, and, if
so, the nature thereof, its period of existence and the action being taken by
the Partnership to correct the situation.
EVENTS OF DEFAULT
The Events of Default under the Notes include the following:
(i) Failure to pay the principal of any Note when due, continued
for 30 days;
(ii) Failure to pay any interest or premium on any Note when due,
continued for 30 days;
(iii) certain events in bankruptcy, insolvency or reorganization
with respect to the Partnership; or
(iv) notice to the Partnership from the Trustee that the
Partnership has failed to keep, observe and perform its
representations, warranties, covenants, conditions or
agreements contained in the Indenture or the Notes, continued
for 30 days before notice or after notice without being cured.
Any default (other than one curable by the payment of money) under the
Notes will not constitute an Event of Default and the period in which to cure
such default may be extended beyond 30 days if the default may be cured and the
Partnership has commenced to cure promptly within such 30-day period and, in the
judgment of the Trustee, the delay in curing does not (i) result in the
inability of the Partnership to meet its monetary obligations under the Notes,
or (ii) adversely affect the availability of any remedies available under the
Indenture.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, upon the occurrence of an Event of Default, the Trustee shall
provide Holders with notice of such default, to the extent known by the Trustee,
within 90 days occurrence thereof. In case an Event of Default shall occur and
be continuing, the Trustee shall be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of the Holders,
unless such Holders have offered to the Trustee satisfactory indemnity. After
such indemnity has been provided, the Holders of a majority in principal amount
of the Notes outstanding will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. If an Event of Default
shall occur and be continuing, the Trustee may, and upon the written direction
of the Holders of a majority in principal amount of the Notes outstanding and
receipt of satisfactory indemnity shall, by written notice to the Partnership,
accelerate the maturity of the Notes; provided, however, that the Holders of a
majority in principal amount of the Notes outstanding may waive certain Events
of Default. For information as to waiver of defaults, See "DESCRIPTION OF THE
NOTES -- Modification and Waiver." If the Notes are not paid at maturity,
interest will continue to accrue until the
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principal amount of the Notes is paid in full. In addition, if the principal
payment due at maturity is overdue in excess of 15 days, a late charge will be
incurred by the Partnership as described above. The late charge will be paid to
the Trustee who will then distribute such amount to the Holders as provided in
the Indenture.
INDIVIDUAL ACTION BY HOLDER RESTRICTED
No Holder of any Note will have any right to institute any proceeding
with respect to the Indenture unless such Holder shall have previously given to
the Trustee written notice of a continuing Event of Default and unless the
Holders of at least a majority in aggregate principal amount of the Notes
outstanding shall have made written request, and offered indemnity as provided
in the Indenture, to the Trustee to institute such proceeding, and the Trustee
shall have failed to institute such proceeding within 60 days. In order to be
entitled to proceed, such Holders must also be joined as parties in such
proceeding. No one or more Holders shall have any right to enforce any right
under the Indenture so as to prejudice the rights of another Holder of the
Notes, or to enable such Holder or Holders to obtain a preference or priority
over another Holder of the Notes.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture or the Notes may be made
by the Partnership with the consent of the Holders of a majority in aggregate
principal amount of like Notes outstanding; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected:
(i) reduce the amount of Notes whose Holders must consent to an
amendment, modification or waiver;
(ii) reduce the rate of or extend the time for payment of interest
on any Note;
(iii) reduce the principal of or extend the stated time of payment
of any Note;
(iv) impose any condition with respect to the payment of the
principal of or interest on any Note; or
(v) reduce the redemption price of any Note.
Holders of a majority in aggregate principal amount of the Notes
outstanding may waive any past default under the Indenture, except a default in
the payment of principal or interest.
TRANSFER AND EXCHANGE
The Indenture provides that a Holder may transfer or exchange Notes in
accordance with the term of the Indenture. The Partnership may require a Holder,
among other things, to furnish an opinion of counsel as to compliance with
applicable state securities law requirements and appropriate endorsements and
transfer documents, and to pay any taxes and fees required by law or permitted
by the Indenture. The Trustee is not required to transfer or exchange any Note
selected for redemption. The registered Holder of a Note will be treated as its
owner for all purposes. The Notes will not be registered on any securities
exchange and it is expected that no public trading market for the Notes will
develop. Accordingly, the Notes should be considered only as a long-term
investment.
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SUMMARY OF THE PARTNERSHIP AGREEMENT
The Amended and Restated Limited Partnership Agreement (the
"Partnership Agreement") is included in full as Exhibit A to this Prospectus.
The Partnership Agreement will be executed on behalf of each subscriber for
Units upon his or her admission to the Partnership by the General Partner acting
pursuant to the power of attorney contained in the Subscription Agreement. The
following is a brief summary of certain provisions of the Partnership Agreement.
It is recommended that each prospective purchaser read the Partnership Agreement
in its entirety. All capitalized terms used below shall have the meanings given
to such terms in the Partnership Agreement.
PARTNERSHIP CAPITAL
The General Partner shall make a contribution to the capital of the
Partnership in an amount equal to 1/99 times the Capital Contributions of the
Limited Partners, which amount shall be payable by the General Partner out of
Distributions from the Partnership. The purchase price of $1,000 per Unit shall
be payable in cash upon subscription, except that any Limited Partner acquiring
20 or more Units in this offering shall be permitted to pay one-half of the
purchase price in cash upon subscription and the balance under a Partner Note.
The minimum investment for Units is $5,000, $2,000 for IRAs, Keoghs and
qualified plans, in each case without taking into account any available timing
discounts. Fractional Units may be issued for investments in excess of the
minimum purchase requirement in the discretion of the General Partner.
With respect to the General Partner's Capital Contribution, if prior to
liquidation the Distributions made to the General Partner and refunded to the
Partnership do not equal or exceed the Capital Contribution required, the
General Partner shall be liable to the Partnership for the balance due. The
obligation of the General Partner to make Capital Contributions shall not bear
interest.
No Partner will be entitled to interest on his or her Capital
Contribution or his or her Capital Account. Except as otherwise provided in the
Partnership Agreement, no Partner has the right to withdraw, or to receive any
return of, his or her Capital Contribution. Neither the Partnership nor the
General Partner shall have personal liability for any Distribution to, or for
the return of the Capital Contribution of, any Limited Partner.
DISTRIBUTIONS
Distributions shall be made to the Partners at such times and in such
amounts as the General Partner shall determine after payment of fees and
expenses, including fees owed to the General Partner and its affiliates pursuant
to the Partnership Agreement. Distributions from operations will be made 1% to
the General Partner and 99% to the Limited Partners until the Limited Partners
have received an annual cumulative return through the date of the distribution
(the "Cumulative Return") in an amount equal to 8% of the Limited Partner's
original investment (reduced by any capital returned through Distributions from
a Sale or Refinance of Hotels). The Cumulative Return begins to accrue for each
Limited Partner from the date upon which he or she is admitted to the
Partnership. In calculating the Cumulative Return, Limited Partners who have
received timing and volume discounts, and who receive volume discounts, are
treated as if they paid $1,000 per Unit, even though their actual purchase price
may have been less. See "THE OFFERING--Volume Discounts." The Cumulative Return
will not, however, include any amounts owed under the Partner Notes. All
investors will be deemed to have contributed the same amount per Unit to the
Partnership for purposes of determining a Limited Partner's Pro Rata Share.
Investors who have received Units subject to timing and volume discounts and who
receive volume discounts, will be specially allocated taxable income in the
amount of the timing and volume discounts in order to equalize the Capital
Accounts of the investors on a per Unit basis, which allocation will generally
occur in the year that the Partnership is liquidated. See "THE OFFERING --
Volume Discounts."
From proceeds of the Offering, the Partnership paid the Cumulative
Return from the date of the First Closing to June 30, 1997 to those persons who
were Limited Partners during that period. Such payments commenced on or about
March 31, 1996 and were made in quarterly installments. The initial
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cash distribution was equal to the Cumulative Return accruing to each Limited
Partner, without regard to any timing or volume discounts, but only as to that
portion of the per Unit purchase price paid at the time of subscription. For the
months remaining in calendar year 1997, the General Partner will subordinate up
to 50% of the Property Management Fee payable to it to the Cumulative Return
accruing to the Limited Partners during the remainder of calendar year 1997. Any
unpaid portion of the Property Management Fees subordinated will accumulate and
shall be payable to the General Partner after the Cumulative Return has been
paid to the Limited Partners. There can be no assurance that any further
distributions will be paid.
After the Cumulative Return due through the date of the distribution
and any Cumulative Return due to Limited Partners for prior years has been paid,
additional distributions from operations will be made 20% to the General Partner
and 80% to the Limited Partners in accordance with each Limited Partner's Pro
Rata Share. Distributions from a Sale or Refinance of Hotels will be made 1% to
the General Partner and 99% to the Limited Partners in accordance with each
Limited Partner's Pro Rata Share until the Limited Partners have received
Distributions from a Sale or Refinancing of Hotels equal to: (a) $1,000 per Unit
held by the Limited Partners plus (b) any unpaid Cumulative Return through the
date of distribution. Additional Distributions from a Sale or Refinance of
Hotels will be made 20% to the General Partner and 80% to the Limited Partners
in accordance with each Limited Partner's Pro Rata Share. See "COMPENSATION OF
GENERAL PARTNER AND MANAGING DEALER -- Partnership Interest of the General
Partner.
All distributions made by March 15 of any year based upon cash on hand
as of December 31 of the previous year will be deemed made as of such December
31.
The price at which the Units are being offered to investors and the
method of calculating the Cumulative Return have been determined arbitrarily.
The offering price for the Units does not bear any relationship to the General
Partner's contribution to the capital of the Partnership or the price at which a
Unit might be resold.
ALLOCATIONS OF INCOME AND LOSS
The rules governing allocations of income and loss among the Partners
are set forth in Section 3.01 of the Partnership Agreement and are generally
intended to reflect the Distribution rules described above and to comply with
the Regulations. These rules are summarized in detail under "TAX CONSIDERATIONS
- -- Allocations of Income and Loss."
AUTHORITY OF THE GENERAL PARTNER
Management of the Partnership and the Hotels will be the sole
responsibility of the General Partner. It will have the authority to do all
things which in its sole judgment, are necessary, proper or desirable to operate
and manage the Partnership. The Limited Partners shall have no right or power to
take part in the management of, or to bind, the Partnership, with the exception
of certain voting rights referred to below in "SUMMARY OF THE PARTNERSHIP
AGREEMENT -- Meetings and Voting Rights of the Limited Partners." The General
Partner will have authority in dealing with the Internal Revenue Service to take
actions and enter into agreements that may be binding on the Partners.
INDEMNIFICATION AND LIMITATION ON LIABILITY OF THE GENERAL PARTNER
The Partnership Agreement provides that the General Partner and its
affiliates will not be liable for loss or damage incurred by reason of certain
acts or omissions and requires the Partnership to indemnify the General Partner
and its affiliates under certain circumstances. See "CONFLICTS OF INTEREST."
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LIABILITY OF PARTNERS TO THIRD PARTIES
The General Partner will be liable for all recourse obligations of the
Partnership to the extent not paid by the Partnership. The net worth of the
General Partner is limited, however, and a significant portion thereof consists
of assets which would be very difficult to convert into cash. The bankruptcy or
insolvency of the General Partner is an event of withdrawal under the
Partnership Agreement, which could result in a dissolution of the Partnership
under the New York limited partnership law. See "SUMMARY OF THE PARTNERSHIP
AGREEMENT -- Dissolution".
The Partnership Agreement provides that no Limited Partner will be
personally liable for the debts of the Partnership beyond the amount of his or
her committed Capital Contribution and his or her share of the undistributed
profits of the Partnership. Under New York law, a limited partnership may not
make a distribution to a partner to the extent that, after giving effect to the
distribution, the limited partnership would be insolvent. A Limited Partner who
receives a distribution might be obligated to return the distribution to the
Partnership if, at the time of such distribution, the Limited Partner knew that
the Partnership would be insolvent after giving effect to the distribution. For
the purposes of these rules, the Partnership will be deemed insolvent if, after
giving effect to the distribution, all liabilities of the Partnership, other
than non-recourse liabilities and liabilities to Partners on account of their
Partnership interests, exceed the fair value of the assets of the Partnership
other than that portion of the fair value of property that is subject to
nonrecourse liability.
The Partnership is a New York limited partnership and the Partnership
Agreement, by its express terms, provides that it is to be governed by New York
law. The Partnership Agreement grants the Limited Partners certain voting rights
with respect to the removal of the General Partner, the amendment of the
Partnership Agreement and other matters. Under New York law, the exercise of
such voting rights will not cause the Limited Partners to be deemed to be taking
part in the management or control of the Partnership's business. However, if a
court in another state where the Partnership does business determined that the
law of such state, rather than New York law, should apply, it is possible that
such court might also conclude that the possession or exercise of the voting
rights provided for in the Partnership Agreement would cause the Limited
Partners to be liable as general partners.
MEETINGS AND VOTING RIGHTS OF THE LIMITED PARTNERS
Meetings of the Limited Partners may be called at any time by a General
Partner or by one or more Limited Partners who own more than 10% of the
outstanding Units. Limited Partners can vote at any meeting and the Limited
Partners can act without a meeting by written consent, provided that certain
procedures and requirements are met.
Limited Partners, with the affirmative vote of those who own more than
50% of the outstanding Units, without the concurrence of the General Partner,
may take action on the following matters:
(1) Amendment of the Partnership Agreement, except that any amendment
which modifies the compensation or distributions to which a General Partner is
entitled or enlarges the obligations or liabilities of a General Partner shall
be effective as to such General Partner only with his or her prior written
consent, and except that certain matters specified in Section 4.01(b) of the
Partnership Agreement may be amended by the General Partner acting alone;
(2) Removal of a General Partner and election of one or more
replacement General Partners; and
(3) Election of a new General Partner upon the removal, dissolution,
withdrawal, bankruptcy or insolvency of a General Partner ("Event of
Withdrawal"), provided there is a remaining General Partner.
By Majority Vote, the Limited Partners may elect to continue the
Partnership and elect a new General Partner upon the occurrence of an Event of
Withdrawal with respect to the last remaining General Partner. The General
Partner is required to obtain approval of the Limited Partners who own more than
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50% of the outstanding Units in order to authorize any dissolution, merger or
other reorganization of the Partnership. The General Partner is authorized,
however, to sell or refinance any or all of the Hotels without obtaining the
consent of any Limited Partners, and may sell all or substantially all of the
assets of the Partnership to an Affiliated Person provided that the transaction
is fully disclosed to all Limited Partners and on terms competitive with those
which may be obtained from a non-affiliated person.
RESIGNATION OF GENERAL PARTNER
The General Partner may not resign or withdraw as a general partner of
the Partnership without the affirmative vote of Limited Partners who own more
than 50% of the outstanding Units, which shall not be unreasonably withheld, and
an opinion of counsel that resignation or withdrawal would not subject the
Partnership to federal income taxation as a corporation and not a partnership.
ASSIGNMENT OF GENERAL PARTNER INTERESTS
A General Partner may not transfer, assign, grant, convey or mortgage
or otherwise encumber its interest as a General Partner in the Partnership.
REMOVAL OF GENERAL PARTNER
A General Partner may be removed as such by a vote of a majority in
interest of the Limited Partners. The Limited Partners may also by such vote
elect a new General Partner or General Partners to replace any removed General
Partner. Upon such removal, the Partnership may, in its discretion, either cause
the removed General Partner to retain his interest in the Partnership as a
Limited Partner (without commensurate voting rights) or it may terminate the
General Partner's interest in the Partnership and pay to him the fair market
value of such interest. The fair market value of a removed General Partner's
interest in the Partnership will be determined by agreement of the Partnership
and the removed General Partner or settled in accordance with the rules of the
American Arbitration Association, if necessary.
RESTRICTIONS ON TRANSFER OF UNITS
There are a number of restrictions on the transferability of Units,
including, among others, the following: (i) an assignment may only be made
effective on the first day of a fiscal quarter of the Partnership; (ii) a
purported assignment of a fractional part of a Unit or less than 5 Units will
not be permitted or recognized (except in cases of inheritance and family
dissolution, and except for assignments of all of a Limited Partner's Units);
(iii) no Units may be assigned if the proposed assignment would, in the opinion
of counsel for the Partnership, result in the termination of the Partnership or
a reclassification of the Partnership as an association taxable as an
association for federal or state tax purposes; and (iv) no Units may be assigned
unless, in the opinion of counsel for the Partnership, such proposed assignment
would not result in the characterization of the Partnership as "publicly traded"
under Section 7704 of the Code. Further restrictions on the assignment of Units
are imposed under state securities laws upon the residents of such states,
including the requirement of certain states that the suitability standards
applied to initial purchasers of the Units be applied to assignees where the
assignment involves residents of such states. In addition, the License
Agreements impose certain restrictions on the transfer of Units. See "THE
PARTNERSHIP'S BUSINESS - Promus Hotel Corporation - License Agreements." It is
not anticipated that a public market for the Units will develop.
DISSOLUTION
The Partnership is to continue until December 31, 2035, but may be
dissolved earlier as provided in the Partnership Agreement or by law. The
Partnership Agreement provides that the withdrawal of a General Partner will
dissolve the Partnership unless a remaining General Partner elects to continue
the business of the Partnership, or, if there is no remaining General Partner,
within a period of 90 days from the effective date of such withdrawal the
Limited Partners by Majority Vote elect to continue the business of the
Partnership and elect a new General Partner. The Partnership will also be
dissolved upon the election by Majority Vote of the Limited Partners to do so,
or upon the sale or other disposition of all or
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substantially all of the Partnership's interests in the Hotels. In the event
that the Partnership is dissolved, its assets will be liquidated and the
proceeds distributed first to pay the debts and liabilities of the Partnership
and the expenses of liquidation, second to provide for contingent liabilities,
third to the Partners in accordance with the first two rules for the allocation
of proceeds of Distributions from a Sale or Refinance of Hotels, except to the
extent that such a distribution would cause or increase a negative capital
account balance for any Partner, and finally to the Partners in accordance with
their respective capital account balances as required by the Regulations.
BOOKS AND RECORDS
The General Partner is required to maintain full and accurate books and
records for the Partnership. All of the Partnership's books and records are
required to be maintained in the Partnership's principal office in Rochester,
New York and all Limited Partners shall have the right to inspect and examine
such books and records at all reasonable times and upon prior notice. A list of
the names and addresses of and number of Units held by all Partners will be
mailed to any Limited Partner within a reasonable period following the receipt
by the General Partner of a written request therefor.
PARTNER'S INDEPENDENT ACTIVITIES
The Partnership Agreement provides that each Partner may have other
business interests and may engage in any other business, trade, profession, or
employment whatsoever, on his own account or in partnership, or as an employee,
officer, director, or stockholder of any other entity.
APPOINTMENT OF GENERAL PARTNER AS ATTORNEY-IN-FACT
Each Limited Partner irrevocably constitutes and appoints the General
Partner as his or her true and lawful attorney-in-fact, with full power and
authority in such Partner's name, place and stead to make, execute, acknowledge
and file any amendments to the certificate of limited partnership, the
Partnership Agreement and any other certificate or document which may be
required to be filed by the Partnership under the laws of any state or by any
governmental agency, or which the General Partner deems advisable to file or
execute, to reflect actions properly taken by the Partners and any continuation,
dissolution or termination of the Partnership.
AMENDMENTS
Except as provided in Sections 4.01(b) and 5.01(a) of the Partnership
Agreement, the Partnership Agreement may be amended only with the affirmative
written consent of the General Partner and the Majority Vote of the Limited
Partners.
APPLICABLE LAW
The Partnership was formed as a limited partnership under the laws of
the State of New York on August 30, 1995. The Partnership Agreement provides
that it is to be construed and enforced in accordance with the laws of the State
of New York.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Partnership was formed on August 30, 1995. Since its formation, the
Partnership has been involved in raising capital pursuant to the Original
Prospectus, and the acquisition and construction of properties. As of the date
of this Prospectus, the Partnership has received Gross Offering Proceeds of $7.6
million, including approximately $5.3 million from the sale of Notes and
approximately $2.3 million from the sale of Units.
The following discussion analyzes the financial statements of the
Partnership as of June 30, 1997 and December 31, 1996, which are attached.
Investments with a 50% or less ownership interest are accounted for by the
equity method. Ownership interests exceeding 50% are accounted for under the
consolidated method. The Partnership had a 54.3% ownership interest in Essex
Glenmaura until June 9, 1997, at which time the Partnership's ownership interest
was reduced to 49.8%. Accordingly, the statements of operations and cash flow
for the six months ended June 30, 1997 include the accounts of the Partnership
and Essex Glenmaura through June 9, 1997. For the period from June 10, 1997 to
June 30, 1997, the Partnership's investment in Essex Glenmaura is accounted for
on the equity method. The financial statements of the Partnership as of December
31, 1996 are consolidated. The consolidated financial statements as of December
31, 1996 include the accounts of the Partnership and Essex Glenmaura. All
significant intercompany transactions and balances have been eliminated in
consolidation.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
ENDED JUNE 30, 1996
From January 1, 1997 to June 30, 1997, the total assets of the
Partnership decreased approximately $4.6 million. The primary reason for the
decrease was the change in accounting method for Essex Glenmaura from the
consolidated to the equity method. The investment in the Solon and Erie
Properties increased by approximately $5.2 million, primarily relating to
construction costs for the Solon Hampton Inn hotel, offset by a decrease of
approximately $7.8 million for Essex Glenmaura. The Partnership's cash balance
decreased from approximately $2.5 million to $11,000 from costs incurred in the
construction of the Solon Hampton Inn hotel and the purchase of the Erie
Property. The assets of the Partnership at June 30, 1997 include $529,000 of
investment in partnership, which represents the Partnership's investment in
Essex Glenmaura, net of reductions for net losses of $603,000 incurred through
June 30, 1997, the sale of 1.05 limited partnership units for $105,000 and
distributions of $12,500. During the period, the Partnership incurred additional
deferred costs of $135,000, representing additional debt acquisition costs from
the offering of the Subordinated Notes, costs incurred to obtain the GMAC-Solon
Loan and the $45,000 franchise fee paid for the Erie Hampton Inn hotel. Such
deferred costs were partially offset by a $40,000 write-off of the franchise fee
for the Warwick site.
The Partnership's liabilities decreased approximately $4.5 million from
January 1, 1997 to June 30, 1997, primarily from the change to the equity method
of accounting as described above. From January 1, 1997 to June 30, 1997, the
outstanding balance of Subordinated Notes payable increased $378,000 from the
issuance of Subordinated Notes payable in the Offering. Accounts
payable-construction increased approximately $1.2 million from outstanding
construction invoices for the Solon Hampton Inn hotel. The construction loan
payable and notes payable of approximately $5.8 million as of December 31, 1996
represented liabilities of Essex Glenmaura, which no longer are presented in the
Partnership's financial statements due to the change in accounting method. In
June 1997, the General Partner advanced $596,000 as a short-term loan to the
Partnership to help pay for construction costs incurred for the Solon Hampton
Inn hotel. The Partnership expects to repay all amounts due the General Partner
during the third quarter from the proceeds of the GMAC-Solon Loan. The minority
interest in Essex Glenmaura is no longer presented in the Partnership's balance
sheet due to the change in accounting method for Essex Glenmaura. Limited
partners' equity decreased $38,000. During the period, the Partnership received
$183,000 in limited partner equity from proceeds of the Offering, incurred an
additional $21,000 in syndication costs, paid $42,000 in distributions to
limited partners and collected $128,000 in promissory note payments from limited
partners. The consolidated net loss for the Partnership from January 1, 1997
through June 9, 1997 of $260,000 and the net loss for the Partnership of $26,000
for the period June 10, 1997 through June 30, 1997 also decreased partners'
capital.
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The primary revenue source for the six month period ended June 30, 1997
was room revenues of $755,000 from the Essex Glenmaura Courtyard by Marriott
hotel, which was the only hotel in operation. Food and beverage revenue and
telephone and other commission revenue totaled $150,000, for total revenues of
$905,000. For the six months ended June 30, 1996, there were no operating
hotels. The only income for 1996 was interest income. Operating expenses for the
six month period ended June 30, 1997, before depreciation, totaled $711,000.
Depreciation of $248,000 was recorded for a loss from operations of $54,000.
Before depreciation, the single largest operating expense for the Partnership
was rooms expense, followed by food and beverage expenses. Operating expenses
for 1996 totaled $38,000 and were composed primarily of depreciation of $22,000.
Since there were no operating revenues for 1996, the loss from operations was
$38,000, the same as the operating expenses. The Partnership's interest expense,
net of interest income was $331,000, representing interest incurred on the notes
payable and the first mortgage loan for Essex Glenmaura through June 9, 1997,
and interest on the Subordinated Notes for the six month period to the extent
the proceeds were not used for construction. The net interest expense for 1996
was $131,000, representing interest on the Subordinated Notes to the extent the
proceeds were not used for construction. Also included in other expenses are the
Partnership's equity in the loss of Essex Glenmaura for the period June 10, 1997
through June 30, 1997 of $12,000 and the loss on termination of the Warwick
franchise agreement of $40,000. The net loss is $437,000 before allocating
$111,000 of the net loss to the minority interest in Essex Glenmaura. The net
loss for the Partnership for the six months ended June 30, 1997 was $326,000.
For the six months ended June 30, 1996, the loss before minority interest was
$169,000, and the net loss was $168,000 after allocating $1,000 of loss to the
minority interests in Essex Glenmaura.
The Courtyard by Marriott hotel opened in September 1996. The property
achieved an average occupancy of 64% for the first six months of 1997, at an
average daily rate of $67.21. The revenue per available room for the first six
months of 1997 was $43.01. The Courtyard by Marriott hotel is in the start-up
phase of operations. New hotels require from several months to a couple of years
to establish a stable customer base. During the start-up phase, occupancy is
building, and room rates may be lower to attract new customers. When a strong
customer base is established, room rates can be raised to a more competitive
level.
At the current time, the Partnership does not have sufficient funds to
complete the construction of the Erie Hampton Inn hotel. The Partnership intends
to raise additional funds from the Offering and obtain External Financing. No
commitments have been received as of the date of this Prospectus for such
External Financing. Since the Partnership can control the timing of
construction, the construction of the Erie Hampton Inn hotel can be delayed
until the required additional financing can be obtained. The Partnership
included a working capital reserve in its total costs for the Solon Hampton Inn
hotel. The Partnership expects that the working capital reserve will be
sufficient to fund any operating deficits of the Solon Hampton Inn hotel.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31, 1996 TO THE FISCAL
YEAR ENDED DECEMBER 31, 1995.
In 1996, the Partnership purchased a 12.5 unit limited partnership
interest in Essex Glenmaura for $1.2 million ($100,000 per unit), for an equity
interest of 54.3%. Essex Glenmaura built a 120- room, three story Courtyard by
Marriott hotel outside of Scranton, Pennsylvania. The Courtyard by Marriott
hotel opened in September 1996. For the last four months of 1996, average
occupancy was 43%, with an average daily rate of $65.00. The Courtyard by
Marriott hotel has been in its ramp-up phase of operations since opening.
Typically, a new hotel needs from several months to two years to establish
itself in a market and build a customer base. Occupancies are lower during the
ramp-up phase until visitors to the community become familiar with the hotel.
The Courtyard by Marriott hotel should benefit from the Marriott central
reservation system, which will direct Courtyard customers looking for lodging in
the Scranton/Wilkes-Barre area to the Essex Glenmaura Courtyard by Marriott
hotel.
In 1996, consolidated total assets of the Partnership increased
approximately $10.3 million. The increase was caused by several factors. Net
investment in real estate increased $7.8 million, $7.5 million of which was from
the construction of the Courtyard by Marriott hotel by Essex Glenmaura, and the
additional $300,000 from development activities by the Partnership. Cash and
cash equivalents increased
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approximately $1.9 million from proceeds of the Partnership's offering of
Subordinated Notes and Units. Debt issuance costs increased $489,000, $295,000
from costs incurred in the Partnership's offering of Subordinated Notes, and
$194,000 of costs associated with obtaining the financing for the Essex
Glenmaura property. Partnership consolidated liabilities increased approximately
$10.0 million for several reasons. Subordinated Notes payable increased $3.2
million from the issuance of Notes payable in the Partnership's offering. Notes
payable increased $1.5 million representing the notes payable issued by Essex
Glenmaura. The construction loan payable of $4.3 million represents construction
financing on the Courtyard by Marriott hotel, which was replaced by $5.0 million
of permanent first mortgage financing in February 1997. Accounts payable
increased $440,000, primarily from outstanding construction invoices. Since most
construction activities commenced in 1996, the accounts payable at the end of
1995 was much smaller. As Essex Glenmaura is consolidated with the Partnership,
the $640,000 minority interest of Essex Glenmaura is presented in the liability
section of the balance sheet. Partners' equity increased $287,000 in 1996 from
proceeds of the Partnership's public offering of the Units, net of syndication
costs and partners' notes, and from the consolidation of the Partnership's
interest in Essex Glenmaura. In 1996, approximately $1.5 million of Units were
issued, which is offset by an increase of $76,000 in partners' notes,
syndication costs of $170,000 and $114,000 of partner distributions. The
consolidated net loss for the Partnership for 1996 of $867,000 also decreased
partners' equity.
The Partnership incurred a consolidated net loss of $867,000 in 1996.
The primary revenue source was rooms revenue of $394,000 from Essex Glenmaura,
which is the only hotel in operation in 1996. Expenses in 1996, before interest
and depreciation, totaled $886,000, for a loss before interest, depreciation and
amortization of $403,000.
The Partnership's consolidated interest expense for 1996, net of
interest income was $475,000, representing interest incurred by Essex Glenmaura
after opening in September, and interest on the proceeds from the Subordinated
Notes which were not used for construction in 1996. Interest on debt proceeds,
primarily from the construction loan used in construction in 1996 was
capitalized. Depreciation and amortization expenses totaled $346,000, for a net
loss of $1.2 million before allocating $357,000 of the net loss to the minority
interest in Essex Glenmaura. The consolidated net loss for the Partnership was
$867,000. With the Courtyard open for all of 1997, and the Solon Hampton Inn
opening around the middle of 1997, 1997 revenues are expected to increase by
500% over 1996. Significant cash flow from operations is expected to be
generated in 1997 as well.
The General Partner believes good investment opportunities exist in the
limited service segments of the lodging industry. The limited service segment of
the lodging industry has experienced significant growth in recent years as a
greater number of leisure travelers seek to maximize value. The General Partner
believes that the continued success of the lodging industry will depend upon,
among other things, the continued demand for lodging facilities by both business
and leisure travelers, which such demand is affected by general economic
conditions, including, costs of labor and materials, unemployment, inflation and
interest rates. In addition to, but directly affected by, economic trends, is
the availability of financing on favorable terms for the construction and
operation of hotels. In recent years a limited number of institutional lenders
have been more willing to provide financing for hotel construction and
operations, and hotel franchisors or their affiliates have established financing
programs for construction and operation of the hotel franchisors' particular
hotels. In addition to these industry considerations, the success of the
Partnership's Hotels will depend upon the hotel franchises developed and
operated by the Partnership, as well as the location of the Hotels. See "THE
PARTNERSHIP'S BUSINESS."
THE OFFERING
SUBSCRIPTION
The Notes and Units are being offered to qualified investors through
the Managing Dealer, an affiliate of the General Partner and a member of the
NASD. The Maximum Offering Amount is such combination of Notes and Units as
represent aggregate Gross Offering Proceeds of $10.9 million, after taking into
account volume and timing discounts with respect to the sale of Units. The
Managing Dealer is not required to purchase any unsold Notes or Units. The
purchase price is $1,000 per Unit, which is
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currently subject to the volume discounts described below. The minimum initial
purchase is $5,000, except that the minimum initial purchase is $2,000 for IRAs,
Keoghs and qualified plans, in each case without taking into account any
available timing discounts. Upon satisfying the applicable minimum investment
requirement, investors may increase their investment in Units or Notes in
increments of $1,000. Fractional Units may be issued for investments in excess
of the minimum purchase requirement in the discretion of the General Partner.
The Managing Dealer may, but is not obligated to, enlist the services of
Soliciting Dealers to assist in the sale of the Notes and Units. The Managing
Dealer and the Soliciting Dealers are not obligated to obtain any subscriptions,
and there is no assurance that any Notes or Units will be sold. See "THE
OFFERING -- Plan of Distribution" below.
The Power of Attorney contained in the Subscription Agreement
authorizes the General Partner to sign on behalf of the subscriber the
Partnership Agreement in substantially the form attached as Exhibit A.
Therefore, by executing the Subscription Agreement, the subscriber is agreeing
to all the terms of the Partnership Agreement.
To subscribe to purchase Notes or Units, a subscriber must transmit the
following to the Managing Dealer prior to the termination of the offering:
(a) a check or money order payable to "M&T Bank as Escrow Agent for
Essex Hospitality Associates IV L.P." in the amount of (i) $1,000 per Unit
subscribed, less any applicable discounts (except that one-half of the purchase
price may be paid by the execution and delivery of a Partner Note in connection
with the purchase of 20 or more Units), and (ii) the principal amount of any
Note subscribed (in increments of $1,000); and
(b) an executed and completed Subscription Agreement in the form
included as Exhibit C hereto.
NO SUBSCRIPTION AGREEMENT SIGNED BY A BROKER-DEALER ON BEHALF OF A
SUBSCRIBER WILL BE ACCEPTED.
The General Partner will promptly notify in writing each subscriber
whose subscription is accepted or rejected. The General Partner will accept or
reject each subscription for Units within four business days after its receipt
by the Partnership. The General Partner will accept or reject each subscription
for Notes within four business days after its receipt by the Partnership or such
later time as the General Partner has accepted sufficient subscriptions for
Units to satisfy the minimum equity requirements of the offering. Subscriptions
will be rejected for failure to conform to the suitability requirements of the
offering, insufficient documentation, over-subscription of the Offering or such
other reasons as the General Partner may in its sole discretion determine to be
in the best interests of the Partnership. Subscriptions will be irrevocable
until the Offering Termination Date. If a subscription is rejected at any time
by the General Partner, the funds of such subscriber deposited in the Escrow
Account will be promptly refunded to him or her, together with interest, if any,
earned thereon to the date of rejection (calculated as described above and after
reduction for a pro rata portion of the fees and expenses of the Escrow Agent).
A Note will be issued to the Holder and a Limited Partner will be
recognized as such not later than 15 days after an interim or final closing of
the Offering. The General Partner and its affiliates may purchase such
combination of Notes and Units in the Offering as represent gross offering
proceeds of up to $1,000,000 in the aggregate. Any such purchases will be made
for investment purposes only and not with a view toward immediate resale.
Units will be non-assessable. Accordingly, once a subscription has been
paid in full, there is no obligation to make additional contributions to the
Partnership's capital.
PLAN OF DISTRIBUTION
The Managing Dealer has agreed to offer the Notes and Units to
qualified investors. Subject to the volume discounts described below, the
Managing Dealer will receive as compensation selling
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commissions equal to 5.5% of the principal amount of each Note sold and up to 8%
of the price of each Unit sold. The Partnership will also pay to the Managing
Dealer an Investor Relations Fee equal to .25% of Gross Offering Proceeds from
the sale of Units and Notes. The Investor Relations Fee is payable annually from
operating revenues, beginning December 31, 1998 and will continue for the next
three calendar years thereafter, but only if and to the extent that total Dealer
Compensation does not exceed 10% of Gross Offering Proceeds and total
Organization and Offering Expenses do not exceed 15% of Gross Offering Proceeds.
Payment of the Investor Relations Fee will be deferred until the Cumulative
Return has been paid. In the event such deferral continues through December 31,
2004, the Investor Relations Fee shall be deemed waived and permanently
extinguished. See "COMPENSATION OF THE GENERAL PARTNER AND MANAGING DEALER." The
Managing Dealer is not obligated to purchase any unsold Notes or Units. To the
extent that the Managing Dealer uses the services of Soliciting Dealers, the
commissions on Notes and Units sold will be paid by the Managing Dealer from its
selling commissions. In addition to the payment of selling commissions, the
General Partner may, in its sole discretion, reallow from its Organization and
Offering Management Fee an amount equal to up to 1% of the gross proceeds of the
offering to the Managing Dealer and Soliciting Dealers.
The Partnership has agreed to indemnify the Managing Dealer and
Soliciting Dealers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "FIDUCIARY RESPONSIBILITY OF THE GENERAL
PARTNER."
VOLUME DISCOUNTS
Volume Discounts
In connection with sales of 30 or more Units to a "purchaser" (as
defined below), the selling commissions payable to the Managing Dealer by a
purchaser will be reduced and such reduction will be credited to the purchaser
by reducing the Unit purchase price payable by such purchaser to the
Partnership. The proceeds to the Partnership per Unit will not be affected by
the volume discounts because, although the purchase price is lower, the selling
commissions payable are also proportionately reduced. The following table sets
forth the volume discounts which will be applied to a purchaser's entire
purchase:
<TABLE>
<CAPTION>
NUMBER PURCHASE COMMISSIONS PROCEEDS TO THE
OF PRICE PER PAYABLE TO PARTNERSHIP PER
UNITS UNIT TO MANAGING UNIT, NET
PURCHASED INVESTORS DEALER BY OF SELLING
PARTNERSHIP COMMISSIONS
--------- --------- --------- ----------
<S> <C> <C> <C>
1-29 $1,000 $80 $920
30-59 990 70 920
60 Units and Over 980 60 920
</TABLE>
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser" as that term is
defined below. Any request to combine more than one subscription must be made in
writing on a form to be supplied by the Managing Dealer, and must set forth the
basis for such request. The Partnership may require that all of the Units which
may be counted toward achieving the level of purchases necessary to obtain a
volume discount be subscribed for and purchased at the same closing of the
offering. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser" as
defined below.
For the purposes of such volume discounts, "purchaser" includes: (i) an
individual, his or her spouse and their children under the age of 21, who
purchases the Units for his or her or their own accounts and all IRA, Keogh and
qualified plans or trusts established by each such individual; (ii) a
corporation, partnership or trust which has been in existence for at least six
months before purchasing the
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Units and was formed for a purpose other than to purchase the Units at a
discount; and (iii) such other investors as the General Partner determines to be
sufficiently related so as to constitute a "purchaser."
Notwithstanding the timing and volume discounts, all investors will be
deemed to have contributed the same amount per Unit to the Partnership for
purposes of determining a Limited Partner's Pro Rata Share. Most tax allocations
and distributions (including the Cumulative Return) are based on a Limited
Partner's Pro Rata Share. If the Partnership is profitable, an investor who has
qualified for a timing or volume discount, or who qualifies for a volume
discount, therefore will receive a slightly higher return on his or her
investment in the Partnership than other investors who do not qualify for such
discounts. Investors who have received Units subject to timing or volume
discounts, or who will receive Units subject to volume discounts, will also be
specially allocated taxable income in the amount of the timing or volume
discounts in order to equalize the Capital Accounts of the investors on a per
Unit basis, which special allocation will generally occur in the year the
liquidation of the Partnership occurs or the year the partner's interest in the
Partnership is redeemed, whichever occurs earlier. If the Partnership is not
profitable, an investor qualifying for a volume discount may receive slightly
more losses than other investors, which losses would slightly reduce the amount
of cash such investors receive at the liquidation of the Partnership compared to
other investors.
SUPPLEMENTAL SALES LITERATURE
An offer to sell the Notes or Units may be made only by means of this
Prospectus. However, the Partnership may utilize certain sales materials in
connection with the offering of the Notes or Units in addition to and apart from
this Prospectus. In certain jurisdictions such sales material may not be
available. This material may include a brochure, question-and-answer booklet, a
speech and slide presentation for public seminars, invitations to seminars, news
articles and public advertisements.
The Partnership will use only sales material which has been approved by
such appropriate regulatory bodies as may be required. The information contained
in such sales material shall not conflict with any of the information contained
in this Prospectus or the Registration Statement of which this Prospectus is a
part, or as incorporated by reference in this Prospectus or said Registration
Statement.
REPORTS
REPORTS TO LIMITED PARTNERS
Within 75 days after the close of each fiscal year of the Partnership,
the General Partner will deliver to each Limited Partner the information
necessary for the preparation of the Partner's federal income tax return and
state income tax returns (state income tax information will be provided for New
York and states in which the Hotels are located). Within 150 days after the end
of each fiscal year, the General Partner will deliver to each Limited Partner an
annual report which will include financial statements of the Partnership audited
by independent certified public accountants on an accrual basis in accordance
with generally accepted accounting principles. The financial statements will
include a balance sheet and statements of income, Partners' equity, and cash
flow. The annual report for each year will report on the Partnership's
activities for that year and identify the source of Partnership distributions.
The General Partner will also prepare and deliver to Limited Partners,
at least semi-annually, a report on the operation of the Hotels.
REPORTS TO HOLDERS OF NOTES
Within 150 days after the close of each fiscal year of the Partnership,
the Partnership will deliver to each Holder of audited financial statements of
the Partnership accompanied by a statement of the General Partner advising
whether any Event of Default under the Notes exists, or whether any event has
occurred which would constitute an Event of Default with the giving of notice or
the lapse of time, or both, and, if so, the nature thereof, its period of
existence and the action being taken by the Partnership to correct the Event of
Default.
107
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes and Units offered
hereby, including the tax consequences of the Notes and Units, will be passed
upon for the Partnership by Harris Beach & Wilcox, LLP, as counsel to the
Partnership and the General Partner. Harris Beach & Wilcox, LLP may represent
the General Partner and certain of its affiliates on matters unrelated to this
offering, and may in the future represent the General Partner and its affiliates
on various other matters. Partners of Harris Beach & Wilcox, LLP may purchase
Units and Notes.
EXPERTS
The consolidated financial statements of Essex Hospitality Associates
IV L.P. and subsidiary as of and for the years ended December 31, 1996 and for
the period from August 30, 1995 (date of inception) through December 31, 1995,
and the financial statements of Essex Partners Inc. as of and for the years
ended December 31, 1996 and 1995 included herein have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
GLOSSARY
ACQUISITION EXPENSES. Expenses (including but not limited to legal fees
and expenses, travel and communication expenses, costs of appraisals,
non-refundable option payments on properties not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses) related to the selection
and acquisition, lease, or sublease of a property whether or not the property is
actually acquired by the Partnership.
ACQUISITION FEES. Fees payable by the Partnership to the General
Partner in the amount of $110,000 per Hotel site that is acquired by the
Partnership.
AFFILIATED PERSON. The General Partner and any Person who, directly or
indirectly, through one or more intermediaries, controls, or is controlled by or
is under common control with, the General Partner. The term "control" (including
the terms "controlled by" and "under common control with") includes the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise.
CAPITAL CONTRIBUTION. The money (including principal payments on
Partner Notes but not the principal amount of the Partner Notes) and the fair
market value of property contributed by a Partner (with value of property
determined by the contributing Partner and the General Partner) in accordance
with Section 2.06 of the Partnership Agreement.
CODE. The Internal Revenue Code of 1986.
CUMULATIVE RETURN. A Distribution to the Limited Partners on a Pro Rata
basis, commencing for each Limited Partner on the date the Partner is admitted
to the Partnership, in an annual amount equal to 8% of the Capital Contribution
of each Limited Partner (less any Distributions made pursuant to Section 2.08 or
subparagraph 3.05(b)(i) of the Partnership Agreement), calculated without regard
to any discounts described in the Prospectus. The Cumulative Return shall be
pro-rated for the years in which a closing of the offering of the Units occurs
and which a sale or refinancing of any or all of the Hotels occurs.
DEALER COMPENSATION. The total amount of Sales Commissions, selling
commissions, investor relations fees and any other fees and reimbursements paid
to the Manager Dealer and Soliciting Dealers in connection with the offering of
Notes and Units, however designated.
DEVELOPMENT FEE. A fee payable by the Partnership to the General
Partner in the amount of $160,000 per Hotel that is developed by the
Partnership, increased by 5% of total construction, site development and
furniture, fixtures and equipment costs in excess of $2.7 million, but not to
exceed
108
<PAGE>
$325,000 per Hotel. The Development Fee for each Hotel shall be payable 15% per
month, beginning with the month in which the General Partner formally solicits
bids for construction of a Hotel and continuing for a term not to exceed six
months. The unpaid balance shall be paid upon the obtaining of a certificate of
occupancy for the Hotel.
DISTRIBUTION. Any transfer of money or other property to a Partner, in
the Partner's capacity as a Partner, from the Partnership. The term
"Distribution" shall not include fees paid to the General Partner or to other
Affiliated Persons pursuant to Article IV of the Partnership Agreement. Property
is to be valued at its fair market value on the date of transfer.
DISTRIBUTIONS FROM A SALE OR REFINANCE OF HOTELS. Distributions to
Partners from a sale or refinance of any or all of the Hotels, or the
distribution of proceeds received from a sale or refinance of properties of
Essex Glenmaura.
ERISA. Employee Retirement Income Security Act of 1974.
ERIE PROPERTY. Approximately 2.5 acres of real property located in the
Summitt Township, Pennsylvania and acquired by the Partnership.
ESCROW ACCOUNT. The interest-bearing account established by the
Partnership with the Escrow Agent for the purpose of depositing proceeds from
the sale of Units and Notes as described in paragraph 2.06(c) of the Partnership
Agreement.
ESCROW AGENT. Manufacturers and Traders Trust Company, Buffalo, New
York, or another bank, which is not an Affiliated Person, selected by the
General Partner.
ESSEX GLENMAURA. Essex Glenmaura L.P., a New York limited partnership,
an Affiliated Person, which is developing a Courtyard by Marriott hotel near
Scranton, Pennsylvania.
ESSEX. Essex Investment Group, Inc., a New York corporation which is
the sole shareholder of the General Partner.
ESSEX PARTNERS. Essex Partners Inc., a New York corporation.
EXTERNAL FINANCING. Financing obtained from sources other than the
General Partner and its Affiliates, including loans from institutional lenders,
which financings are secured by mortgage liens on the Partnership's real
properties and any improvements thereon.
FEE MORTGAGE. A mortgage and security agreement covering the
Partnership's interest in real property which it has purchased.
FIRST CLOSING. The initial closing which occurred on December 29, 1995,
at which time all subscription proceeds then held in the Escrow Account were
released to the Partnership for use as described in the Original Prospectus.
FRONT-END FEES. Fees and expenses paid for any services rendered in
connection with the Partnership's organizational or acquisition phases,
including all expenses of the Partnership's organization, expenses related to
the offering of Units and Notes pursuant to the Prospectus, Acquisition Fees (as
defined in the Partnership Agreement), Acquisition Expenses, Development Fees
and Organization and Offering Expenses.
GENERAL PARTNER. Essex Partners Inc., a New York corporation and any
successor duly elected by the Limited Partners.
GLENMAURA NOTES. $1,500,000 of Essex Glenmaura's unsecured notes,
maturing June 1, 1998, unless extended to December 1, 1999.
109
<PAGE>
GROSS OFFERING PROCEEDS. The gross cash proceeds and the aggregate
principal amount of the Partner Notes received by the Partnership from the sale
of the Units and Notes.
HOLDERS. The purchasers of Notes or their successors.
HOTELS. The two lodging facilities constructed or to be constructed by
the Partnership and operated pursuant to license agreements with Promus Hotel
Corporation. "Hotel" shall mean any one of the lodging facilities.
INDENTURE. The Indenture dated as of November 1, 1995 between the
Partnership and the Trustee covering the Subordinated Notes.
INVESTMENT IN HOTELS. The amount of Gross Offering Proceeds actually
paid or allocated to the purchase, development, construction or improvement of
the Hotels to be constructed by the Partnership, including the purchase price of
the land, the initial working capital reserves allocable to the Hotels (but not
reserves in excess of 5 percent of the Gross Offering Proceeds), franchise fees
paid to the Franchisor, construction management and development fees paid to
Persons who are not Affiliated Persons, construction period interest and other
cash payments such as interest and taxes, but excluding Front-End Fees.
Investment in Hotels shall also include the amount of Gross Offering Proceeds
used to purchase limited partnership interests in Essex Glenmaura.
IRAS. Individual retirement accounts.
IRS. The Internal Revenue Service.
LIMITED PARTNERS. Those Persons listed on SCHEDULE A to the Partnership
Agreement as Limited Partners and their successors.
MAJORITY VOTE. The affirmative vote or written consent of Limited
Partners then owning of record more than 50 percent of the outstanding Units.
MM&S. MM&S Resources, Inc., an Affiliated Person.
MANAGEMENT AGREEMENT. An agreement entered into with respect to the
Solon Hampton Inn hotel, and to be entered into with respect to the Erie Hampton
Inn hotel, between the Partnership and the General Partner setting forth the
terms and conditions according to which the General Partner shall operate and
maintain the Hotels on behalf of the Partnership.
MANAGING DEALER. Essex Capital Markets Inc., an Affiliated Person.
NASD. The National Association of Securities Dealers, Inc.
NOTES. The Subordinated Notes.
ORGANIZATION AND OFFERING EXPENSES. Those expenses incurred in
connection with preparing the Partnership for registration and subsequently
offering and distributing the Units and Notes to the public, including all
advertising expenses.
ORIGINAL PROSPECTUS. The Partnership's prospectus dated November 24,
1995.
ORGANIZATION AND OFFERING MANAGEMENT FEE. A fee payable by the
Partnership to the General Partner equal to 3.4% of the Gross Offering Proceeds.
PARI PASSU INDEBTEDNESS. Indebtedness of the Partnership having no
priority of payment over and not subordinated in right of payment to the
Subordinated Notes.
110
<PAGE>
PARTNER. Any General or Limited Partner.
PARTNER NOTE. A non-interest bearing promissory note payable to the
Partnership and executed by a Limited Partner in connection with the purchase of
20 or more Units.
PARTNERSHIP. Essex Hospitality Associates IV L.P., a New York limited
partnership.
PARTNERSHIP AGREEMENT. The Amended and Restated Limited Partnership
Agreement of the Partnership.
PARTNERSHIP MANAGEMENT FEE. A fee payable by the Partnership to the
General Partner equal to .75% of the gross revenues from each Hotel.
PERSON. An individual, a corporation, a partnership, a trust, an
unincorporated organization or a government or an agency or political
subdivision thereof.
PRO RATA SHARE. The Pro Rata Share of each Limited Partner shall be 99%
multiplied by a fraction, the numerator of which is the number of Units held by
the Limited Partner, and the denominator of which shall be the aggregate number
of Units held by all the Limited Partners. That portion of any Unit for which a
Partner Note remains outstanding shall not be included in either the numerator
or the denominator in such calculation. The Pro Rata Share of the General
Partner is 1%.
PROMUS HOTEL CORPORATION. Promus Hotel Corporation (inclusive of its
subsidiaries), franchisor of Hampton Inn, Hampton Inn & Suites, and Homewood
Suites hotels.
PROPERTY MANAGEMENT FEE. A fee payable by the Partnership to the
General Partner equal to 4.5% of the gross revenues from each Hotel.
PROSPECTUS. The Partnership's prospectus as included in the
Registration Statement.
REGISTRATION STATEMENT. The registration statement on file with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, for the registration of Units and Notes to be sold by the Partnership
at the time the Registration Statement becomes effective. If the Partnership
files a post-effective amendment to the Registration Statement or a new
Registration Statement and the Prospectus included therein may be used by the
Partnership pursuant to Rule 424 under the Securities Act of 1933 (or any
corresponding provision of succeeding rules or regulations of the Securities and
Exchange Commission), the term "Registration Statement," from and after the
declaration of the effectiveness of the post-effective amendment of the new
Registration Statement refers to the Registration Statement as amended by the
post-effective amendment thereto or the then- effective Registration Statement,
as the case may be.
REGULATIONS. The Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as amended from time to time (including
corresponding provisions of succeeding regulations). Reference is made to a
specific Regulation in the following manner: "Treas. Reg. ss.1.709-2."
SALES COMMISSIONS. Sales commissions of up to $80 per Unit and $55 per
$1,000 Note sold pursuant to this Prospectus, payable by the Partnership to the
Managing Dealer.
SENIOR INDEBTEDNESS. All indebtedness of the Partnership, whether
outstanding on the date of the Indenture governing the Subordinated Notes or
thereafter created or arises as a result of External Financing.
SOLICITING DEALERS. Broker-dealer firms which are NASD members whose
services are enlisted by the Dealer to assist in the sale of the Notes and
Units.
111
<PAGE>
SOLON PROPERTY. Approximately 2.28 acres of real property located in
Solon, Ohio and acquired by the Partnership.
OFFERING TERMINATION DATE. The date designated by the General Partner
for the termination of the Partnership's offering of Unites and Notes, which
date shall not be later than November 24, 1997.
TRUSTEE. Manufacturers and Traders Trust Company, Buffalo, New York, or
its successor.
SUBORDINATED NOTES. Up to $6.0 million of the Partnership's unsecured
notes, maturing December 31, 2001, unless extended to December 31, 2002.
UNITS. The interest of the Limited Partners in the Partnership shall be
divided into 5,000 Limited Partnership Units.
WARWICK PROPERTY. Approximately 2.535 acres of real property located in
Warwick, Rhode Island and acquired by the Partnership.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the General Partner
- - Report of Independent Auditors -
- - Balance Sheets as of December 31, 1996 and December 31, 1995 - Statements of
Income and Changes in Retained Earnings for the years ended December 31,
1996 and December 31, 1995
- - Statements of Cash Flows for years ended December 31, 1996 and December 31,
1995
- - Notes to Financial Statements
- - Balance Sheet (Unaudited) as of June 30, 1997, including notes thereto
Financial Statements of the Partnership
- - Report of Independent Auditors
- - Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 -
- - Consolidated Statements of Operations for the year ended December 31, 1996
and for the period from August 30, 1995 (date of inception) through
December 31, 1995
- - Consolidated Statements of Cash Flows for the year ended December 31, 1996
and for the period from August 30, 1995 (date of inception) through
December 31, 1995
- - Notes to Financial Statements
- - Consolidated Statement of Changes in Partners Capital for the year ended
December 31, 1996 and for the period from August 30, 1995 (date of
inception) through December 31, 1995.
- - Balance Sheet as of June 30, 1997 (Unaudited)
- - Statement of Income for the six months ended June 30, 1997 (Unaudited)
and for the six months ended June 30, 1996 (Unaudited)
- - Statement of Cash Flows for the six months ended June 30, 1997 (Unaudited) -
Notes to Financial Statements
Financial Statements of Essex Glenmaura L.P.
- - Balance Sheet as of June 30, 1997 (Unaudited)
- - Statement of Income for the six months ended June 30, 1997 (Unaudited)
and for the six months ended June 30, 1996 (Unaudited)
- - Statement of Cash Flows for the six months ended June 30, 1997 (Unaudited) -
Notes to Financial Statements
113
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of
Essex Investment Group, Inc.)
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors of
Essex Partners Inc.:
We have audited the accompanying balance sheets of Essex Partners Inc. (a wholly
owned subsidiary of Essex Investment Group, Inc.) as of December 31, 1996 and
1995, and the related statements of income and changes in retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Essex Partners Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Rochester, New York
February 21, 1997
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
- -------------------------------------------------------- ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 84,643 915,433
Advances receivable from partnerships ............. 815,825 355,546
Prepaid and other ................................. 5,682 33,391
---------- ----------
Total current assets ................. 906,150 1,304,370
Noncurrent receivables from partnerships ............... 533,825 210,927
Investments in partnerships ............................ 506,224 415,257
Deferred tax asset ..................................... 48,000 48,000
Office furniture and equipment, less accumulated
depreciation of $74,560 in 1996 and $49,162 in 1995 87,479 100,466
---------- ----------
$2,081,678 2,079,020
========== ==========
Liabilities and Stockholder's Investment
Current liabilities:
Accounts payable and accrued expenses ............. 40,504 185,380
Due to affiliates, net ............................ 216,006 --
---------- ----------
Total current liabilities ............ 256,510 185,380
Accrued partnership contributions ...................... 91,770 163,542
---------- ----------
348,280 348,922
---------- ----------
Commitments and contingencies (note 6)
Stockholder's investment:
Common stock, par value $.01, authorized 2,000,000
shares; 100 shares issued and outstanding ..... 1 1
Paid-in capital ................................... 999 999
Retained earnings ................................. 1,732,398 1,729,098
---------- ----------
Total stockholder's investment ....... 1,733,398 1,730,098
---------- ----------
$2,081,678 2,079,020
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Statements of Income and Changes in Retained Earnings
For the years ended December 31, 1996 and 1995
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Organization, property acquisition, disposition
and development fees ........................... $ 652,156 1,269,313
Management and administrative fees .................. 1,139,551 995,237
Equity income (loss) of partnerships ................ (11,290) 29,752
---------- ----------
Total revenues ............................. 1,780,417 2,294,302
---------- ----------
Operating expenses:
Personnel ........................................... 1,136,218 1,192,018
Office operations ................................... 170,883 151,749
Occupancy ........................................... 143,666 117,711
Sales and marketing ................................. 51,280 164,217
Professional fees ................................... 57,594 51,626
Provision for losses on receivables from partnerships 210,653 155,212
---------- ----------
Total operating expenses ................... 1,770,294 1,832,533
---------- ----------
Income from operations ..................... 10,123 461,769
---------- ----------
Other income (expense):
Interest income ..................................... 75,920 30,942
Interest expense .................................... (80,743) (102,282)
Loss on sale of hotel franchise rights .............. -- (150,000)
---------- ----------
(4,823) (221,340)
---------- ----------
Income before income taxes
and extraordinary item ................. 5,300 240,429
Income taxes ............................................. 2,000 111,000
---------- ----------
Income before extraordinary item ........... 3,300 129,429
Extraordinary item - gain on forgiveness of debt,
net of income tax expense of $40,000 ................ -- 60,000
---------- ----------
Net income ................................. 3,300 189,429
Retained earnings, beginning of year ..................... 1,729,098 1,552,069
Adjustment pursuant to tax sharing arrangement ........... -- 137,600
Dividend to parent ....................................... -- (150,000)
---------- ----------
Retained earnings, end of year .......................... $1,732,398 1,729,098
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Statements of Cash Flows
For the years ended December 31, 1996 and 1995
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 3,300 189,429
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity (income) loss of partnerships ............. 11,290 (29,752)
Depreciation...................................... 25,397 23,328
Provision for losses on receivables from
partnerships ................................. 210,653 155,212
Loss on sale of hotel franchise rights ........... -- 150,000
Deferred income taxes ............................ -- (48,000)
Adjustment pursuant to tax sharing arrangement ... -- 137,600
Extraordinary gain on forgiveness of debt ........ -- (100,000)
Cash provided (used) by changes in:
Prepaid and other current assets ............. 27,709 (24,920)
Accounts payable and accrued expenses ........ (144,876) 166,896
Accrued partnership contributions ............ (71,772) (9,026)
----------- -----------
Net cash provided by operating activities. 61,701 610,767
----------- -----------
Cash flows from investing activities:
Advances to partnerships, net .................... (993,830) (116,849)
Investments in partnerships ...................... (242,500) (112,219)
Distributions from partnerships .................. 140,243 54,831
Purchase of office furniture and equipment ....... (12,410) (25,516)
Proceeds from sale of hotel franchise rights ..... -- 225,000
----------- -----------
Net cash provided by (used in)
investing activities ............. (1,108,497) 25,247
----------- -----------
Cash flows from financing activities:
Advances from affiliates, net .................... 216,006 87,038
Repayment of debt ................................ -- (175,000)
Dividend to parent ............................... -- (150,000)
----------- -----------
Net cash provided by (used in)
financing activities ............. 216,006 (237,962)
----------- -----------
Net increase (decrease) in cash and
cash equivalents ................. (830,790) 398,052
Cash and cash equivalents, beginning of year ......... 915,433 517,381
----------- -----------
Cash and cash equivalents, end of year ............... $ 84,643 915,433
=========== ===========
(Continued)
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Statements of Cash Flows, Continued
1996 1995
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............. 86,859 102,282
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
December 31, 1996 and 1995
(1) Description of Business and Summary of Significant Accounting Policies
Essex Partners Inc. (the Company) is the managing general partner of real
estate partnerships. In addition to revenues earned as an investor, the
Company receives management, administrative, development and other fees for
services rendered to the partnerships.
The Company's parent, Essex Investment Group, Inc. (Essex), is an
integrated financial services and real estate company that develops and
markets a broad range of investment and insurance products and services for
individuals, businesses and individual pension accounts.
Cash Equivalents
Cash equivalents consist of money market accounts.
Investments in Partnerships
Investments in partnerships are accounted for by the equity method. Any
initial partnership capital contribution required by the Company which is
payable out of future distributions to the Company is accrued.
Recognition of Revenue
Organization, property acquisition, disposition, development, management
and administrative fees are recognized as earned in accordance with
contractual arrangements for each transaction.
Income Taxes
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
The effect of deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period which includes the enactment date.
The Company is included in the consolidated federal and combined New York
State income tax returns of Essex. Essex allocates current federal and
state income taxes on a prorata basis to only its subsidiaries which have
taxable income. Any difference between current income taxes determined on a
separate company basis in accordance with the asset and liability method
and the amount allocated to the Company by Essex is reflected as an
adjustment of retained earnings.
(Continued)
- 1 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) Partnership Investments and Advances Receivable
The Company is a general partner in partnerships which primarily own and
operate hotels, apartment buildings and manufactured home communities. The
Company also earns fees in connection with providing organization,
financing, acquisition, development, management, administration and due
diligence services to those partnerships. Such fees totaled $1,726,426 in
1996 and $2,192,192 in 1995.
The Company makes operating advances to those partnerships as well as in
connection with the acquisition and construction of real estate. Such
receivables, which are generally due on demand and unsecured, are
summarized as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Partnership 1996 1995
- -------------------------------------------------- ---------- ----------
<S> <C> <C>
Essex-Ashford River Oaks L.P.:
Mortgage note ............................. $ 270,000 --
Advances .................................. 472,372 267,086
Essex Microtel LeRay L.P. ........................ 313,084 --
Essex Geneseo Associates L.P. .................... 173,293 101,211
Essex Albion Credits L.P. ........................ -- 168,107
Others ........................................... 360,901 270,069
---------- ----------
1,589,650 806,473
Less allowance for uncollectible advances ........ 240,000 240,000
---------- ----------
1,349,650 566,473
Less current portion ............................. 815,825 355,546
---------- ----------
$ 533,825 210,927
========== ==========
</TABLE>
(Continued)
- 2 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(2) Partnership Investments and Advances Receivable (continued)
Essex - Ashford River Oaks L.P. (River Oaks) owns and operates a 300-site
manufactured home community in Springfield, Illinois which the Company
began managing in September 1995. River Oaks has experienced deficit
operating cash flow. The Company has advanced $742,372 to fund operations,
debt service requirements and capital improvements. During 1996, the
Company secured $270,000 of the $742,372 advance with a second mortgage.
The mortgage is receivable on demand with interest only due monthly at
prime plus 1% per annum (9.25% at December 31, 1996). Although no repayment
terms have been set, management of the Company expects to receive repayment
of substantially all amounts in 1997 upon completion of a securitized debt
offering by River Oaks. Summarized financial information for River Oaks as
of and for the years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assets ................... $ 2,530,000 2,978,000
Liabilities ............... 2,380,000 2,660,000
Partners capital .......... 150,000 318,000
Revenue ................... 370,000 389,000
Net loss .................. (168,000) (157,000)
</TABLE>
The Company also guarantees certain indebtedness of River Oaks (see
note 6).
Essex Microtel LeRay L.P. (LeRay) owns and operates a 100-room Microtel
hotel located in LeRay, New York. During 1996, the Company advanced
$313,084 to LeRay, primarily to reduce outstanding mortgage debt. No
repayment terms have been set and management of the Company does not expect
to receive repayment until ultimate disposition of the property. Summarized
financial information for LeRay as of and for the years ended December 31,
1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assets ............................ $ 2,170,000 2,240,000
Liabilities ........................ 1,780,000 1,629,000
Partners capital ................... 390,000 611,000
Revenue ............................ 577,000 698,000
Net loss ........................... (221,000) (128,000)
</TABLE>
(3) Hotel Franchise Rights
In 1994, the Company purchased rights to 15 Microtel hotel franchises for
$375,000 in exchange for cash of $100,000 and a noninterest-bearing note
payable for $275,000. During 1995, the Company sold one franchise right for
$25,000 to an affiliate and the remaining 14 rights were resold to the
franchiser for $200,000, resulting in a loss of $150,000. The Company
repaid $175,000 of the related noninterest-bearing note payable and the
remaining $100,000 was forgiven, resulting in an extraordinary gain of
$60,000, net of the related income tax effect of $40,000.
(Continued)
- 3 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(4) Related Party Transactions
The Company provides management and administrative services under contracts
with several other entities owned by officers of Essex, earning fees of
$65,281 in 1996 and $72,358 in 1995.
Essex allocated interest expense to the Company of $80,743 in 1996 and
$102,282 in 1995.
(5) Income Taxes
Total income taxes for 1996 and 1995 were allocated as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Income from operations ................... $ 2,000 111,000
Extraordinary item ....................... -- 40,000
-------- --------
$ 2,000 151,000
======== ========
</TABLE>
The components of income tax expense attributable to income from operations
are as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1996:
Federal ................................. $ 1,500 -- 1,500
State ................................... 500 -- 500
--------- --------- ---------
$ 2,000 -- 2,000
========= ========= =========
1995:
Federal ................................. 119,800 (38,500) 81,300
State ................................... 39,200 (9,500) 9,700
--------- --------- ---------
$ 159,000 (48,000) 111,000
========= ========= =========
</TABLE>
(Continued)
- 4 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(5) Income Taxes (continued)
The difference between income tax expense and the amounts computed by
applying the U.S. Federal income tax rate of 34% to income before income
taxes and extraordinary item is primarily attributable to state income
taxes.
In 1996 and 1995, Essex allocated $2,000 and $21,400 of consolidated
current income tax expense to the Company pursuant to the inter-company tax
sharing arrangement. The difference between current income taxes allocated
to the Company under the tax sharing arrangement in 1995 and the amount
reflected above in accordance with the asset and liability method is
reflected in the accompanying statement of changes in retained earnings as
adjustments to retained earnings.
At both December 31, 1996 and 1995 the deferred tax asset of $96,000
results from temporary differences related to the allowance for
uncollectible receivables from partnerships, less a valuation allowance of
$48,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and
tax planning strategies in making this assessment. Based on the level of
historical taxable income and estimates of future taxable income over the
periods which the deferred tax assets are deductible, management believes
it is more likely than not that the Company will realize the benefits of
these deductible differences, net of the valuation allowance at December
31, 1996.
(Continued)
- 5 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(6) Commitments and Contingencies
As the general partner in several partnerships, the Company may, subject to
partnership agreement restrictions, be held liable for all recourse debt
and obligations of such partnerships to the extent that the obligations are
not otherwise funded. The amounts of such contingent liabilities include
guarantees of the following partnership obligations at December 31, 1996:
<TABLE>
<S> <C>
Essex-Ashford River Oaks L.P.
Unsecured subordinated notes payable to private investors $1,000,000
Mortgage payable to bank, secured by a first mortgage on the property 600,000
Essex Microtel Lehigh L.P.
Mortgage payable to bank, secured by a first mortgage on the property 2,600,000
Essex Geneseo Associates L.P.
Mortgage payable to bank, secured by a first mortgage on the property 2,983,350
Essex Real Estate Partnership Notes
Mortgage and unsecured notes payable to private investors, primarily
secured by first and second mortgages on certain properties 976,000
Essex Glenmaura L.P.
Unsecured subordinated notes payable to private investors 1,500,000
Essex Mobile Home Properties IX L.P.
Unsecured subordinated notes payable to private investors 1,200,000
Greenport L.L.C.
Mortgage payable to bank, secured by a first mortgage on the property 135,000
</TABLE>
(Continued)
- 6 -
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
(6) Commitments and Contingencies (continued)
Although there is no current plan or intention to do so, the capital of
the Company is available for withdrawal by Essex. Summarized consolidated
financial information for Essex as of and for the years ended December
31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Assets ................... $ 6,400,000 5,100,000
Liabilities .............. 5,200,000 4,700,000
Total stockholders' equity 1,200,000 400.000
Revenue .................. 13,900,000 9,200,000
Net income ............... 400,000 300,000
</TABLE>
The Company guarantees a term note payable of Essex to a bank of $645,000
at December 31, 1996.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A WHOLLY OWNED SUBSIDIARY OF ESSEX INVESTMENT GROUP, INC.)
Balance Sheet
June 30, 1997 (Unaudited)
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 158,658
Advances receivable from partnerships 1,830,281
Prepaid and other 8,837
-----------
Total current assets 1,997,776
-----------
Non-current receivables from partnerships 275,260
Investments in partnerships 550,070
Deferred tax asset 48,000
Office furniture and equipment less accumulated 81,684
depreciation of $87,988
-----------
955,014
-----------
$2,952,790
==========
</TABLE>
See accompanying notes to unaudited financial statements
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A WHOLLY OWNED SUBSIDIARY OF ESSEX INVESTMENT GROUP, INC.)
Balance Sheet
June 30, 1997 (Unaudited)
Liabilities and Stockholder's Investment
- ----------------------------------------
<S> <C>
Current liabilities:
Accounts payable and accrued expenses $ 39,274
Due to affiliates, net 1,085,363
-----------
Total current liabilities 1,124,637
-----------
Note payable 12,000
Accrued partnership contributions 94,954
-----------
1,231,591
-----------
Commitments and contingencies (Note 3)
Stockholder's Investment
Common stock, par value $.01, authorized 2,000,000 shares;
100 shares issued and outstanding 1
Paid-in capital 999
Retained earnings 1,720,199
-----------
Total stockholder's investment 1,721,199
-----------
$2,952,790
==========
</TABLE>
See accompanying notes to unaudited financial statements
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Unaudited Financial Statements
June 30, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Essex Partners Inc. (the Company) is the managing general partner of
real estate partnerships. In addition to revenues earned as an
investor, the Company receives management, administrative, development
and other fees for services rendered to the partnerships.
The Company's parent, Essex Investment Group, Inc. (Essex), is an
integrated financial services and real estate company that develops and
markets a broad range of investment and insurance products and services
for individuals, businesses and individual pension accounts.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial data included in these financial statements is
unaudited; however, in the opinion of management, such financial data
includes all adjustments of a normal recurring nature necessary for a
fair presentation of the Company's financial condition and results of
operations.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts.
INVESTMENTS IN PARTNERSHIPS
Investments in partnerships are accounted for by the equity method. Any
initial partnership capital contribution required by the Company which
is payable out of future distributions to the Company is accrued.
RECOGNITION OF REVENUE
Organization, property acquisition, disposition, development,
management and administrative fees are recognized as earned in
accordance with contractual arrangements for each transaction.
INCOME TAXES
Income taxes are accounted for under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the year in which those temporary differences are
expected to be recovered or settled. The effect of deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period which includes the enactment date.
The Company is included in the consolidated federal and combined New
York State income tax returns of Essex. Essex allocates current federal
and state income taxes on a prorata basis to only its subsidiaries
which have taxable income. Any difference between current income taxes
determined on a separate company basis in accordance with the asset and
liability method and the amount allocated to the Company by Essex is
reflected as an adjustment of retained earnings.
(Continued)
1
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Unaudited Financial Statements
June 30, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) PARTNERSHIP INVESTMENTS AND ADVANCES RECEIVABLE
The Company is a general partner in partnerships which primarily own
and operate hotels, apartment buildings and manufactured home
communities. The Company also earns fees in connection with providing
organization, financing, acquisition, development, management,
administration and due diligence services to those partnerships.
The Company makes operating advances to those partnerships as well as
in connection with the acquisition and construction of real estate.
Such receivables, which are generally due on demand and unsecured, are
summarized as follows at June 30, 1997:
<TABLE>
<CAPTION>
PARTNERSHIP
-----------
<S> <C>
Essex-Ashford River Oaks L.P.:
Mortgage note $ 270,000
Advances 490,722
Essex Microtel LeRay L.P. 313,084
Essex Geneseo Associates L.P. 185,000
Essex Hospitality Associates IV L.P. 361,256
Others 725,479
----------
2,345,541
Less allowance for uncollectible advances 240,000
----------
2,105,541
Less current portion 1,830,281
----------
$ 275,260
==========
</TABLE>
Essex-Ashford River Oaks L.P. (River Oaks) owns and operates a 300-site
manufactured home community in Springfield, Illinois which the Company
began managing in September 1995. River Oaks has experienced deficit
operating cash flow. The Company has advanced $760,722 to fund
operations, debt service requirements and capital improvements. During
1996, the Company secured $270,000 of the $760,722 advance with a
second mortgage. The mortgage is receivable
(Continued)
2
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Unaudited Financial Statements
June 30, 1997
(2) PARTNERSHIP INVESTMENTS AND ADVANCES RECEIVABLE (CONTINUED)
on demand with interest only due monthly at prime plus 1% (9.50% per
annum at June 30, 1997). Although no repayment terms have been set,
management of the Company expects to receive repayment of substantially
all amounts in 1997 upon completion of a securitized debt offering by
River Oaks.
Summarized financial information for River Oaks as of and for the six
months ended June 30, 1997 follows:
<TABLE>
<S> <C>
Assets $ 2,680,000
Liabilities 2,418,000
Partners capital 262,000
Revenue 248,000
Net loss (90,000)
</TABLE>
The Company also guarantees certain indebtedness of River Oaks (see
note 3).
Essex Microtel LeRay L.P. (LeRay) owns and operates a 100-room Microtel
hotel located in LeRay, New York. During 1996, the Company advanced
$313,084 to LeRay, primarily to reduce outstanding mortgage debt. No
repayment terms have been set and management of the Company does not
expect to receive repayment until ultimate disposition of the property.
Summarized financial information for LeRay as of and for the six months
ended June 30, 1997 follows:
<TABLE>
<S> <C>
Assets $ 2,182,000
Liabilities 1,780,000
Partners capital 402,000
Revenue 254,000
Net loss (89,000)
</TABLE>
(Continued)
3
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Unaudited Financial Statements
June 30, 1997
(3) COMMITMENTS AND CONTINGENCIES
As the general partner in several partnerships, the Company may,
subject to partnership agreement restrictions, be held liable for all
recourse debt and obligations of such partnerships to the extent that
the obligations are not otherwise funded. The amounts of such
contingent liabilities include guarantees of the following partnership
obligations at June 30, 1997:
<TABLE>
<S> <C>
ESSEX-ASHFORD RIVER OAKS L.P.
Unsecured subordinated notes payable to private
investors $1,000,000
Mortgage payable to bank, secured by a first
mortgage on the property 600,000
ESSEX MICROTEL LEHIGH L.P.
Mortgage payable to bank, secured by a first
mortgage on the property 2,600,000
ESSEX GENESEO ASSOCIATES L.P.
Mortgage payable to bank, secured by a first
mortgage on the property 2,983,350
ESSEX REAL ESTATE PARTNERSHIP NOTES
Mortgage and unsecured notes payable to private
investors, primarily secured by first and second
mortgages on certain properties 976,000
ESSEX GLENMAURA L.P.
Unsecured subordinated notes payable to private
investors 1,500,000
ESSEX MOBILE HOME PROPERTIES IX L.P.
Unsecured subordinated notes payable to private
investors 1,200,000
GREENPORT L.L.C.
Mortgage payable to bank, secured by a first
mortgage on the property 135,000
</TABLE>
(Continued)
4
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Unaudited Financial Statements
June 30, 1997
(3) COMMITMENTS AND CONTINGENCIES (continued)
Although there is no current plan or intention to do so, the capital of
the Company is available for withdrawal by Essex. Summarized unaudited
consolidated financial information for Essex as of and for the six
months ended June 30, 1997 follows:
<TABLE>
<S> <C>
Assets $ 6,720,000
Liabilities 4,790,000
Total stockholders' 1,930,000
Revenue 7,546,000
Net income 257,000
</TABLE>
The Company guarantees a term note payable of Essex to a bank of
$412,000 at June 30, 1997.
5
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Essex Hospitality Associates IV L.P.:
We have audited the accompanying consolidated balance sheets of Essex
Hospitality Associates IV L.P. (a New York limited partnership) and subsidiary
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in partners' capital and cash flows for the year ended
December 31, 1996 and for the period from August 30, 1995 (date of inception)
through December 31, 1995. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Essex Hospitality
Associates IV L.P. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the year ended December 31,
1996 and for the period from August 30, 1995 (date of inception) through
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Rochester, New York
March 17, 1996
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
- -------------------------------------------------- ----------- -----------
<S> <C> <C>
Investment in real estate, at cost:
Land ........................................ $ 2,492,195 1,400,435
Land improvements ........................... 271,348 --
Buildings ................................... 4,961,102 --
Furniture, fixtures and equipment ........... 1,280,352 --
Construction in progress .................... 469,487 26,250
----------- -----------
9,474,484 1,426,685
----------- -----------
Less accumulated depreciation ............... 231,420 --
----------- -----------
Net investment in real estate ...... 9,243,064 1,426,685
Cash and cash equivalents ........................ 2,515,685 628,864
Due from affiliates .............................. 81,500 --
Other assets ..................................... 147,512 5,153
----------- -----------
Deferred costs:
Debt issuance ............................... 743,075 253,841
Franchise fees .............................. 128,000 80,000
----------- -----------
871,075 333,841
----------- -----------
Less accumulated amortization ............... 191,324 --
----------- -----------
Net deferred costs ................. 679,751 333,841
----------- -----------
$12,667,512 2,394,543
=========== ===========
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Accounts payable - construction. ............ $ 335,914 155,400
Other accounts payable and accrued expenses . 258,724 --
Due to affiliate ............................ -- 64,495
Construction loan payable ................... 4,294,243 --
Notes payable ............................... 1,500,000 --
Subordinated notes payable .................. 4,920,000 1,744,000
----------- -----------
Total liabilities .................. 11,950,249 1,963,895
----------- -----------
Minority interest in partnership ................. 641,368 --
----------- -----------
Commitments and contingencies (notes 4 and 5)
Partners' capital ................................ 882,514 519,895
Less notes receivable from partners ......... 165,251 89,247
----------- -----------
Net partners' capital .............. 717,263 430,648
----------- -----------
$12,667,512 2,394,543
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Statements of Operations
Year ended December 31, 1996 and
period from August 30, 1995 (date of inception) through December 31, 1995
1996 1995
----------- -----------
<S> <C> <C>
Revenue:
Rooms ........................................... $ 394,134 --
Food and beverage ............................... 54,048 --
Telephone and other commissions ................. 34,880 --
----------- -----------
483,062 --
----------- -----------
Operating expenses:
Rooms ........................................... 249,766 --
Administrative .................................. 155,429 --
Food and beverage ............................... 128,541 --
Marketing ....................................... 89,240 --
Repairs and maintenance ......................... 82,573 --
Utilities ....................................... 28,822 --
Management fees to affiliate .................... 25,338 --
Telephone and other commissions ................. 19,869 --
Royalty fees .................................... 15,766 --
Insurance ....................................... 12,058 --
Property taxes .................................. 6,569 --
Depreciation and amortization ................... 345,756 --
Miscellaneous ................................... 72,214 --
----------- -----------
1,231,941 --
----------- -----------
Loss from operations ................... (748,879) --
Interest:
Income .......................................... 74,202 --
Expense ......................................... (548,788) --
----------- -----------
Loss before minority interest in loss of
partnership ........................ (1,223,465) --
Minority interest in loss of partnership ............. 356,524 --
----------- -----------
Net loss ............................... $ (866,941) --
=========== ===========
Net loss - general partners ......................... (8,669) --
- limited partners ....................... (858,272) --
----------- -----------
$ (866,941) --
=========== ===========
Net loss per limited partner unit ................... $ (551) --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Statements of Changes in Partners' Capital
Year Ended December 31, 1996 and
Period for August 30, 1995 (date of inception) through December 31, 1995
Partners' Capital
---------------------------------------
Net
Notes Partners
General Limited Total Receivable Capital
------- ------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at August 30, 1995 ..... $ -- -- -- -- --
(date of inception)
Capital contributions........... 6,574 650,898 657,472 (89,247) 568,225
Syndication costs .............. -- (137,477) (137,477) -- (137,477)
Return of original limited
partners contribution....... -- (100) (100) -- (100)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 ... 6,574 513,321 519,895 (89,247) 430,648
Capital contributions .......... 15,120 1,496,830 1,511,950 (76,004) 1,435,946
Syndication costs .............. -- (168,799) (168,799) -- (168,799)
Distributions to partners ...... (1,136) (112,455) (113,591) -- (113,591)
Net loss ....................... (8,669) (858,272) (866,941) -- (866,941)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ... $ 11,889 870,625 882,514 (165,251) 717,263
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Statements of Cash Flows
Year ended December 31, 1996 and
period from August 30, 1995 (date of inception) through December 31, 1995
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ................................. $ 444,876 --
Cash paid to suppliers and employees .......................... (717,237) --
Interest received ............................................. 55,016 --
Interest paid ................................................. (519,717) --
---------- ----------
Net cash used in operating
activities .......................... (737,062) --
---------- ----------
Cash flows used in investing activities:
Investment in real estate ..................................... (6,094,996) (1,276,438)
Cash acquired with acquisition of controlling interest
in partnership ............................................ 248,522 --
Other assets - deposits ....................................... (34,528) --
Franchise fees paid ........................................... -- (80,000)
---------- ----------
Net cash used in investing activities ... (5,881,002) (1,356,438)
---------- ----------
Cash flows from financing activities:
Proceeds from construction loan ............................... 4,294,243 --
Proceeds from issuance of subordinated notes payable .......... 3,176,000 1,744,000
Debt issuance costs ........................................... (418,800) (192,737)
Proceeds from offering of limited partnership units ........... 1,435,946 568,225
Proceeds from offering of subsidiary limited partnership
units, net ................................................ 303,277 --
Syndication costs ............................................. (172,190) (134,086)
Distributions to partners ..................................... (113,591) --
Return of original partner's contribution ..................... -- (100)
---------- ----------
Net cash provided by financing activities 8,504,885 1,985,302
---------- ----------
Net increase in cash and cash
equivalents ......................... 1,886,821 628,864
Cash and cash equivalents - beginning of period .................... 628,864 --
---------- ----------
Cash and cash equivalents - end of period ......................... $ 2,515,685 628,864
=========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Consolidated Statements of Cash Flows (continued)
For the Years ended December 31, 1996 and
period from August 30, 1995 (date of inception) through December 31, 1995
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income to net cash used in operating activities:
Net loss ............................................................. $ (866,941) --
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................................ 345,756 --
Minority interest in net loss of partnership ................. (356,524) --
Change in:
Other assets ............................................. (72,896) --
Accounts payable and accrued expenses .................... 213,543 --
----------- -----------
Net cash used in operating
activities ...................................... $ (737,062) --
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Net assets acquired with acquisition of controlling interest in
partnership:
Investment in real estate ................................... $ 2,243,340 --
Cash ......................................................... 1,498,522 --
Deferred costs and other assets .............................. 518,749 --
Debt ......................................................... (1,500,000) --
Other liabilities ............................................ (493,497) --
Minority interest ........................................... $(1,017,114) --
=========== ===========
Obligations incurred in connection with construction
in progress . .................................................... $ 180,514 150,247
=========== ===========
Debt issuance and syndication costs due to affiliate ................. $ -- 64,495
=========== ===========
Notes received from general and limited partners ..................... $ 76,004 89,247
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Organization
Essex Hospitality Associates IV L.P. (the Partnership) is a New York
limited partnership formed on August 30, 1995 for the purpose of acquiring
land and constructing, owning and operating a series of hotels. The
Partnership may also invest in and lend funds to other partnerships that
own hotels. The Partnership is financing its activities through a public
offering of notes and limited partnership units. The Partnership's general
partner is Essex Partners Inc. (Essex Partners), a subsidiary of Essex
Investment Group, Inc. (Essex).
The Partnership has acquired land in order to construct and operate hotels.
In December 1995, land was purchased in Solon, Ohio and Warwick, Rhode
Island in anticipation of the construction of a Hampton Inn and Suites
hotel and a Homewood Suites hotel, respectively. Construction was delayed
at both sites as a result of higher than projected construction costs and a
change in market conditions. The Solon site is now under construction for a
Hampton Inn hotel while plans for the Warwick site have not yet been
resolved.
In January 1996, the Partnership acquired a 54% limited partnership
interest in Essex Glenmaura L.P. (Glenmaura) through the purchase of 12.5
limited partnership units for $1,250,000. The purchase price was equal to
the prorata portion of the fair value of the net assets acquired. Glenmaura
owns and operates a Courtyard by Marriott hotel near Scranton,
Pennsylvania. Construction of the hotel was completed during 1996 and
operations began on September 4, 1996.
A general description of the allocation of Partnership income, loss, and
distributions follows. For a more comprehensive description see the
Partnership Agreement.
Allocations of income from operations will be allocated 99% to the
limited partners and 1% to the general partner until the amount
allocated to the limited partners equals the cumulative annual return
of 8% of their contribution. Any remaining income from operations is
allocated 80% to the limited partners and 20% to the general partner.
Income on the sale of any or all of the hotels is allocated 99% to the
limited partners until each limited partner has been allocated income
in an amount equal to his or her pro rata share of the nondeductible
syndication expenses and sales commissions and 1% to the general
partner. Thereafter, income on the sale of any or all the hotels is
allocated in the same manner as income from operations.
(Continued)
- 1 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(1) Organization (continued)
Allocations of losses from operations will be allocated 80% to the
limited partners and 20% to the general partner in the amounts
sufficient to offset all income which was allocated 80% to the limited
partners. Thereafter, operating losses are allocated 99% to the limited
partners and 1% to the general partner. Loss on the sale of any or all
of the hotels will be first allocated in the same manner as losses from
operations, except that the allocation of such loss would be made prior
to allocations of income from operations. All other losses are
allocated 99% to the limited partners and 1% to the general partner.
Cash distributions will initially be made 99% to the limited partners
and 1% to the general partner. After the limited partners have received
a cumulative annual return of 8% of their contribution, additional
distributions may then be made 80% to the limited partners and 20% to
the general partner. Distributions of the net proceeds of sale or
refinancing of any or all hotels will be made 1% to the general partner
and 99% to the limited partners pro rata in accordance with the number
of units held by each limited partner until the limited partners have
received distributions from sale or refinance of hotels equal to $1,000
per unit. Thereafter, distributions shall next be made 1% to the
general partner and 99% to the limited partners until each limited
partner has received any unpaid cumulative return accrued through the
date of the distribution. Additional distributions will then be made
20% to the general partner and 80% to the limited partners.
Essex Partners and its affiliates are receiving substantial fees in
connection with the offering of notes and limited partnership units.
Additional fees will be paid to them in connection with the acquisition,
development and operation of the hotels and management of the Partnership
(see note 5).
In accordance with the Partnership agreement, the ratio of gross proceeds
from the offering of limited partnership units to total gross proceeds from
the public offering of notes and limited partnership units prior to the
termination of the offering may not be less than .15 to 1. At December 31,
1996, that ratio was .31 to 1.
(2) Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the Partnership were prepared on the accrual
basis of accounting in conformity with generally accepted accounting
principles.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership and Glenmaura. All significant intercompany transactions and
balances have been eliminated in consolidation.
(Continued)
- 2 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(2) Summary of Significant Accounting Policies (continued)
Investment in Real Estate
Investment in real estate is stated at cost. Investment in real estate is
reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset. Depreciation is calculated using
the straight-line method for buildings and accelerated methods for and
improvements, furniture, fixtures and equipment over the following
estimated useful lives of the assets as each hotel commences operations:
Buildings 39 years
Land improvements 15 years
Furniture, fixtures and equipment 5 - 7 years
Cash and Cash Equivalents
Cash investments with maturities of three months or less at the time of
purchase are considered to be cash equivalents.
Deferred Costs
Costs of issuing the subordinated notes payable are being amortized on a
straight-line basis over the term of the notes.
Franchise fees paid for the right to own and operate the hotels will be
amortized on a straight-line basis over the term of each franchise
agreement, as each hotel commences operations.
Syndication Costs
Selling commissions and legal, accounting, printing and other filing costs
totaling $306,276 related to the offering of the limited partnership units
were charged against the proceeds of the public offering.
Income Taxes
No provision for income taxes has been provided since any liability is the
individual responsibility of the partners.
Recognition of Revenue
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
(Continued)
- 3 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(2) Summary of Significant Accounting Policies (continued)
Limited Partnership Per Unit Data
Net loss per limited partner unit is calculated by dividing net loss by the
weighted average number of units outstanding during the year. The weighted
average number of units outstanding was 1,557 during fiscal 1996.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the managing general partner to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) Debt
Construction Loan
Glenmaura received construction financing from a bank in the amount of
$4,500,000, of which $4,294,243 has been drawn as of December 31, 1996. The
term is for twelve months and requires monthly payments of interest only at
a rate of 2.5% over the LIBOR rate (7.875% at December 31, 1996). The loan
is guaranteed by Essex Partners and collateralized by the related hotel
property. Additionally, covenants require minimum net worth and limit
distributions.
On February 28, 1997, Glenmaura obtained permanent financing from GMAC
Corporation (GMAC) for $5,000,000, the proceeds of which were used to repay
the construction loan. The term of the loan will be for four years with a
one year extension available if certain debt service coverage is attained.
Monthly payments of interest only will be due at 3% over the LIBOR rate for
the first year. Principal and interest payments are due thereafter. The
commitment fee is $50,000 (1% of the loan proceeds) with 50% of the fee due
upon acceptance of the commitment. The additional 50% is payable at
closing. The loan will be collateralized by the real and personal property
and certain other assets.
Notes Payable
Glenmaura has $1,500,000 of unsecured notes requiring monthly payments of
interest only at 10.5% through June 1, 1998, at which time all principal
will be due unless Glenmaura exercises its two one-year extensions at
extension fees ranging from one-half to one percent. Glenmaura also has the
right to prepay the notes at face value. Essex Partners guarantees payment
of principal and interest on the notes.
(Continued)
- 4 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(3) Debt (continued)
Subordinated Notes Payable
Subordinated notes payable of the Partnership of $4,920,000 bear interest
at a rate of 10.5% per annum, payable monthly, and mature December 31,
2001, unless extended by the Partnership to December 31, 2002 upon payment
of an extension fee equal to .5% of the principal amount of the notes
outstanding. The notes are issued as unsecured obligations of the
Partnership.
In 1996, interest of $193,354, was capitalized in investments in real
estate as the notes were used to finance construction of the hotels. No
interest was capitalized in 1995.
The aggregate annual principal payments of the debt obligations for the
years subsequent to 1996 are as follows:
1997 $ --
1998 1,539,129
1999 51,449
2000 56,836
2001 9,772,586
--------------
$ 11,420,000
==============
(4) Franchise Fees
In 1995, the Partnership entered into license agreements with Promus
Corporation (Promus) to operate a Homewood Suites hotel in Warwick, Rhode
Island and a Hampton Inn and Suites hotel in Solon, Ohio site. An initial
franchise fee of $40,000 was paid for each hotel and the term and
amortization period of the franchise agreements is twenty years. In
addition, for each hotel, the Partnership will be required to pay Promus a
monthly royalty fee of 4% of gross rooms revenues, a monthly
marketing/reservation fee of 4% of gross rooms revenue, an initial software
license fee of $3,000 plus $85 per guest room with a monthly maintenance
charge of $200 to $400 per month, and a monthly amount equal to any sales
tax or similar tax imposed on Promus on payments received under the license
agreement. During 1996 Promus approved the conversion of the Solon, Ohio
agreement to a Hampton Inn.
Promus requires the Partnership to establish a capital reserve escrow
account based on a percentage of gross revenues generated by each hotel
which will be used for product quality requirements of the hotel.
Cumulative funding of the reserve for the first five years increases from
1% to 5% of gross revenues and stabilizes at 5% for the term of the
agreement. The Promus franchise agreements impose certain restrictions on
the transfer of limited partnership units. Promus restricts the sale,
pledge or transfer of units in excess of 25% without their consent.
(Continued)
- 5 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(4) Franchise Fees (continued)
Glenmaura has a franchise agreement with Marriott International, Inc. Under
the terms of the agreement, Glenmaura paid an initial franchise fee of
$48,000 in 1995. The term and amortization period of the franchise
agreement is twenty years, with an option to renew for an additional
ten-year period. Glenmaura is required to pay a monthly royalty fee in an
amount equal to 4% of gross room rentals for the first two years of
operations and 5% during the remainder of the term of the agreement, a
marketing fee of 2 - 3% gross revenues, a reservation system fee and a
property management system fee. In 1996, fees totaled $15,766.
(5) Related Party Transactions
A summary of fees earned by Essex Partners or its affiliates from the
Partnership and Glenmaura in 1996 and 1995 follows:
<TABLE>
<CAPTION>
Type of Fee Amount of Fee 1996 1995
----------- ------------- ---- ----
<S> <C> <C> <C>
Selling Commission Up to $80 per limited partnership
unit and $55 per $1,000 note sold $ 289,063 147,154
Organization and Offering Fee 3.4% of the gross proceeds of the
offering 158,876 81,423
Offering and Organization Fee Up to $40,000 if proceeds of the
- Glenmaura offering of limited partnership
units is $4,000,000, reduced by
any selling commissions paid 16,000 --
Acquisition Fee $110,000 per hotel site -- 220,000
Development Fee $160,000 per hotel, plus 5% of the
total cost of the hotel in excess of
$2.7 million (not to exceed
$325,000 per hotel) 108,000 --
Development Fee $285,000 (less $171,000 paid prior
- Glenmaura to the Partnership's purchase of a
controlling interest of Glenmaura) 114,000 --
Property Management Fee 4.5% of gross operating revenues
from the hotels 21,718 --
Partnership Management Fee .75% to 1.25% of gross operating
revenues from the hotels 3,620 --
Accounting Fee $800 per month 3,200 --
---------------------------
$714,477 448,577
===========================
</TABLE>
(Continued)
- 6 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(5) Related Party Transactions (continued)
The above fees are reflected in the accompanying financial statements as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Balance sheets:
Investment in real estate ........... $222,000 220,000
Deferred debt issuance costs ........ 282,664 155,216
Partners' capital - syndication costs 165,275 73,361
-------- --------
$669,939 448,577
======== ========
Statements of
operations:
Management fees to affiliate ........ 25,338 --
Administrative expense .............. 3,200 --
Miscellaneous expense ............... 16,000 --
-------- --------
$ 44,538 --
======== ========
</TABLE>
Organization and offering fees are allocated to syndication costs and
debt issuance costs based on the pro-rata share of limited partners' units
and notes payable to the total offering.
In 1995, the Partnership paid a $110,000 acquisition fee in connection with
the Warwick, Rhode Island site. As it is unlikely that a hotel will be
constructed on the Warwick site, the amount of the fee is included in due
from affiliates at December 31, 1996.
Under the terms of the Partnership agreement, Essex Partners or its
affiliates will also earn other fees as follows:
Type of Fee Amount of Fee
----------- -------------
Investor .25% of the gross proceeds of the offering payable
Relations Fee annually in 1998 through 2001
Refinancing Fee 1% of the gross proceeds of re-financing any or all of
the hotels
Sales Fee 3% of the gross sale price of any or all of the hotels
(excluding the Glenmaura hotel which is 2.5%)
(Continued)
- 7 -
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
(5) Related Party Transactions (continued)
Glenmaura has made a non-refundable deposit of $55,000 pursuant to an
option to purchase a second parcel of land (the Second Project) adjacent to
the Project for purposes of constructing a second hotel. The option
agreement expired in December of 1996 but is currently being renegotiated.
In the event that Essex Partners elects to proceed with the Second Project
on behalf of Glenmaura, Essex Partners will receive additional compensation
related to the acquisition of the second parcel, construction of the Second
Project and securing additional equity and debt financing to fund such
activities. Such compensation will include an acquisition fee equal to
$50,000 for its services related to the acquisition of the second parcel
and a development fee up to $150,000 plus 3% of total construction, site
development and fixtures, furniture and equipment costs. In addition, as
compensation for arranging construction and permanent financing, Essex
Partners may receive a financing fee equal to 1% of the gross proceeds of
the financing.
The Partnership will also be subject to a number of conflicts of interest
arising from its relationships with the general partner, its owners and
affiliates and due to other activities and entities in which the general
partner and its affiliates have or may have a direct or indirect financial
interest.
(6) Events Subsequent to Date of Independent Auditors' Report
In May 1997, the Partnership elected not to proceed with development of a
hotel on the Warwick, Rhode Island property and is pursuing the sale of the
property. The disposal is not expected to have a significant impact on the
Partnership's financial statements.
In June 1997, the Partnership acquired a property in Erie, Pennsylvania for
$650,000 in anticipation of constructing a Hampton Inn hotel. The
Partnership is currently negotiating with GMAC for a first mortgage loan of
approximately $4.5 million.
On June 9, 1997, the Partnership sold 1.05 limited partnership units of
Glenmaura for $105,000 to Essex Partners, thereby reducing the
Partnership's investment interest to 49.8%. As a result, the Partnership no
longer controls Glenmaura and will be accounted for on the equity method.
In July 1997, the Partnership completed construction of the Hampton Inn in
Solon, Ohio and obtained a first mortgage of $4.5 million with GMAC. The
term is for four years with a one year extension available if certain debt
service coverage is attained. Monthly payments of interest only will be due
at 3.25% over the LIBOR rate for the first year. Principal and interest
payments are due thereafter.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Balance Sheet
June 30, 1997
(unaudited)
Assets 1997
------ ----
<S> <C>
Investments in real estate, at cost:
Land $2,074,526
Construction in progress 4,806,188
---------
6,880,714
Less accumulated depreciation 0
---------
Net investments in real estate 6,880,714
---------
Investment in partnership 529,494
Cash and cash equivalents 11,013
Deferred costs:
Debt issuance 610,147
Franchise 85,000
Other 73,224
---------
768,371
Less accumulated amortization (97,840)
---------
670,531
---------
Other assets 8,411
---------
Total assets $8,100,163
==========
Liabilities and Partners' Capital
---------------------------------
Liabilities
Accounts payable - construction $1,566,637
Accounts payable and accrued expenses 0
Due to affiliate 596,156
Subordinated notes payable 5,298,000
Construction loan payable 0
Notes payable 0
---------
Total liabilities 7,460,793
---------
Commitments and contingencies (note 5)
Partners' capital 677,812
Less notes receivable from partners (38,442)
---------
Total partners' capital 639,370
---------
Total liabilities and partners' capital $8,100,163
==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statements of Income
For the Six Months ended June 30, 1997 and 1996
(unaudited)
1997 1996
---- ----
<S> <C> <C>
Revenue:
- --------
Rooms $754,675 0
Food and beverage 95,678 0
Telephone and other commissions 54,703 0
------- -------
905,056 0
------- -------
Operating expenses:
- -------------------
Rooms 210,552 0
Food & beverage expenses 108,148 0
Administrative & general 85,521 1,187
Utilities 61,810 0
Advertising & promotion 52,310 0
Repairs & maintenance 45,917 0
Management fees 38,058 0
Royalty fees 26,245 0
Commissions expenses 24,097 0
Property taxes 15,835 0
Insurance 13,506 0
Partnership management fees 6,343 0
Depreciation and amortization 247,925 21,990
--------- --------
Miscellaneous 22,687 14,206
--------- --------
958,954 37,383
--------- --------
Loss from operations (53,898) (37,383)
Other income (expense):
- -----------------------
Interest expense (368,967) (140,751)
Interest income 37,898 9,743
Loss on termination of franchise agreement (40,000) 0
Equity income (loss) of partnership (12,763) 0
--------- --------
(383,832) (131,008)
--------- ---------
Loss before minority interest in income
(loss) of partnership (437,730) (169,047)
--------- --------
Minority interest in loss of partnership 111,254 1,438
--------- --------
Net loss ($326,476) (167,609)
========= ========
Net loss - general partners (3,265) (1,676)
- limited partners (323,211) (165,933)
--------- --------
($326,476) (167,609)
========= ========
Net loss per limited partner unit ($135) (148)
========= ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $892,810 152
Cash paid to suppliers (836,571) (13,957)
Interest received 37,898 9,743
Interest paid (368,967) (140,751)
--------- ---------
Net cash used in operating activities (274,830) (144,813)
--------- ---------
Cash flows from investing activities
Payments for land and construction in progress (3,877,225) (3,164,845)
Payments for franchise fees (45,000) 0
Proceeds from sale of partnership interest 105,000 0
Cash change with change in controlling
interest in partnership 5,131 248,522
Payments for deposits (8,048) (174,165)
--------- ---------
Net cash used in investing activities (3,820,142) (3,090,488)
--------- ---------
Cash flows from financing activities
Partners' capital contributions 311,656 1,274,825
Payments for syndication costs (20,862) (199,648)
Proceeds from notes payable 378,000 2,899,000
Proceeds from mortgage loan 5,000,000 0
Payoff of construction loan, net (4,294,243) 1,177,149
Payments for debt acquisition costs (151,268) (329,595)
Payments for escrow accounts (108,969) 0
Payments for organization costs (22,458) (548)
Advance from affiliate 551,156 0
Payments for distributions (52,712) (39,526)
--------- ---------
Net cash provided by financing activities 1,590,300 4,781,657
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,504,672) 1,546,356
Cash and cash equivalents - beginning of period 2,515,685 628,864
--------- ---------
Cash and cash equivalents - end of period $11,013 2,175,220
========= =========
See accompanying notes to unaudited financial statements.
<PAGE>
Essex Hospitality Associates IV L.P.
Statements of Cash Flows (continued)
For the Six Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
---- ----
Reconciliation of net loss to net cash flows
from operating activities:
Net loss ($326,476) (167,609)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 247,925 21,990
Equity loss of partnership 12,763 0
Minority interest in net loss of partnership (111,254) (1,438)
Loss on termination of franchise agreement 40,000 0
Changes in:
Other assets (15,175) 2,244
Accounts payable and other expenses (122,613) 0
--------- ---------
($274,830) (144,813)
========= =========
Supplemental schedule of noncash investing
and financing activities:
Obligations incurred in connection with construction
in progress $1,230,723 1,199,481
========= =========
Notes received from (paid by) general and limited
partners ($126,807) 81,564
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(1) ORGANIZATION
Essex Hospitality Associates IV L.P. (the Partnership) is a New York
limited partnership formed on August 30, 1995 for the purpose of
acquiring land and constructing, owning and operating a series of
hotels. The Partnership may also invest in and lend funds to other
partnerships that own hotels. The Partnership is financing its
activities through a public offering of notes and limited partnership
units. The Partnership's general partner is Essex Partners Inc. (Essex
Partners), a subsidiary of Essex Investment Group, Inc. (Essex).
The Partnership has acquired land in order to construct and operate
hotels. In December 1995, land was purchased in Solon, Ohio. The Solon
site is now under construction for a Hampton Inn hotel which is
expected to open in early August, 1997. As a condition to receiving
permanent financing, a special purpose entity was created to own the
Solon Hampton Inn, Solon Hotel LLC. The managing member of Solon Hotel
LLC is Essex Hotel LLC, a single purpose entity created to act as the
managing member of Solon Hotel LLC. The membership interests in Solon
Hotel LLC are owned 99% by the Partnership and 1% by Essex Hotel LLC,
whose sole member is the Partnership.
In December 1995, the Partnership also purchased land in Warwick, Rhode
Island in anticipation of the construction of a Homewood Suites hotel.
Construction was delayed at as a result of higher than projected
construction costs and a change in market conditions. The Partnership
has decided not to proceed with construction of the Homewood Suites and
is currently pursuing a sale of the site. The disposal is not expected
to have a significant impact on the Partnership's financial statements.
In June, 1997, the Partnership purchased land in Erie, Pennsylvania for
construction of a Hampton Inn hotel. In June, 1997, the Partnership
transferred the Erie property to a single purpose entity, Erie Hotel
LLC. The managing member of Erie Hotel LLC is Essex Hotels II LLC, a
single purpose entity created to act as the managing member of Erie
Hotel LLC. The membership interests in Erie Hotel LLC are owned 99% by
the Partnership and 1% by Essex Hotels II LLC, whose sole member is the
Partnership. The Partnership is currently negotiating with GMAC for a
first mortgage loan in the principal amount of $4.5 million to finance
the construction of the Erie Hampton Inn hotel.
In January 1996, the Partnership acquired a 54% limited partnership
interest in Essex Glenmaura L.P. (Glenmaura) through the purchase of
12.5 limited partnership units for $1,250,000. The purchase price was
equal to the prorata portion of the fair value of the net assets
acquired. Glenmaura owns and operates a Courtyard by Marriott hotel
near Scranton, Pennsylvania. Construction of the hotel was completed
during 1996 and operations began on September 4, 1996. As a condition
to receiving permanent financing for the Solon Hampton Inn, the
Partnership was required to reduce its investment in Glenmaura to less
than 50%. In June 1997, 1.05 units were sold to the general partner for
$105,000, reducing the Partnership's interest to 49.8%.
The following is a general description of the allocation of income,
loss, and distributions. For a more comprehensive description see the
Partnership Agreement:
1
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(1) ORGANIZATION (continued)
Allocation of income from operations will be allocated 99% to
the limited partners and 1% to the general partner until the
amount allocated to the limited partners equals the cumulative
annual return of 8% of their contribution. Any remaining
income from operations is allocated 80% to the limited
partners and 20% to the general partner. Income on the sale of
any or all of the hotels is allocated 99% to the limited
partners until each limited partner has been allocated income
in an amount equal to his or her pro rata share of the
nondeductible syndication expenses and sales commission and 1%
to the general partner. Thereafter, income on the sale of any
or all the hotels is allocated in the same manner as income
from operations.
Allocations of losses from operations will be allocated 80% to
the limited partners and 20% to the general partner in the
amounts sufficient to offset all income which was allocated
80% to the limited partners. Thereafter, operating losses are
allocated 99% to the limited partners and 1% to the general
partner. Loss on the sale of any or all of the hotels will be
first allocated in the same manner as losses from operations,
except that the allocation of such loss would be made prior to
allocations of income from operations. All other losses are
allocated 99% to the limited partners and 1% to the general
partner.
Cash distributions will initially be made 99% to the limited
partners and 1% to the general partner. After the limited
partners have received a cumulative annual return of 8% of
their contribution, additional distributions may then be made
80% to the limited partners and 20% to the general partner.
Distributions of the net proceeds of sale or refinancing of
any or all hotels will be made 1% to the general partner and
99% to the limited partners prorata in accordance with the
number of units held by each limited partner until the limited
partners have received distributions from sale or refinance of
hotels equal to $1,000 per unit. Thereafter, distributions
shall next be made 1% to the general partner and 99% to the
limited partners until each limited partner has received any
unpaid cumulative return accrued through the date of the
distribution. Additional distributions will then be made 20%
to the general partner and 80% to the limited partners.
Essex Partners and its affiliates are receiving substantial fees in
connection with the offering of notes and limited partnership units.
Additional fees will be paid to them in connection with the
acquisition, development and operation of the hotels and management of
the Partnership (see note 5).
In accordance with the Partnership agreement, the ratio of gross
proceeds from the offering of limited partnership units to total gross
proceeds from the public offering of notes and limited partnership
units prior to the termination of the offering may not be less than .15
to 1. At June 30, 1997, that ratio was .31 to 1.
2
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements of the Partnership were prepared on the
accrual basis of accounting in conformity with generally accepted
accounting principles.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial data included in these financial statements is
unaudited; however, in the opinion of management, such financial data
includes all adjustments of a normal recurring nature necessary for a
fair presentation of the Partnership's financial condition and results
of operation.
INVESTMENT IN PARTNERSHIP
Investment in partnership with a 50% or less ownership interest will be
accounted for by the equity method. Ownership interests exceeding 50%
will be accounted for under the consolidated method.
The statement of operations and cash flows include the accounts of the
Partnership and Glenmaura through June 9, 1997, date upon which the
Partnership's ownership interest of Glenmaura decreased to less than
50% as discussed in note 1. For the period from June 10, 1997 through
June 30, 1997, the Partnership's investment in Glenmaura is accounted
for under the equity method.
INVESTMENT IN REAL ESTATE
Investment in real estate is stated at cost. Investment in real estate
is reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
Depreciation is calculated using the straight-line method for buildings
and accelerated methods for land improvements, furniture, fixtures and
equipment over the following estimated useful lives of the assets as
each hotel commences operations:
<TABLE>
<S> <C>
Buildings 39 years
Land improvements 15 years
Furniture, fixtures and equipment 5 - 7 years
</TABLE>
CASH AND CASH EQUIVALENTS
Cash investments with maturities of three months or less at the time of
purchase are considered to be cash equivalents.
3
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS
Costs of issuing the debt will be amortized on a straight-line basis
over the term of the debt.
Franchise fees paid for the right to own and operate the hotels will be
amortized on a straight-line basis over the term of each franchise
agreement, as each hotel commences operations.
SYNDICATION COSTS
Selling commissions and legal, accounting, printing and other filing
costs totaling $327,138 related to the offering of the limited
partnership units were charged against the proceeds of the public
offering.
INCOME TAXES
No provision for income taxes has been provided since any liability is
the individual responsibility of the partners.
RECOGNITION OF REVENUE
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
LIMITED PARTNERSHIP PER UNIT DATA
Net loss per limited partner unit is calculated by dividing net loss by
the weighted average number of units outstanding during the period. The
weighted average number of units outstanding was 2,394 for the six
months ended June 30, 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires the general partner
to make estimates and assumptions that affect the reported amounts of
asset and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
4
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(3) DEBT
FIRST MORTGAGE LOAN
On July 7, 1997, Solon Hotel LLC obtained permanent financing from GMAC
Commercial Mortgage Corporation for $4,500,000. The term of the loan
will be for four years with a one year extension available upon the
payment of an extension fee and if certain debt service coverage is
attained. Interest will accrue at 3.25% over the 30-day LIBOR index.
Monthly payments of interest only will be due for the first year.
Principal and interest payments are due thereafter based on a 25-year
amortization. Starting in the second year of the loan, Solon Hotel LLC
will be required to maintain a replacement reserve of 2% of monthly
room revenues. The replacement reserve payment will increase to 4% of
monthly room revenues in the third year of the loan. The loan is
collateralized by the real and personal property and certain other
assets.
SUBORDINATED NOTES PAYABLE
Subordinated notes payable of the Partnership of $5,298,000 bear
interest at a rate of 10.5% per annum, payable monthly, and mature
December 31, 2001, unless extended by the Partnership to December 31,
2002 upon payment to holders of an extension fee equal to .5% of the
principal amount of the subordinated notes outstanding. The notes are
issued as unsecured obligations of the Partnership.
The aggregate annual principal payments of the debt obligations due for
the six months ended December 31, 1997 and the years subsequent to 1997
are as follows:
<TABLE>
<S> <C>
1997 -0-
1998 24,039
1999 51,484
2000 56,383
2001 9,666,094
-----------
9,798,000
</TABLE>
For the six months ended June 30, 1997 and 1996, interest of $128,736
and $31,375, respectively, was capitalized in investments in real
estate as the debt was used to finance construction of hotels.
5
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(4) FRANCHISE FEES
In 1996, Promus Corporation (Promus) approved a license agreement for
the Partnership to operate a Hampton Inn hotel in Solon, Ohio. An
initial franchise fee of $40,000 was paid. In 1997, the Partnership
entered into a license agreement with Promus to operate a Hampton Inn
in Erie, Pennsylvania which required an initial franchise fee of
$45,000. The term and amortization period of the license agreements is
twenty years. In addition, for each hotel, the Partnership will be
required to pay Promus a monthly royalty fee of 4% of gross rooms
revenues, a monthly marketing/reservation fee of 4% of gross rooms
revenue, an initial software license fee of $3,000 plus $85 per guest
room with a monthly maintenance charge of $200 to $400 per month, and a
monthly amount equal to any sales tax or similar tax imposed on Promus
on payments received under the license agreement.
Promus requires the Partnership to establish a capital reserve escrow
account based on a percentage of gross revenues generated by each hotel
which will be used for product quality requirements of the hotel.
Cumulative funding of the reserve for the first five years increases
from 1% to 5% of gross revenues and stabilizes at 5% for the term of
the agreement. The Promus franchise agreements impose certain
restrictions on the transfer of limited partnership units. Promus
restricts the sale, pledge or transfer of units in excess of 25%
without their consent.
In 1995, the Partnership entered into a license agreement with Promus
to operate a Homewood Suites hotel in Warwick, Rhode Island. An initial
franchise fee of $40,000 was paid. The franchise agreement for the
Homewood Suites in Warwick has expired. The franchise fee has been
written off since the franchise agreement has expired.
6
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(5) RELATED PARTY TRANSACTIONS
A summary of fees earned by Essex Partners or its affiliates for the
six months ended June 30, 1997 and 1996 under the terms of the
Partnership agreement follows:
<TABLE>
<CAPTION>
Type of Fee Amount of Fee 1997 1996
- ----------- ------------- ---- ----
<S> <C> <C> <C>
Selling Commission Up to $80 per limited partnership unit and
$55 per $1,000 sold $ 35,430 $237,005
Organization and Offering 3.4% of the gross proceeds of the offering 19,074 133,367
Fee
Acquisition Fee $110,000 per hotel site 110,000 0
Development Fee $160,000 per hotel, plus 5% of the total cost
of the hotel in excess of $2.7 million (not to
exceed $325,000 per hotel) 108,000 0
Offering and Organization Up to $40,000 if proceeds of the offering of
Fee - Glenmaura limited partnership units is $4,000,000,
reduced by any selling commissions paid 0 16,000
Development Fee - $285,000 (less $171,000 paid prior to the
Glenmaura Partnership's purchase of a controlling interest
of Glenmaura) 0 85,500
Property Management Fee 4.5% of gross operating revenues from the
hotels 38,058 0
Partnership Management .75% to 1.25% of gross operating revenues
Fee from the hotels 6,343 0
Accounting Fee $800 per month 4,000 0
-------- --------
$320,905 $471,872
======== ========
</TABLE>
7
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(5) RELATED PARTY TRANSACTIONS (continued)
The above fees are reflected in the accompanying financial statements
as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Balance Sheet:
Investment in real estate $218,000
Deferred debt issuance costs 33,642
Syndication costs, charged to partner's capital 20,862
$272,504
========
Statements of Operations:
Management fees to affiliates $38,058
Administrative expense 4,000
Partnership management fees 6,343
$48,401
=======
</TABLE>
Organization and offering fees are allocated to syndication costs and
debt issuance costs based on the pro-rata share of limited partner's
units and notes payable to the total offering.
In 1995, the Partnership paid a $110,000 acquisition fee in connection
with the Warwick, Rhode Island site. The acquisition fee was refunded
to the Partnership in 1997.
8
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(5) RELATED PARTY TRANSACTIONS (continued)
Under the terms of the Partnership agreement, Essex Partners or its
affiliates will also earn other fees as follows:
<TABLE>
<CAPTION>
Type of Fee Amount of Fee
----------- -------------
<S> <C>
Investor Relations Fee .25% of the gross proceeds of the offering payable annually in
1998 through 2001
Refinancing Fee 1% of the gross proceeds of re-financing any or all of the hotels
Sales Fee 3% of the gross sale price of any or all of the hotels
</TABLE>
The Partnership will also be subject to a number of conflicts of
interest arising from its relationships with the general partner, its
owners and affiliates and due to other activities and entities in which
the general partner and its affiliates have or may have a direct or
indirect financial interest.
(6) INVESTMENT IN PARTNERSHIP
The Partnership owns a 49.8% interest in Essex Glenmaura L.P. (see note
1). Summarized financial information for Essex Glenmaura as of and for
the six months ended June 30, 1997 follows:
<TABLE>
<S> <C>
Assets $7,765,000
Liabilities 6,623,000
Partners' capital 1,142,000
Revenues 1,117,000
Net loss (268,000)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Essex Glenmaura L.P.
Balance Sheet
June 30, 1997
(unaudited)
Assets 1997
------ ----
<S> <C>
Investments in real estate, at cost:
Land $1,223,636
Land improvements 272,008
FF&E 1,337,474
Building 4,961,877
Construction in progress 0
----------
7,794,995
Less accumulated depreciation (461,897)
----------
Net investments in real estate 7,333,098
----------
Unrestricted cash and cash equivalents (13,610)
Restricted cash and cash equivalents 120,520
Deferred costs:
Debt issuance 268,430
Franchise 48,000
Other 10,000
326,430
----------
Less accumulated amortization (155,403)
----------
171,027
----------
Other assets 154,261
----------
Total assets $7,765,296
==========
Liabiliities and Partners' Capital
----------------------------------
Liabilities
Accounts payable and accrued expenses $ 103,142
Accounts payable - construction 19,876
First mortgage loan payable 5,000,000
Construction loan payable 0
Notes payable 1,500,000
----------
Total liabilities 6,623,018
----------
Commitments and contingencies (notes 5 and 6)
Partners' capital 1,142,278
----------
Total liabilities and partners' capital $7,765,296
==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Glenmaura L.P.
Statements of Income
For the Six Months ended June 30, 1997 and 1996
(unaudited)
1997 1996
---- ----
<S> <C> <C>
Revenue:
- --------
Rooms $934,223 0
Food and beverage 115,615 0
Telephone and other commissions 67,433 0
---------- -----
1,117,271 0
---------- -----
Operating expenses:
- -------------------
Rooms 258,254 0
Food & beverage expenses 128,349 0
Administrative & general 102,853 656
Utilities 68,939 0
Advertising & promotion 62,118 0
Repairs & maintenance 59,202 0
Management fees 47,084 0
Royalty fees 33,804 0
Commissions expenses 29,348 0
Property taxes 19,002 0
Insurance 13,506 0
Miscellaneous 8,796 5,247
Partnership management fees 7,847 0
Depreciation and amortization 266,836 0
---------- -----
1,105,938 5,903
---------- -----
Income (loss) from operations before interes 11,333 (5,903)
Interest expense (279,818) 0
Interest income 456 2,756
---------- -----
(279,362) 2,756
---------- -----
Net loss (268,029) (3,147)
---------- -----
Net loss - general partners (10,721) (126)
- limited partners (257,308) (3,021)
---------- -----
($268,029) (3,147)
========== ======
Net loss per limited partner unit ($11,696) (137)
========== ======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Glenmaura L.P.
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $1,083,058 0
Cash paid to suppliers (968,699) (6,301)
Interest received 456 2,756
Interest paid (279,818) 0
--------- ----------
Net cash from operating activities (165,003) (3,545)
--------- ----------
Cash flows from investing activities
Payments for land and construction in progress (363,557) (2,722,829)
Payments for deposits 8,268 (174,165)
--------- ----------
Net cash used in investing activities (355,289) (2,896,994)
--------- ----------
Cash flows from financing activities
Repayment of construction loan (4,323,314) 0
Proceeds from 1st mortgage loan 5,000,000 0
Construction loan advances 29,071 1,177,149
Escrow account deposits (120,520) 0
Payments for debt acquisition costs (83,705) (61,677)
Partner capital contributions 0 1,572,500
Payments for syndication costs 0 (19,300)
Payments for distributions (23,000) 0
--------- ----------
Net cash from financing activities 478,532 2,668,672
--------- ----------
Net increase in cash and cash equivalents (41,760) (231,867)
Cash and cash equivalents - beginning of period 28,150 248,522
--------- ----------
Cash and cash equivalents - end of period ($13,610) 16,655
========== ==========
See accompanying notes to unaudited financial statements.
<PAGE>
Essex Glenmaura L.P.
Statements of Cash Flows (continued)
For the Six Months Ended June 30, 1997 and 1996
(unaudited)
Reconciliation of net income to net cash flows from
operating activities:
Net income ($268,029) (3,147)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 266,836 0
Changes in:
Shortterm assets (34,213) (398)
Minority interest in net loss of partnership
Accounts payable and other expenses (129,597) 0
--------- ----------
($165,003) (3,545)
========== ==========
Supplemental schedule of noncash investing and
financing activities:
Obligations incurred in connection with
construction in progress ($305,000) (155,495)
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
ESSEX GLENMAURA L.P.
(A Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Scope of Business
The Partnership was formed on May 18, 1995 and will terminate on the
earlier of December 31, 2045 or the date the Partnership is terminated
pursuant to the partnership agreement or by law.
The Partnership is a New York Limited Partnership formed to construct,
own and operate a 120-room hotel, Courtyard by Marriott, Southeast of
Scranton, Pennsylvania under a franchise agreement with Marriott
International, Inc. (the Project). Construction was completed during
1996 and operations began on September 4, 1996.
Unaudited Interim Financial Information
The interim financial data included in these financial statements is
unaudited; however, in the opinion of management, such financial data
includes all adjustments of a normal recurring nature necessary for a
fair presentation of the Partnership's financial condition and results
of operations
.
Allocations of Income or Loss
The Partnership agreement provides that net losses of the Partnership
be first allocated among the Partners to the extent of the positive
balances in the Partners' capital accounts, to make the respective
balances equal to the distributions that would have been made had the
aggregate balances in all Partners' capital accounts been distributed
in accordance with each Partner's pro rata share. Losses are next
allocated in accordance with each Partner's pro rata share in an amount
equal to the difference between nonrecourse debt of the Partnership and
the adjusted basis of the Partnership property securing such
nonrecourse debt. All additional losses are allocated to the General
Partner. Net income is allocated first to the General Partner in an
amount equal to the loss allocated to the General Partner as described
above. Next, income is allocated in accordance with each Partner's pro
rata share in an amount equal to the loss allocated to the Partners as
described above. Income is then allocated to those Partners with
negative balances in their capital accounts. All additional income is
then allocated in accordance with each Partner's pro rata share.
Cash and Cash Equivalents
For the purposes of the financial statements, cash and cash equivalents
include money market funds and commercial savings accounts.
Method of Accounting
The Partnership has prepared its financial statements on the accrual
method of accounting.
Income Taxes
No provision for income taxes has been provided since any liability is
the individual responsibility of the Partners.
Investment in Real Estate
The investment in real estate is stated at cost and includes $261,929
of capitalized interest. Depreciation is calculated using straight-line
and accelerated methods over the estimated useful lives of the assets.
1
<PAGE>
ESSEX GLENMAURA L.P.
(A Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Costs
Organization costs are being amortized on a straight-line basis over a
period of sixty months, beginning the first month of operation.
Debt acquisition fees are being amortized over the life of the related
debt on a straight-line basis.
Distributions
Distributions shall be made in accordance with each Partner's pro rata
share at an amount and time determined by the General Partner.
Syndication Costs
Selling commissions, legal and other costs totaling $46,617 related to
the offering of limited Partnership units were charged against
Partner's capital.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the Partnership reviews long-lived assets
and certain identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
2. DEPOSIT
The Partnership has made a non-refundable deposit of $55,000 pursuant
to an option to purchase a second parcel of land (the Second Project)
adjacent to the Project for purposes of constructing a second hotel.
The option agreement expired in December of 1996 but is currently being
renegotiated.
2
<PAGE>
ESSEX GLENMAURA L.P.
(A Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997 and 1996
3. FINANCING OF INVESTMENT IN REAL ESTATE
Financing of real estate consists of the following at June 30, 1997 and
1996:
Notes Payable
Notes payable consist of $1,500,000 of unsecured notes requiring
monthly installments of interest only at 10.5% per annum. The notes
mature on June 1, 1998 upon which all principal will be due unless the
Partnership exercises its early repayment or note extension options.
The Partnership has the right to repay the notes at face value. The
Partnership also has the option to exercise two one-year extensions at
extension fees ranging from one-half to one percent. Essex Partners
Inc. guarantees payment of principal and interest on the notes.
Mortgage Loan
On February 28, 1997, the Partnership obtained permanent financing from
GMAC Corporation for $5,000,000. The term of the loan is four years
with a one year extension available if certain debt service coverage is
attained. Monthly payments of interest only are due for the first year.
Interest accrues at 3% over the LIBOR rate. Principal and interest
payments are due thereafter based on a twenty-five year loan
amortization. Starting in the second year of the loan, the Partnership
will be required to maintain a replacement reserve escrow at 4% of room
revenues. A commitment fee of $50,000 (1% of the loan proceeds) was
paid, 50% of the fee upon acceptance of the commitment and 50% at
closing. The loan is collateralized by the real and personal property
and certain other assets.
The aggregate annual principal payments for the years subsequent to
1997 are as follows: (there are no principal payments required in 1997)
<TABLE>
<S> <C>
1998 $ 39,129
1999 51,449
2000 56,836
2001 4,852,586
-------------
$ 5,000,000
=============
</TABLE>
Construction Loan
The Partnership received construction financing from Key Bank of up to
$4,500,000, of which $1,177,149 had been drawn down as of June 30, 1996
and required monthly payments of interest only at a rate of 2.5% over
the LIBOR rate. The construction loan was repaid with proceeds from the
first mortgage loan.
3
<PAGE>
ESSEX GLENMAURA L.P.
(A Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997 and 1996
4. RELATED PARTY TRANSACTIONS
A summary of the fees earned by Essex Partners or its affiliates in
1996 and 1995 under the terms of the Partnership agreement are as
follows:
<TABLE>
<CAPTION>
Six months ended
---------------------
TYPE OF FEE AMOUNT OF FEE JUNE 1997 JUNE 1996
- ----------- ------------- --------- ---------
<S> <C> <C> <C>
Offering and Organization Fee Up to $40,000 if proceeds of the offering of
limited partnership units if $4,000,000, reduced
by any selling commissions paid $ 0 16,000
Development Fee $285,000 payable in six monthly
installments of $42,750 with the balance
due ($28,500 at December 31, 1996) upon
issuance of the
certificate of occupancy - 85,500
Property Management Fee 4.5% of gross operating revenues from the hotel 47,084 -
Partnership Management Fee .75% of gross operating revenues from the hotel 7,847 -
Accounting Fee $800 per month 4,800 -
</TABLE>
In addition, Essex Partners may receive the following fees:
a) a refinancing fee upon the closing of a refinancing of the
Project, in the aggregate amount of 1% of the gross proceeds
of the refinancing,
b) a sales fee upon the closing of a sale of the Project, in the
aggregate amount of 2.5% of the gross sales price, provided
that the sum of such fee and any competitive real estate
commission paid by the Partnership with respect to such sale
does not exceed 5% of the gross sale price, and that Essex
Partners Inc. renders substantial services in connection with
the sale,
c) in the event the General Partner elects to proceed with the
Second Project on behalf of the Partnership, Essex Partners
Inc. will receive additional compensation related to the
acquisition of the second parcel, construction of the Second
Project and securing additional equity and debt financing to
fund such activities. Such compensation will include an
acquisition fee equal to $50,000 for its services related to
the acquisition of the second parcel and a development fee up
to $150,000 plus 3% of total construction, site development
and fixtures, furniture and equipment costs, as compensation
for its services related to the development of the Second
Project. In addition, as compensation for arranging
construction and permanent financing for the Second Project,
Essex Partners Inc. may receive a financing fee equal to 1% of
the gross proceeds of the financing. Essex Partners Inc. also
will receive an additional property management fee and
partnership management fee calculated as described in the
summary schedule above based on the gross operating revenues
of the Second Project. If the Second Project is sold and/or
refinanced, Essex Partners Inc. will receive additional sales
and/or refinancing fees calculated as described in paragraphs
(a) and (b) above based on the gross sales and/or refinancing
proceeds of the Second Project, and
4
<PAGE>
ESSEX GLENMAURA L.P.
(A Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997 and 1996
4. RELATED PARTY TRANSACTIONS (CONTINUED)
d) Essex Partners Inc. and its affiliates also will receive
offering-related fees for services in connection with (I) the
offering of additional partnership interests and/or notes, or
(ii) the possible refinancing of the Project or the Second
Project to fund the acquisition of the land and/or
construction or one or both of those projects. Essex Partners
Inc. and its affiliates are expressly authorized to receive
from the Partnership the fees and sales commissions
customarily charged by Essex Partners Inc. and its affiliates
for rendering comparable services on competitive terms.
5. FRANCHISE FEES
The Partnership has entered into a franchise agreement with Marriott
International, Inc. Under the terms of the agreement, the Partnership
paid an initial franchise fee of $48,000. The term and amortization
period of the franchise agreement is twenty years, with an option to
renew for an additional ten-year period.
The Partnership is required to pay a monthly royalty fee in an amount
equal to 4% of gross room rentals for the first two years of operations
and 5% during the remainder of the term of the agreement, a marketing
fee of 2-3% of gross revenues, a reservation system fee, a property
management system fee, a communication support fee and a revenue
management fee. Payments to Marriott for the six month period ending
June 30, 1997 included royalty fees of $33,804, marketing fees of
$16,902, reservation system fees of $22,323 and other fees of $7,870.
There were no fees paid in the first six months of 1996.
5
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
ESSEX HOSPITALITY ASSOCIATES IV L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS
Acquisition Expenses.....................................................1
Acquisition Fees.........................................................1
Adjusted Capital Account Deficit.........................................2
Advance ................................................................2
Affiliated Person........................................................2
Agreement................................................................3
Capital Account..........................................................3
Capital Contribution.....................................................3
Code ................................................................3
Cumulative Return........................................................3
Distribution.............................................................4
Escrow Account...........................................................4
Escrow Agent.............................................................4
Escrow Agreement.........................................................4
Escrow Unit Days.........................................................4
Fiscal Period............................................................4
Front-End Fees...........................................................5
General Partner..........................................................5
General Partner Residual Interest........................................5
Gross Offering Proceeds..................................................5
Hotels ................................................................5
Income Or Loss...........................................................5
Income or Loss from Disposition of a Hotel...............................6
Investment In Hotels.....................................................6
Limited Partners.........................................................6
Majority Vote of Limited Partners........................................7
Management Agreement.....................................................7
Managing Dealer..........................................................7
Mortgage Notes...........................................................7
Net Escrow Earnings......................................................7
Net Offering Proceeds....................................................7
Net Proceeds of Sale or Refinancing......................................7
Nonrecourse Deductions...................................................7
Nonrecourse Liability....................................................7
Notes ................................................................7
Organization And Offering Expenses.......................................8
<PAGE>
Original Agreement.......................................................8
Original Limited Partner.................................................8
Partner ................................................................8
Partner Minimum Gain.....................................................8
Partner Nonrecourse Debt.................................................8
Partner Nonrecourse Deductions...........................................8
Partner Note.............................................................8
Partnership..............................................................8
Partnership Minimum Gain.................................................9
Person ................................................................9
Pro Rata Share...........................................................9
Prospectus...............................................................9
Registration Statement...................................................9
Regulations..............................................................9
Regulatory Allocations..................................................10
Safe Harbor.............................................................10
Sales Commissions.......................................................10
Syndication Expenses....................................................10
Subordinated Notes......................................................10
Termination Date........................................................10
Units ...............................................................10
ARTICLE II - ORGANIZATION
Section 2.01 Formation..................................................10
Section 2.02 Name.......................................................11
Section 2.03 Purpose....................................................11
Section 2.04 Principal Office...........................................11
Section 2.05 Term.......................................................11
Section 2.06 Capital Contributions......................................11
Section 2.07 Admission Of Additional Limited Partners...................14
Section 2.08. Return Of Non-Utilized Capital............................14
ARTICLE III - ALLOCATIONS AND DISTRIBUTIONS
Section 3.01 Allocations Of Income Or Loss..............................15
Section 3.02 Special Allocations........................................17
Section 3.03 Curative Allocations.......................................19
Section 3.04 Other Allocation Rules.....................................20
Section 3.05 Distributions..............................................22
<PAGE>
ARTICLE IV - THE GENERAL PARTNER
Section 4.01 Powers Of The General Partner..............................23
Section 4.02 Duties Of The General Partner..............................24
Section 4.03 Partnership Tax Matters....................................26
Section 4.04 Indemnification Of The General Partner.....................26
Section 4.05 Authority Of The General Partner...........................28
Section 4.06 Contracts With Affiliated Persons..........................28
Section 4.07 Compensation Of Affiliated Persons.........................29
Section 4.08 Withdrawal Of The General Partner..........................32
Section 4.09 Assignment Of The General Partner Interest.................32
Section 4.10 Expenses Of The Partnership................................32
Section 4.11 Purchase Of Units..........................................36
ARTICLE V - THE LIMITED PARTNERS
Section 5.01 Powers Of Limited Partners.................................37
Section 5.02 Liability Of Limited Partners..............................37
Section 5.03 Meetings Of Limited Partners...............................38
Section 5.04 Assignment Of Units........................................39
Section 5.05 Form Of Assignment.........................................40
Section 5.06 Rights Of Assignee.........................................42
Section 5.07 Admission Of Limited Partners..............................42
ARTICLE VI - DISSOLUTION
Section 6.01 Dissolution................................................43
Section 6.02 Liquidation................................................46
Section 6.03 Final Statement............................................46
ARTICLE VII - BOOKS, REPORTS AND FISCAL MATTERS
Section 7.01 Books And Records..........................................46
Section 7.02 Reports....................................................47
Section 7.03 Bank Accounts..............................................48
ARTICLE VIII - GENERAL
Section 8.01 Other Business Interests...................................48
Section 8.02 Notices....................................................48
Section 8.03 Captions...................................................48
Section 8.04 Pronouns and Plurals.......................................49
Section 8.05 Entire Agreement...........................................49
Section 8.06 Further Action.............................................49
Section 8.07 Binding Effect.............................................49
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Section 8.08 Creditors..................................................49
Section 8.09 Validity...................................................49
Section 8.10 Governing Law..............................................49
Section 8.11 Accounting Method..........................................49
Section 8.12 Amendment..................................................49
Section 8.13 Power Of Attorney..........................................50
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AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
ESSEX HOSPITALITY ASSOCIATES IV L.P.
This Amended and Restated Limited Partnership Agreement (this
"Agreement") amends and restates an agreement of limited partnership entered
into on August 24, 1995 by the General Partner and the Original Limited Partner
(the "Original Agreement").
This Agreement admits the Limited Partners to the Partnership and
provides for the withdrawal of the Original Limited Partner. The General Partner
and the Limited Partners agree to make the contributions required by, and
otherwise agree to the terms of, this Agreement.
In consideration of the mutual covenants hereinafter expressed, the
Partners agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated:
ACQUISITION EXPENSES. Expenses (including but not limited to legal fees
and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on properties not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses) related to the selection
and acquisition, lease or sublease of a property whether or not the property is
actually acquired by the Partnership.
ACQUISITION FEES. The total of all commissions and similar fees paid by
any Person, including the General Partner and any other Affiliated Person, in
connection with the purchase, lease, sublease, development or construction of
any Hotel by the Partnership, however designated and including a real estate
commission, a selection
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fee, and a non-recurring management or loan fee. Acquisition Fees do not include
any construction or developers fees paid to a Person who is not an Affiliated
Person in connection with the actual construction or development of a Hotel
after acquisition of the land by the Partnership.
ADJUSTED CAPITAL ACCOUNT DEFICIT. The deficit balance, if any, in a
Partner's Capital Account as of the end of any Fiscal Period after the Partner's
Capital Account has been decreased by the items described in Treas. Reg.
ss.1.704-1(b)(2)(ii)(d)(4), (5) and (6) and increased by any amounts which the
Partner: (a) is obligated to restore pursuant to the terms of this Agreement;
(b) is otherwise treated as being obligated to restore under Treas. Reg.
ss.1.704-1(b)(2)(ii)(c); or (c) is deemed to be obligated to restore pursuant to
the penultimate sentences of Treas. Reg. ss.1.704-2(g)(1) and 1.704-2(I)(5).
Adjusted Capital Account Deficit is intended to comply with the provisions of
Treas. Reg. ss.1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
ADVANCE. Any transfer of money by an Affiliated Person to the
Partnership, and any amount paid on behalf of the Partnership by an Affiliated
Person, in the form of a loan or otherwise, in excess of the General Partner's
Capital Contribution. Advances shall bear interest at the rate charged by any
lending institution providing the funds to the Affiliated Person for the purpose
of making the Advance or, if there is no such lending institution, at an annual
rate of one percent above the prime rate as established from time to time by
Manufacturers and Traders Trust Company, Buffalo, New York or its successor. If
the Advance is made in connection with a particular Hotel, the interest rate
payable to an Affiliated Person shall in no event exceed the rate which would be
charged by lending institutions on comparable loans for the same purpose in the
locality of the Hotel. No prepayment charge or penalty shall be required on an
Advance. No Affiliated Person shall be under any obligation to make any Advance
to the Partnership.
AFFILIATED PERSON. Any Person who is the General Partner or who,
directly or indirectly, through one or more intermediaries, controls, or is
controlled by or is under common control with, the General Partner. For purposes
of this Section, the term "control" (including the terms "controlled by" and
"under common control with") includes the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
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AGREEMENT. As defined in the Preamble.
CAPITAL ACCOUNT. The amount of cash contributed by each Partner
pursuant to Section 12.06:
(a) increased by the amount of: (I) any other cash and the fair market
value of any other property (determined by the contributing Partner and the
General Partner) contributed by the Partner as a Capital Contribution; (ii)
money paid to reduce the principal amount of any Partner Note; (iii) Income
allocated to the Partner and any items in the nature of income or gain specially
allocated to the Partner pursuant to Sections 3.02, 3.03 and 3.04 (except as
provided in the last sentence of paragraph 3.04(d)); and (iv) any Partnership
liabilities assumed by the Partner or which are secured by Partnership property
distributed to the Partner; and
(b) decreased by the amount of: (I) cash and the fair market value of
any Partnership property (determined by the contributing Partner and the General
Partners) distributed to the Partner as a Distribution; (ii) Losses allocated to
the Partner and any items in the nature of expenses or losses specially
allocated pursuant to Sections 3.02, 3.03 and 3.04 (except as provided in the
last sentence of paragraph 3.04(d)); and (iii) any liabilities of the Partner
assumed by the Partnership or which are secured by any property contributed by
the Partner to the Partnership as a Capital Contribution.
Capital Accounts shall be maintained and adjusted in accordance with the
provisions of Treas. Reg. ss.1.704-1(b)(2)(iv). In the event that any interest
in the Partnership is transferred in accordance with this Agreement, the
transferee shall succeed to the Capital Account of the transferor to the extent
it relates to the interest transferred. This Agreement is intended to comply
with Treas. Reg. ss.1.704-1(b), and shall be interpreted and applied in a manner
consistent with that Regulation.
CAPITAL CONTRIBUTION. The money (including principal payments on
Partner Notes but not the principal amount of the Notes) and the fair market
value of property contributed by a Partner (with the value of property
determined by the contributing Partner and the General Partners) in accordance
with Section 2.06.
CODE. The Internal Revenue Code of 1986.
CUMULATIVE RETURN. A Distribution to the Limited Partners on a Pro Rata
basis, commencing for each Limited Partner on the date the Partner is admitted
to the
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Partnership, in an annual amount equal to 8 percent of the Capital Contribution
of each Limited Partner (less any Distributions made pursuant to Section 2.08 or
subparagraph 3.05(b)(I), calculated without regard to any volume discounts
described in the Prospectus. The Cumulative Return shall be pro-rated for the
years in which a closing of the offering of Units occurs and in which a sale or
refinancing of any or all of the Hotels occurs.
DISTRIBUTION. Any transfer of money or other property to a Partner, in
the Partner's capacity as a Partner, from the Partnership. The term
"Distribution" shall not include fees paid to the General Partner or to other
Affiliated Persons pursuant to Article IV. Property is to be valued at its fair
market value on the date of transfer.
ESCROW ACCOUNT. The interest-bearing account established by the
Partnership with the Escrow Agent for the purpose of depositing initial proceeds
from the sale of Units and Notes as described in paragraph 2.06(c).
ESCROW AGENT. Manufacturers and Traders Trust Company, Buffalo, New
York, or another bank, which is not an Affiliated Person, selected by the
General Partner.
ESCROW AGREEMENT. An agreement entered into between the Partnership and
the Escrow Agent setting forth the terms and conditions according to which the
Escrow Agent shall maintain the Escrow Account.
ESCROW UNIT DAYS. In the case of a purchaser of Units, the gross cash
proceeds received by the Partnership from the purchaser in connection with the
sale of Units multiplied by the number of days during the period commencing on
the date that the gross cash proceeds attributable to the Units were deposited
in the Escrow Account and ending on the Termination Date. In the case of a
purchaser of Notes, the principal amount of the Notes purchased by the holder
multiplied by the number of days during the period commencing on the date that
the holder's subscription proceeds attributable to the Notes were deposited in
the Escrow Account and ending on the Termination Date.
FISCAL PERIOD. From January l to December 31 of each year or such
portion thereof as the Partnership shall be in existence.
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FRONT-END FEES. Fees and expenses paid by any party for any services
rendered in connection with the Partnership's organizational or acquisition
phases, including all expenses of the Partnership's organization, expenses
related to the offering of Units and Notes pursuant to the Prospectus,
Acquisition Fees, Acquisition Expenses, Development Fees, and Organization and
Offering Expenses.
GENERAL PARTNER. Essex Partners Inc., a New York corporation or any
successor duly elected by the Limited Partners.
GENERAL PARTNER RESIDUAL INTEREST. The amount of any Distribution which
the Managing General Partner is entitled to receive from the Partnership under
subparagraphs 3.05(a)(ii) and 3.05(b)(iii).
GROSS OFFERING PROCEEDS. The gross cash proceeds and the aggregate
principal amount of the Partner Notes received by the Partnership from the sale
of the Units and Notes.
HOTELS. Lodging facilities to be constructed by the Partnership and
operated under franchises or license agreements with national lodging chains
selected by the General Partner as described in the Prospectus, and "Hotel"
shall mean any one of the lodging facilities.
INCOME OR LOSS. The Partnership's taxable income or loss for each
Fiscal Period determined in accordance with Section 703(a) of the Code (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Section 703(a)(1) of the Code shall be included in
taxable income or loss), with the following adjustments:
(a) Sales Commissions and Syndication Expenses allocated pursuant to
paragraphs 3.02(h) and 3.02(I) shall not be taken into account;
(b) any expenditures of the Partnership described in Section
705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treas. Reg. ss.1.704-1(b)(2)(iv)(I), shall be subtracted from such
taxable income or loss;
5
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(c) any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Income or Loss shall be
added to Income or Loss;
(d) any gain or loss which would have been realized by the Partnership
on the sale of assets distributed in kind to Partners, determined with reference
to the fair market value and the adjusted tax basis of the property for federal
income tax purposes immediately prior to the distribution, shall be added to or
subtracted from Income or Loss;
(e) Income or Loss does not include any amount allocated pursuant to
paragraph 3.04(d); and
(f) all computed without regard to any adjustment to the adjusted tax
basis of a Partnership asset resulting from an election under Section 754 of the
Code (except to the extent required by Treas. Reg. ss.1.704-1(b)(2)(iv)(m)).
INCOME OR LOSS FROM DISPOSITION OF A HOTEL. The gain or loss recognized
by the Partnership with regard to the sale, exchange, condemnation or other
disposition of any Hotel.
INVESTMENT IN HOTELS. The amount of Gross Offering Proceeds actually
paid or allocated to the purchase, lease, sublease, development, construction or
improvement of the Hotels to be constructed by the Partnership, including the
purchase price of the land, lease deposit, the initial working capital reserves
allocable to the Hotels (but not reserves in excess of 5 percent of the Gross
Offering Proceeds), franchise fees paid to the Partnership's franchisor,
construction management and development fees paid to Persons who are not
Affiliated Persons and other cash payments such as interest and taxes, but
excluding Front-End Fees. Investment in Hotels shall also include the amount of
Gross Offering Proceeds used to purchase limited partnership interests in Essex
Glenmaura, L.P., as more particularly described in the Prospectus.
LIMITED PARTNERS. Those Persons listed on Schedule A as Limited
Partners and their successors.
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MAJORITY VOTE OF LIMITED PARTNERS. The affirmative vote or written
consent of Limited Partners then owning of record more than 50 percent of the
outstanding Units.
MANAGEMENT AGREEMENT. An agreement to be entered between the
Partnership and the General Partner setting forth the terms and conditions
according to which the General Partner shall operate and maintain the Hotels on
behalf of the Partnership.
MANAGING DEALER. Essex Capital Markets Inc., an Affiliated Person.
MORTGAGE NOTES. The promissory notes of the Partnership in the
aggregate principal amount of up to $10 million to be offered and sold pursuant
to the Prospectus and as more particularly described therein.
NET ESCROW EARNINGS. The interest earned on the proceeds from the sale
of the Units and Notes while held in the Escrow Account, reduced by fees and
expenses of the Escrow Agent and by the interest earnings paid to a subscriber
whose subscription is not accepted.
NET OFFERING PROCEEDS. Gross Offering Proceeds reduced by Front-End
Fees.
NET PROCEEDS OF SALE OR REFINANCING. The net cash realized by the
Partnership from the sale, refinancing or other disposition of one or more
Hotels, after retirement of existing mortgage debt and the payment of all
expenses related to the transaction.
NONRECOURSE DEDUCTIONS. For any Fiscal Period, an amount equal to the
excess, if any, of the net increase, if any, in the amount of Partnership
Minimum Gain during that Fiscal Period over the aggregate amount of any
Distributions during that Fiscal Period of proceeds of a Nonrecourse Liability
that are allocable to an increase in Partnership Minimum Gain, determined
according to Treas. Reg. ss.1.704-2.
NONRECOURSE LIABILITY. Any Partnership liability (or portion thereof)
for which no Partner bears the economic risk of loss, determined according to
Treas. Reg. ss.1.704-2(b)(3).
NOTES. The Mortgage Notes and the Subordinated Notes.
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ORGANIZATION AND OFFERING EXPENSES. Those expenses incurred in
connection with preparing the Partnership for registration and subsequently
offering and distributing the Units to the public, including all advertising
expenses.
ORIGINAL AGREEMENT. As defined in the Preamble.
ORIGINAL LIMITED PARTNER. Barbara J. Purvis, the Vice President of
Essex Partners Inc.
PARTNER. Any General or Limited Partner.
PARTNER MINIMUM GAIN. An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if the
Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined
according to Treas. Reg. ss.1.704-2(I)(3).
PARTNER NONRECOURSE DEBT. Any Nonrecourse Liability of the Partnership
for which any Partner bears the economic risk of loss, determined in according
to Treas. Reg. ss.1.704-2(b)(4).
PARTNER NONRECOURSE DEDUCTIONS. For any Fiscal Period, an amount with
respect to a Partner Nonrecourse Debt equal to the excess, if any, of the net
increase, if any, in the amount of Partner Minimum Gain attributable to Partner
Nonrecourse Debt during that Fiscal Period over the aggregate amount of any
Distributions during that Fiscal Period to the Partner that bears the economic
risk of loss for Partner Nonrecourse Debt to the extent the Distributions are
from the proceeds of Partner Nonrecourse Debt and are allocable to an increase
in Partner Minimum Gain attributable to Partner Nonrecourse Debt, determined in
accordance with Treas. Reg.
ss.1.704-2(I)(2).
PARTNER NOTE. A non-interest bearing promissory note payable to the
Partnership and executed by a Limited Partner in connection with the purchase of
20 or more Units, providing for payments as described in Section 2.06.
PARTNERSHIP. The limited partnership formed by the Original Agreement
and continued by this Agreement.
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PARTNERSHIP MINIMUM GAIN. The amount determined by computing, with
respect to each Nonrecourse Liability, the amount of gain, if any, that would be
realized by the Partnership if it disposed of (in a taxable transaction) the
Partnership property subject to the Nonrecourse Liability in full satisfaction
thereof (and for no other consideration), and by then aggregating the amounts so
computed. It is intended that Partnership Minimum Gain be determined in
accordance with Treas. Reg.
ss.1.704-2(d).
PERSON. An individual, a corporation, a partnership, a trust, an
unincorporated organization or a government or an agency or political
subdivision thereof.
PRO RATA SHARE. The Pro Rata Share of each Limited Partner shall be
ninety-nine percent multiplied by a fraction, the numerator of which is the
number of Units held by the Limited Partner and the denominator of which is the
aggregate number of Units held by all Limited Partners. That portion of any Unit
for which a Partner Note remain outstanding shall not be included in either the
numerator or denominator in such calculation. The Pro Rata Share of the General
Partner is one percent.
PROSPECTUS. The Partnership's prospectus as included in the
Registration Statement.
REGISTRATION STATEMENT. The registration statement on file with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, for the registration of Units and Notes to be sold by the Partnership
at the time the registration statement becomes effective. If the Partnership
files a post-effective amendment to the Registration Statement or a new
Registration Statement and the Prospectus included therein may be used by the
Partnership pursuant to Rule 424 under the Securities Act of 1933 (or any
corresponding provision of succeeding rules or regulations of the Securities and
Exchange Commission), the term "Registration Statement," from and after the
declaration of the effectiveness of the post-effective amendment or the new
Registration Statement, refers to the Registration Statement as amended by the
post-effective amendment thereto or the then- effective Registration Statement,
as the case may be.
REGULATIONS. The Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as amended from time to time (including
corresponding provisions of succeeding regulations). Reference is made to a
specific Regulation in the following manner: "Treas. Reg. ss.1.709-2."
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REGULATORY ALLOCATIONS. The allocations set forth in paragraphs (c),
(d) and (e) of Section 3.02.
SAFE HARBOR. Any one of the "safe harbors" set forth in Internal
Revenue Service Notice 88-75, 88-2 C.B. 386 (or such other guidance subsequently
published by the Internal Revenue Service setting forth safe harbors under which
limited partnership interests will not be treated as "readily tradable on a
secondary market (or the substantial equivalent thereof)" within the meaning of
Section 7704 of the Code).
SALES COMMISSIONS. Sales commissions of up to $80 per Unit and $55 per
$1,000 Note sold pursuant to the Prospectus and payable by the Partnership to
the Managing Dealer.
SYNDICATION EXPENSES. All expenditures, other than Sales Commissions
and the investor relations fee described in Section 4.07(b), connected with the
issuing and marketing of interests in the Partnership within the meaning of
Treas. Reg. ss.1.709-2(b).
SUBORDINATED NOTES. The promissory notes of the Partnership in the
aggregate principal amount of up to $6 million to be offered and sold pursuant
to the Prospectus and as more particularly described therein.
TERMINATION DATE. The date designated by the General Partner for the
termination of the Partnership's offering of Units and Notes, which shall not be
later than twenty-four months after the initial date of effectiveness of the
Registration Statement.
UNITS. The interest of the Limited Partners in the Partnership shall be
divided into up to 5,000 Limited Partnership Units. Fractional Units shall be
rounded to the nearest 100th.
ARTICLE II
ORGANIZATION
SECTION 2.01 FORMATION. The Partnership was formed as a limited
partnership under the laws of the State of New York by execution and filing of
the
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Certificate of Limited Partnership on August 30, 1995 with the Secretary of
State of the State of New York.
SECTION 2.02 NAME. The name of the Partnership is Essex Hospitality
Associates IV L.P. The Partnership may also do business under such other names
as the General Partner may designate by written notice to all Partners.
SECTION 2.03 PURPOSE. The purpose of the Partnership is to construct,
hold and operate the Hotels with a view to preserving capital and generating
Distributions and long-term capital appreciation, to dispose of the Hotels, and
to perform any acts necessary or appropriate to accomplish the foregoing.
SECTION 2.04 PRINCIPAL OFFICE. The principal office of the Partnership
shall be located at 100 Corporate Woods, Rochester, New York 14623, or at such
other place as the General Partner may designate by written notice to all
Partners.
SECTION 2.05 TERM. The Partnership commenced on August 30, 1995 and
shall continue, unless sooner dissolved in accordance with the terms of this
Agreement or the laws of the State of New York, through December 31, 2035.
SECTION 2.06 CAPITAL CONTRIBUTIONS.
(a) The General Partner shall contribute as its Capital Contribution to
the Partnership an amount equal to 1/99 of the Capital Contributions of the
Limited Partners. The Capital Contributions of the General Partner shall be
payable out of Distributions to the General Partner from the Partnership. If
Distributions to the General Partner do not equal or exceed the Capital
Contribution required to be made by that General Partner under this paragraph
2.06(a) prior to liquidation of the Partnership or the liquidation of the
General Partner's interest in the Partnership, the General Partner shall pay to
the Partnership the balance due on its Capital Contribution: (I) in the case of
the liquidation of the Partnership, not later than the date that the Partnership
is liquidated in accordance with paragraph 6.02(a); and (ii) in the case of the
liquidation of the General Partner's interest in the Partnership, not later than
the end of the Fiscal Period in which the General Partner's interest is
liquidated (or, if later, within 90 days after the date of liquidation). The
obligation of the General Partner to make its Capital Contribution shall not
bear interest.
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(b) Upon the formation of the Partnership, the Original Limited Partner
contributed $100 to the capital of the Partnership. Upon the effective date of
this Agreement, the Original Limited Partner shall withdraw from the Partnership
and the Partnership shall return her Capital Contribution.
(c) Each Limited Partner acquiring 20 or more Units pursuant to the
offering described in the Prospectus shall contribute to the capital of the
Partnership: (I) $500 for each Unit purchased (subject to reduction for
discounts as described in the Prospectus), payable by check or money order at
the time the subscription is accepted by the General Partner; and (ii) a Partner
Note in the principal amount of $500 for each Unit purchased (subject to
reduction for discounts as described in the Prospectus). The Partner Note shall
be payable at the earliest of: (x) thirty days after demand by the General
Partner made at least six months after acceptance of the subscription of the
Limited Partner, provided that: (a) a property has been identified for
acquisition by the Partnership and a date for closing of the purchase has been
scheduled and, within 30 days prior to the scheduled closing date, the
Partnership has insufficient cash gross offering proceeds to consummate the
purchase and commence construction of the Hotel; or (b) one or more properties
have been acquired and funds are needed for the completion of construction of a
Hotel; (y) two years from the date that the Limited Partner is admitted as a
Limited Partner; or (z) three years from the Effective Date of the Registration
Statement. Each Limited Partner acquiring less than 20 Units pursuant to the
offering described in the Prospectus shall contribute to the capital of the
Partnership $1,000 for each Unit purchased payable by check or money order at
the time the subscription is accepted by the General Partner. No sale of Units
shall be made to any Person of fewer than five Units, except that IRAs, Keogh
and qualified plans may purchase two Units. The General Partner may accept
subscriptions to purchase fractional Units, in its sole discretion, after the
purchaser has satisfied the minimum investment requirements for the offering. No
sale of Units shall be consummated unless and until the General Partner shall
have received and accepted subscriptions for the purchase of Units and Notes
which represent, in the aggregate, Gross Offering Proceeds of at least
$1,978,100. All subscription proceeds shall be kept by the General Partner
separate and apart from all other funds, and shall be deposited and held in
trust in the Escrow Account, until such time as the subscriber is: (vi) admitted
as a Limited Partner and the offering pursuant to the Prospectus is terminated
or the subscription is rejected by the General Partner; or (vii) a Note is
issued by the Partnership payable to the subscriber and the offering pursuant to
the Prospectus is terminated or the subscription is rejected by the General
Partner.
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(d) No Partner shall have any right of partition with respect to the
assets of the Partnership.
(e) Neither the Partnership nor the General Partners shall have
personal liability for any Distribution to, or for the return of the Capital
Contribution of, any Limited Partner. No Partner shall be entitled to interest
on their Capital Contribution or their Capital Account.
(f) No Partner shall be personally liable for, or required to make up,
any deficit in the Partner's Capital Account, except that the General Partner
shall be liable for the balance due on its Capital Contribution obligations as
provided in paragraph 2.06(a).
(g) No Units except those Units issued by the Partnership pursuant to
the initial public offering described in the Prospectus shall be offered for
sale or issued by the Partnership without the written consent of the General
Partner and a Majority Vote of the Limited Partners.
(h) Upon the occurrence of an event of default under any Partner Note,
the General Partner, acting for and on behalf of the Partnership, by written
notice to the defaulting Limited Partner, shall have the right to purchase from
the defaulting Limited Partner his Units for a price equal to the amount of cash
paid by such Limited Partner for his Units, including the amount of the
principal payments, if any, made on any Partner Note (less the expenses incurred
by the Partnership in purchasing and reselling the Units, including reasonable
attorney's fees and a sales commission to the Managing Dealer in the amount of
$50 per Unit that is resold), in which event the defaulting Limited Partner
shall cease to have any interest in the Partnership with respect to such Units
(including, without limitation, any Cumulative Return which accrued from the
date the defaulting Limited Partner's subscription was accepted by the Managing
General Partner) and the Partner Note of the defaulting Limited Partner shall be
cancelled. Any such sale shall be deemed effective as of the date of the
occurrence of the event of default under the Partner Note. The Partnership may,
at the option of the General Partner, pay any or all of the price by giving a
note payable without interest on a date five years from the occurrence of the
event of default. The General Partner shall have the right to resell any Unit
repurchased by the Partnership pursuant to this paragraph 2.06(h) upon such
terms as it deems advisable and to admit the purchaser of any such Unit as a
Limited Partner upon satisfaction of the requirements set forth in Section 5.07
of this Agreement. None of the proceeds from
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a resale shall be payable to the defaulting Limited Partner. The General Partner
shall not resell any Unit repurchased by the Partnership pursuant to this
paragraph 2.06(h) to any Affiliated Person unless the Unit has first been
offered to the non-defaulting Limited Partners who are not Affiliated Persons.
The foregoing rights are in addition to and not in limitation of any other right
or remedy of the Partnership, and the failure of the General Partner to require
a sale hereunder shall not be deemed a waiver of any other rights or remedies
available to the Partnership on account of a default under a Partner Note.
SECTION 2.07 ADMISSION OF ADDITIONAL LIMITED PARTNERS. The General
Partner may admit additional Limited Partners or permit an increase in the
number of Units held by any Limited Partner at any time on or prior to the
Termination Date, provided that the total number of Units held by all Limited
Partners shall not exceed 5,000. Additional Limited Partners shall be admitted
to the Partnership pursuant to this Section 2.07 upon the execution of an
amendment to this Agreement adding to Schedule A the names and addresses of the
additional Limited Partners and the number of Units held by the additional
Limited Partners.
SECTION 2.08. RETURN OF NON-UTILIZED CAPITAL.
(a) If, within 24 months from the initial effective date of the
Registration Statement, no property upon which a Hotel is to be constructed has
been purchased, leased or sub-leased, the Partnership shall: (I) refund to each
Limited Partner the cash portion of the purchase price paid for Units; (ii)
refund any amounts received under any Partner Notes; and (iii) cancel any
outstanding Partner Notes.
(b) Except as permitted under Section 4.08, no Partner other than the
Original Limited Partner shall have any right to withdraw as a Partner or make a
demand for withdrawal of the Partner's Capital Contribution (or the capital
interest reflected in the Partner's Capital Account) until the full and complete
winding up and liquidation of the business of the Partnership.
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ARTICLE III
ALLOCATIONS AND DISTRIBUTIONS
SECTION 3.01 ALLOCATIONS OF INCOME OR LOSS.
(a) Except as provided in paragraph 3.01(b) and Sections 3.02, 3.03 and
3.04, Income shall be allocated:
(i) first 99 percent to the Limited Partners and one percent
to the General Partner in the same proportion as the cumulative Loss for all
prior years was allocated among the Partners pursuant to subparagraph
3.01(c)(iv), until the cumulative Income allocated pursuant to this subparagraph
3.01(a)(I) is equal to the cumulative Loss allocated in all prior years pursuant
to subparagraph 3.01(c)(iv).
(ii) next 99 percent to the Limited Partners, in proportion to
each Limited Partner's respective Cumulative Return, and one percent to the
General Partner until the cumulative Income allocated pursuant to subparagraphs
3.01(b)(iii) and (iv) and this subparagraph 3.01(a)(ii) is equal to the
cumulative amount distributed, or which would have been distributed if adequate
funds had been available for distribution, pursuant to subparagraphs 3.05(a)(I)
and 3.05(b)(ii); and
(iii) thereafter 80 percent to the Limited Partners in
accordance with each Limited Partner's Pro Rata Share and 20 percent to the
General Partner.
For purposes of applying this paragraph 3.01(a), Income on the sale of any or
all of the Hotels for any Fiscal Period shall be allocated only after Income
from all other sources for such Fiscal Period has been allocated pursuant to
this paragraph 3.01(a).
(b) Income from Disposition of a Hotel shall be allocated:
(i) first, 99 percent to the Limited Partners and one percent
to the General Partner, in the same proportion as the cumulative Syndication
Expenses and the cumulative Loss (if any) for all prior years was allocated
among the Partners pursuant to paragraph 3.02(I), until the cumulative Income
allocated pursuant to paragraph 3.02(I) and this subparagraph 3.01(b)(I) is
equal to the sum of the cumulative Syndication Expenses and the cumulative Loss
allocated in all prior years pursuant to paragraph 3.02(I);
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(ii) next, 99 percent to the Limited Partners, in the same
proportion as the amount of Sales Commissions were paid with respect to the
Units acquired by each Limited Partner and one percent to the General Partner,
until the cumulative Income allocated pursuant to this subparagraph 3.01(b)(ii)
is equal to the cumulative Sales Commission allocated in all prior years
pursuant to paragraph 3.01(h); and
(iii) finally, as provided in paragraph 3.01(a).
(c) Except as provided in paragraph 3.01(d) and Sections 3.02, 3.03 and
3.04, Loss shall be allocated:
(i) first, 80 percent to the Limited Partners and 20 percent
to the General Partners, in the same proportions as the cumulative Income (if
any) for all prior years was allocated 80 percent to the Limited Partners and 20
percent to the General Partner, until the cumulative Loss allocated pursuant to
subparagraph 3.01(d)(ii) and this subparagraph 3.01(c)(I) equals the cumulative
amount distributed pursuant to subparagraphs 3.05(a)(ii) and 3.05(b)(iii);
(ii) next, 99 percent to the Limited Partners and one percent
to the General Partner, in the same proportions as the cumulative Income (if
any) for all prior years was allocated among the Partners pursuant to
subparagraph 3.01(a)(ii), until the cumulative Loss allocated pursuant to this
subparagraph 3.01(c)(ii) is equal to the amount by which the cumulative Income
allocated pursuant to subparagraph 3.01(a)(ii) exceeds the cumulative amounts
distributed pursuant to subparagraph 3.05(a)(I) and 3.05(b)(ii); and
(iii) thereafter, 99 percent to the Limited Partners, in the
same proportions as the Capital Contributions were made by the Limited Partners
(taking into account for this purpose the principal amount of the Partner
Notes), and one percent to the General Partner.
(d) Loss from Disposition of a Hotel shall be allocated:
(I) first, 80 percent to the Limited Partners and 20 percent
to the General Partner, in the same proportion as the cumulative Income from
Disposition of a Hotel (if any) for all prior years was allocated 80 percent to
the Limited Partners and 20 percent to the General Partner, until the cumulative
Loss allocated pursuant to
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subparagraph 3.01(c)(I) and this subparagraph 3.01(d)(I) is equal to the amount
by which the cumulative Income allocated pursuant to subparagraph 3.01(a)(iii)
exceeds the cumulative amount distributed pursuant to subparagraph 3.05(b)(iii);
(ii) next, 80 percent to the Limited Partners and 20 percent
to the General Partner, in the same proportions as the cumulative Income from
Disposition of a Hotel (if any) for all prior years was allocated 80 percent to
the Limited Partners and 20 percent to the General Partner, until the cumulative
Loss allocated pursuant to subparagraph 3.01(c)(I) and this subparagraph
3.01(d)(ii) is equal to the amount by which the cumulative Income allocated
pursuant to subparagraph 3.01(a)(iii) exceeds the cumulative amount distributed
pursuant to subparagraph 3.05(a)(ii); and
(iii) finally, as provided in paragraph 3.01(c).
SECTION 3.02 SPECIAL ALLOCATIONS. The following special allocations
shall be made in the following order:
(a) Notwithstanding any other provision of this Article III, if there
is a net decrease in Partnership Minimum Gain during any Fiscal Period, each
Partner shall be specially allocated items of Partnership income and gain for
that Fiscal Period (and, if necessary, subsequent Fiscal Periods) in an amount
equal to the Partner's share of the net decrease in Partnership Minimum Gain
during that Fiscal Period, determined in accordance with Treas. Reg.
ss.1.704-2(g). It is intended that items so allocated be determined and the
allocations made in accordance with the minimum gain chargeback requirement of
Treas. Reg. ss.1.704-2(f), and this paragraph 3.02(a) shall be interpreted
consistently therewith.
(b) Notwithstanding any other provision of this Article III except
paragraph 3.02(a), if there is a net decrease in Partner Minimum Gain during any
Fiscal Period, each Partner who has a share of the net decrease in Partner
Minimum Gain, determined in accordance with Treas. Reg. ss.1.704-2(I)(5), shall
be specially allocated items of Partnership income and gain for that Fiscal
Period (and, if necessary, subsequent Fiscal Periods) in an amount equal to the
Partner's share of the net decrease in Partner Minimum Gain during that Fiscal
Period, determined in accordance with Treas. Reg. ss.1.704-2(I)(4). It is
intended that the items so allocated be determined and the allocations made in
accordance with the minimum gain chargeback requirement of
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Treas. Reg. ss.1.704-2(I)(4), and this paragraph 3.02(b) shall be interpreted
consistently therewith.
(c) In the event any Partner unexpectedly receives in any Fiscal Period
any adjustments, allocations or distributions described in Treas. Reg.
ss.1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain
shall be specially allocated to that Partner in such Fiscal Period (and, if
necessary, in subsequent Fiscal Periods) in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of that Partner as quickly as possible, provided that an
allocation pursuant to this paragraph 3.02(c) shall be made if and only to the
extent that the Partner would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Article III have been tentatively made as
if paragraph 3.02(e) and this paragraph 3.02(c) were not in this Agreement.
(d) No Loss or item of Partnership deduction for any Fiscal Period
shall be allocated to any Partner to the extent the allocation: (I) would cause
the Partner to have an Adjusted Capital Account Deficit; or (ii) would increase
the Partner's Adjusted Capital Account Deficit. Any Loss or item of Partnership
deduction which cannot be allocated as a result of the restrictions contained in
this paragraph 3.02(d) shall be allocated to the General Partner.
(e) In the event that any Partner has a deficit Capital Account at the
end of any Fiscal Period that is in excess of the sum of: (I) the amount that
Partner is obligated to restore; and (ii) the amount that Partner is deemed to
be obligated to restore pursuant to the penultimate sentences of Treas. Reg.
ss.ss.1.704-2(g)(I) and 1.704-2(I)(5), each such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
paragraph 3.02(e) shall be made if and only to the extent that such Partner
would have a deficit Capital Account in excess of such sum after all other
allocations provided for in this Article III have been tentatively made as if
paragraph 3.02(c) and this paragraph 3.02(e) were not in this Agreement.
(f) Nonrecourse Deductions for any Fiscal Period shall be specially
allocated 99 percent to the Limited Partners in accordance with each Limited
Partner's Pro Rata Share and one percent to the General Partner.
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(g) Any Partner Nonrecourse Deductions for any Fiscal Period shall be
specially allocated to the Partner who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse
Deductions are attributable in accordance with Treas. Reg. ss.1.704-2(I)(1).
(h) Sales Commissions paid by the Partnership with respect to any Unit
shall be allocated 99 percent to the Limited Partner who acquired the Unit and
one percent to the General Partner.
(i) Syndication Expenses for any Fiscal Period shall be allocated 99
percent to the Limited Partners in the same proportions as the Capital
Contributions were made by the Limited Partners (taking into account for this
purpose the face amount of any Partner Note) and one percent to the General
Partner. If Limited Partners are admitted to the Partnership pursuant to
Sections 2.06 and 2.07 on different dates, all Syndication Expenses allocated to
the Limited Partners shall be divided among the Limited Partners from time to
time so that, to the extent possible, total Syndication Expenses are allocated
to each Unit in the manner set forth in the preceding sentence of this
subparagraph 3.02(I). In the event the General Partner determines that such
result is not likely to be achieved through the allocation of future Syndication
Expenses, the Managing General Partner may allocate Income or Loss so as to
achieve the same effect on the Capital Accounts of the Limited Partners.
(j) To the extent that any discrepancies in Capital Accounts (as
determined on a per Unit basis) exist among the Limited Partners at the date of
admission of Limited Partners, solely as a result of the volume discounts
described in the Prospectus, items of Partnership gross income and gain shall be
specially allocated to the Limited Partners in proportion to such discrepancies
until such discrepancies are eliminated in the earlier of the year that the
liquidation of the Partnership occurs or the year that a Partner's Unit is
redeemed by the Partnership; provided, however, to the extent that special
allocations pursuant to paragraph 3.02(c) or 3.02(d) made in a prior year have
eliminated such discrepancies, no special allocation shall be made pursuant to
this paragraph 3.02(j).
SECTION 3.03 CURATIVE ALLOCATIONS. The Regulatory Allocations are
intended to comply with certain requirements of Treas. Reg. ss.1.704-1(b).
Notwithstanding any other provisions of this Article III (other than paragraphs
3.02(a) through (g) and paragraphs 3.04(c) through (e)), the General Partner
shall, to the extent possible, make allocations of Income or Loss simultaneously
with or subsequent to such Regulatory
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Allocations to the extent necessary so that the aggregate Distributions from the
Partnership will be consistent with those that would have been made under
Section 3.05, computed as if Section 6.02 did not apply.
SECTION 3.04 OTHER ALLOCATION RULES.
(a) Upon the admission of the Limited Partners and in the event of an
assignment of a Unit pursuant to Sections 5.04 and 5.05 in any Fiscal Period,
Income or Loss for that Fiscal Period shall be allocated among the Partners to
reflect their varying interests during the Fiscal Period. For purposes of
computing the varying interests of each Partner, the Partnership shall make an
interim closing of its books as of the effective date of the admission of a
Partner or the assignment of a Unit and compute the items of Income or Loss
applicable to the period of time before and after that date using the accrual
method of accounting. Any assignment of a Unit shall be effective as of the
first day of the calendar month nearest the date of assignment.
(b) If Limited Partners are admitted to the Partnership pursuant to
Section 2.06 or 2.07 on different dates, Loss allocated to the Limited Partners
for such Fiscal Period (and, if necessary, each subsequent Fiscal Period) shall
be divided among the Persons owning Units from time to time during such Fiscal
Periods, in accordance with paragraph 3.04(a) and in the manner selected by the
General Partner in its discretion, so that, to the extent possible, the
cumulative Loss per Unit allocated to each Limited Partner as of the end of each
Fiscal Period is the same.
(c) If any fees or other payments made to the General Partner are
determined to be a distribution of profits of the Partnership for federal income
tax purposes, gross income of the Partnership in an amount equal to the amount
of the fee or other payment determined to be a distribution of profits shall be
allocated to the General Partner. To the extent that any Distribution to the
General Partner is determined for federal income tax purposes to be a fee paid
to the General Partner, the General Partner's allocated share of Loss shall be
increased, or its share of Income reduced, by an amount equal to the
Distribution.
(d) Except as provided in the following sentence, for federal income
tax purposes each item of income, gain, loss or deduction shall be allocated in
the same manner as the corresponding item is allocated for Capital Account
purposes. In accordance with Sections 704(c) and 704(b) of the Code and the
Regulations thereunder, items of income, gain, loss or deduction with respect to
any asset
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contributed to the capital of the Partnership shall, solely for tax purposes, be
allocated among the Partners so as to take account any variation between the
adjusted basis of the property to the Partnership for federal income tax
purposes and the fair market value of the property at the time of contribution,
as determined by the contributing Partner and the Partnership. The amount of
income, gain, loss or deduction allocated under the immediately preceding
sentence of this paragraph 3.04(d) shall not increase or decrease the Capital
Account of the contributing Partner to the extent that the fair market value of
the property has been previously added to the Partner's Capital Account.
(e) Solely for the purpose of determining a Partner's proportionate
share of the "excess nonrecourse liabilities" of the Partnership within the
meaning of Treas. Reg. ss.1.752-3(a)(3), the Partners' interest in Partnership
profits is as follows: 99 percent to the Limited Partners in accordance with
each Limited Partner's Pro Rata Share and one percent to the General Partner.
(f) If the obligation of the General Partner to make its Capital
Contribution pursuant to paragraph 2.06(a), or the obligations of any Limited
Partner to pay the principal due on a Partner Note, are determined at any time
during the term of the Partnership to be subject to the provisions of Section
483, 1274 or 7872 of the Code (or any other similar provision or successor
provisions thereto) and as a result the Partnership is (or would but for actions
taken pursuant to this paragraph 3.04(f) be) determined to have received or to
be receiving imputed interest income or original issue discount, the imputed
interest income or original issue discount recognized by the Partnership in any
Fiscal Period shall be specially allocated to the Partners in accordance with
the ratio that the imputed interest income or original issue discount
attributable to each Partner bears to the total amount of imputed interest
income or original issue discount recognized by the Partnership for that Fiscal
Period. Alternatively, at the option of the General Partner, if the Partnership
is, as a result of the General Partner's Capital Contribution obligation or the
obligations of any Limited Partner to pay the principal due on a Partner Note,
determined to have received or to be receiving imputed interest income or
original issue discount, the General Partner and the Limited Partners are hereby
authorized to pay to the Partnership as interest on their respective Capital
Contribution obligations the amount necessary to prevent the Partnership from
recognizing imputed interest income or original issue discount as a result of
such Capital Contribution obligations, in which event: (I) gross income of the
Partnership shall be specially allocated to the General Partner and the Limited
Partners issuing Partner Notes in accordance with their Pro Rata Share for any
Fiscal Period in
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an amount equal to the full amount of income recognized by the Partnership
during that Fiscal Period as a result of the receipt of such payments from the
General Partner and the Limited Partners; and (ii) cash of the Partnership in an
amount equal to the amount of such payments received by the Partnership in any
Fiscal Period shall be distributed to the General Partner and the Limited
Partners for such Fiscal Period in accordance with their respective Pro Rata
Shares prior to the making of any other Distributions pursuant to Section 3.05.
SECTION 3.05 DISTRIBUTIONS.
(a) Except as provided in paragraph 3.05(c), Distributions shall be at
such times and in such amounts as the General Partner shall determine. All
Distributions made by March 15 of a year, based upon cash on hand as of December
31 of the previous year, will be treated for purposes of this Article III as
having been made on December 31 of the previous year. Except as provided in
subparagraph 3.04(f)(ii) and in paragraphs 3.05(b), 3.05(c) and 6.02(b),
Distributions shall be made:
(i) first, 99 percent to the Limited Partners, in proportion
to their unpaid Cumulative Return, and one percent to the General Partner until
each Limited Partner has received the Cumulative Return due to the Limited
Partner through the date upon which the Distribution is made plus any unpaid
Cumulative Return due to the Limited Partner for prior years; and
(ii) thereafter, 80 percent to the Limited Partners, in
accordance with each Limited Partner's Pro Rata Share, and 20 percent to the
General Partner.
(b) Except as provided in subparagraph 3.04(f)(ii) and in paragraphs
3.05(c) and 6.02(b), the Net Proceeds of Sale or Refinancing shall be
distributed:
(i) first, 99 percent to the Limited Partners, in accordance
with each Limited Partner's Pro Rata Share, and one percent to the General
Partner until each Limited Partner has received aggregate Distributions under
this subparagraph 3.05(b)(I) equal to $1,000 per Unit;
(ii) next, 99 percent to the Limited Partners, in proportion
to their unpaid Cumulative Return, and one percent to the General Partner until
each Limited Partner has received the Cumulative Return due to the Limited
Partner through
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the date on which the Distribution is made plus any unpaid Cumulative Return due
to the Limited Partner for prior years; and
(iii) thereafter, 80 percent to the Limited Partners, in
accordance with each Limited Partner's Pro Rata Share, and 20 percent to the
General Partner.
(c) The Net Escrow Earnings received by the Partnership shall be
promptly distributed to the Limited Partners and Note holders in proportion to
each Limited Partner's or Note holder's relative Escrow Unit Days.
ARTICLE IV
THE GENERAL PARTNER
SECTION 4.01 POWERS OF THE GENERAL PARTNER.
(a) Except as required by paragraph 4.02(d), the General Partner shall
have complete discretion in the management and control of the business of the
Partnership. In addition to powers provided by law, the General Partner is
hereby authorized to (I) expend Partnership funds in furtherance of the purpose
of the Partnership; (ii) acquire, sell, transfer, convey, lease (as lessor or
lessee) or otherwise deal with any or all of the assets of the Partnership;
(iii) incur obligations for and on behalf of the Partnership in connection with
Partnership business; (iv) invest the capital of the Partnership; (v) borrow
moneys for and on behalf of the Partnership on such terms and conditions as the
General Partner may deem advisable and proper and pledge the credit and mortgage
or encumber assets of the Partnership for such purposes; (vi) repay in whole or
in part, refinance, recast, modify or extend any security interest affecting the
assets of the Partnership, and in connection therewith execute for and on behalf
of the Partnership any or all extensions, renewals, or modifications of such
security interests; (vii) determine the terms of the offering of Units,
including the manner of complying with applicable law, and in connection
therewith execute for and on behalf of the Partnership any registration
statement or other document required under any federal or state securities law
and take any additional action as it shall deem necessary or desirable to
effectuate the offering of such Units; (viii) employ such agents, employees,
independent contractors, attorneys and accountants as the General Partner deems
reasonably necessary; (ix) obtain insurance for the proper protection of the
Partnership, the General Partner and the Limited Partners; (x) commence, defend,
compromise or settle any claims, proceedings, actions or litigation for and on
behalf
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of the Partnership (including claims, proceedings, actions or litigation
involving the General Partner in its capacity as a general partner) and retain
legal counsel in connection therewith and pay out of the assets of the
Partnership any and all liabilities and expenses (including fees of legal
counsel) incurred in connection therewith; (xi) make such decisions and enter
into such agreements as it may reasonably believe to be necessary; and (xii)
prepare, execute, file and deliver any document, or take such other action, as
may be necessary or desirable to carry out the purpose of the Partnership.
(b) The General Partner, acting for and on behalf of the Partnership,
is expressly authorized to amend this Agreement without the consent or vote of
any of the Limited Partners to: (I) reflect the addition or deletion of Limited
Partners or the return of capital to Partners; (ii) add to the representations,
duties or obligations of the General Partner or to surrender any right or power
granted to the General Partner for the benefit of Limited Partners; (iii) cure
any ambiguity, to correct or supplement any provision herein which may be
inconsistent with any other provisions herein, or to add any other provisions
with respect to matters or questions arising under this Agreement which will not
be inconsistent with the provisions of this Agreement; (iv) change the name of
the Partnership; or (v) delete or add any provision from or to this Agreement
requested to be so deleted or added by the staff of the Securities and Exchange
Commission or by a state regulatory agency, the deletion or addition of which
provision is deemed by the regulatory agency to be for the benefit or protection
of the Limited Partners. No amendment shall be adopted pursuant to this
paragraph 4.01(b) unless the adoption thereof: (x) does not adversely affect the
rights of the Limited Partners; and (y) does not adversely affect the status of
the Partnership as a partnership for federal income tax purposes.
SECTION 4.02 DUTIES OF THE GENERAL PARTNER.
(a) The General Partner shall devote such of its time as it deems
necessary to the affairs of the Partnership.
(b) The ratio of total Gross Offering Proceeds from the sale of Notes
to the greater of (I) Gross Offering Proceeds from the sale of Notes and Units,
including the principal amount of Partner Notes, or (ii) the aggregate fair
market value of the Partnership's Hotels, plus the Partnership's interest in
Essex Glenmaura L.P., shall not be more than .85 to 1.0.
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(c) The General Partner shall not cause the merger or other
reorganization of the Partnership or dissolve the Partnership without a Majority
Vote of Limited Partners approving the action.
(d) The General Partner shall observe the following policies in
connection with Partnership operations: (I) the Partnership shall not acquire
property in exchange for Units; (ii) the Partnership shall not acquire real
property unless supported by a land appraisal prepared by a competent,
independent appraiser, which appraisal shall be maintained in the General
Partner's records and shall be available for inspection and duplication by
Limited Partners; (iii) except with respect to the Partnership's investment in
Essex Glenmaura L.P., which is expressly approved, investments by the
Partnership in general partnership or limited partnership interests of, or joint
venture arrangements with, other Persons shall be prohibited unless approved by
the General Partner and a Majority Vote of Limited Partners; (iv) the
Partnership shall not invest in junior trust deeds and similar obligations
except for junior trust deeds which arise from the sale of Hotels; (v) the funds
of the Partnership shall not be commingled with the funds of any other Person,
provided that the foregoing shall not prohibit the General Partner from
establishing a master fiduciary account pursuant to which separate subtrust
accounts are established for the benefit of affiliated limited partnerships of
the General Partner so long as the Partnership funds are protected from claims
of other partnerships and their creditors; (vi) the General Partner shall have
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Partnership, whether or not in its possession or control, and, except as
otherwise provided herein, shall not employ, or permit another to employ, such
funds or assets in any manner except for the exclusive benefit of the
Partnership; (vii) the General Partner shall not create for the Units a
"secondary market (or the substantial equivalent thereof)" within the meaning of
Section 7704 of the Code or otherwise permit, recognize, or facilitate the
trading of Units on any such market, or permit any Affiliated Persons to take
such actions, if as a result thereof the Partnership would be taxed for federal
income tax purposes as an association taxable as a corporation; (viii) neither
the General Partner nor any other Affiliated Person shall: (a) receive for their
account any kickbacks or rebates with respect to expenditures made by or on
behalf of the Partnership; (b) enter into any reciprocal arrangement that has
the effect of circumventing this subparagraph 4.02(d)(viii); or (c) directly or
indirectly, pay or award any commissions or other compensation to any Person for
encouraging or inducing any other Person to purchase Units (nothing herein shall
prohibit the payment of normal sales commissions and fees to broker-dealers
including, without limitation, the Managing Dealer) in connection with an
offering of interests in the Partnership;
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and (ix) the General Partner shall not cause the Partnership to enter into any
contract to construct or develop any Hotel without a specific price being
guaranteed by a written guarantee of completion by the General Partner.
SECTION 4.03 PARTNERSHIP TAX MATTERS. The General Partner is the tax
matters partner of the Partnership. In carrying out its responsibilities as tax
matters partner, the General Partner shall have authority to make such elections
(including but not limited to making an election under Section 754 of the Code
and selecting any reasonable method to allocate income pursuant to Section
704(c) of the Code), take such actions and enter into such agreements as it
deems in the best interests of the Limited Partners who own more than 50 percent
of the outstanding Units. Any expense incurred by the Partnership in contesting
with the Internal Revenue Service or any state income tax authority any change
in Income or Loss or the allocation of Income or Loss to any Partner shall be an
expense of the Partnership.
SECTION 4.04 INDEMNIFICATION OF THE GENERAL PARTNER.
(a) The Partnership, its receiver or its trustee, shall indemnify, save
harmless and pay all judgements and claims against the General Partner, and any
other Affiliated Person who performs services for the Partnership, from any
liability, loss or damage incurred by reason of any act performed or omitted to
be performed when acting in connection with the business of the Partnership as
described in this Agreement, including costs and attorney's fees and any amounts
expended in the settlement of any claims or liability, loss or damage.
Notwithstanding the preceding sentence: (I) if such liability, loss or claim
arises out of any action or inaction of the General Partner or Affiliated
Person, the General Partner or Affiliated Person must have determined in good
faith that such course of conduct was in the best interest of the Partnership
and the action or inaction in fact did not constitute fraud, bad faith or gross
negligence by the General Partner or Affiliated Person; and (ii) any
indemnification shall be recoverable only from the assets of the Partnership and
not from the assets of the Limited Partners. All judgments against the
Partnership and the General Partner wherein the General Partner is entitled to
indemnification must first be satisfied from Partnership assets before the
General Partner may be held responsible. Persons entitled to indemnification
under this paragraph 4.04(a) shall be entitled to receive advances for
attorney's fees and other legal costs and expenses arising out of claims made
against them, provided that no advance shall be made with respect to any claim
unless the action relates to the performance of duties or services by the
indemnified party on behalf of the Partnership and the indemnified party
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undertakes in writing prior to receipt of the advance to repay in full the
advance in the event that, upon the ultimate disposition of the claim, the party
would not be entitled to indemnification under this paragraph 4.04(a). Nothing
in this paragraph 4.01(a) shall constitute a waiver by a Limited Partner of any
right which the Limited Partner may have against any party under federal or
state securities laws. Affiliated Persons will be indemnified only for
liabilities arising out of activities in which they engage on behalf of the
Partnership or in connection with its business which are within the scope of
activities permitted to be performed by the Affiliated Person under this
Agreement and which are duly authorized by the General Partner.
(b) Notwithstanding paragraph 4.04(a), neither the General Partner nor
any other Affiliated Persons performing services for the Partnership shall be
indemnified from any liability, loss or damage incurred in connection with any
claim or settlement involving violations of federal or state securities laws by
the General Partner or by any Affiliated Person or any liability for fraud, bad
faith or gross negligence. Notwithstanding the preceding sentence,
indemnification will be allowed for settlements and related expenses of lawsuits
alleging securities law violations, and for expenses incurred in successfully
defending such lawsuits, if: (I) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the party
seeking indemnification; (ii) a court dismisses each count involving alleged
securities law violations with prejudice as to the party seeking
indemnification; or (iii) a court approves the settlement and finds that
indemnification of any payment in settlement and related costs should be made
and, before seeking court approval for indemnification, the party seeking
indemnification shall place before the court the position of the Securities and
Exchange Commission and any state securities administrators of any state in
which the Notes or Units were offered or sold pursuant to the Prospectus or in
which Limited Partners or holders of Notes then reside with respect to the issue
of indemnification for securities law violations.
(c) The Partnership shall not pay for any insurance covering liability
of the General Partner or any other Affiliated Person for actions or omissions
for which indemnification is not permitted hereunder. Notwithstanding the
preceding sentence, nothing contained herein shall preclude the Partnership from
purchasing and paying for such types of insurance, including extended coverage
liability and casualty and worker's compensation, as would be customary for any
Person owning comparable properties and engaged in a similar business or from
naming the General Partner and any other Affiliated Person as additional insured
parties thereunder (if such addition does not add to the premiums payable by the
Partnership).
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(d) No contract or agreement entered into by a Limited Partner will
reduce or eliminate the fiduciary duty owed to the Limited Partner by the
General Partner.
SECTION 4.05 AUTHORITY OF THE GENERAL PARTNER. In no event shall any
Person (other than an Affiliated Person) dealing with the General Partner with
respect to any property of the Partnership be obligated to see that the terms of
this Agreement have been complied with, or be obligated to inquire into the
necessity or expediency of any act or action of the General Partner, and every
contract, agreement, lease, promissory note, mortgage or other instrument or
document executed by the General Partner with respect to the assets of the
Partnership shall be conclusive evidence in favor of any and every Person (other
than an Affiliated Person) relying thereon or claiming thereunder that: (a) at
the time of the execution or delivery thereof, the Partnership was in full force
and effect; (b) the instrument or document was duly executed in accordance with
the terms and provisions of this Agreement and is binding upon the Partnership
and all of the Partners; and (c) the General Partner was duly authorized and
empowered to execute and deliver any and every such instrument or document for
and on behalf of the Partnership.
SECTION 4.06 CONTRACTS WITH AFFILIATED PERSONS.
(a) The Partnership shall not purchase or lease property in which the
General Partner or any other Affiliated Person has an interest nor shall it
purchase or lease any property from any entity in which the General Partner or
any other Affiliated Person has an interest. Notwithstanding the preceding
sentence, the General Partner may purchase property in its own name from an
Affiliated Person or a third party (and assume loans in connection therewith)
and temporarily hold title thereto for the purpose of facilitating the
acquisition of property, the borrowing of money or obtaining of financing for
the Partnership, the completion of construction of one or more of the Hotels, or
any other purposes related to the business of the Partnership provided that
neither the General Partner nor any Affiliated Person realize any benefit from
the transaction apart from compensation otherwise permitted by this Article IV.
The General Partner shall not sell property to the Partnership pursuant to this
paragraph 4.06(a) if the cost of the property would exceed the funds reasonably
anticipated to be available to the Partnership to purchase the property. The
General Partner will consider all of the relevant facts and circumstances in
deciding which properties, if any, will be purchased by the Partnership from the
General Partner pursuant to this paragraph 4.06(a), including the cost of the
property, the cost to complete construction, the funds
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available to the Partnership, and the investment objectives and policies of the
Partnership.
(b) The Partnership shall not sell or lease property to the General
Partner or any other Affiliated Person except: (I) the rental of Hotel rooms in
the ordinary course of business; and (ii) the sale of all or substantially all
of the assets of the Partnership to an Affiliated Person, provided that the
transaction is fully disclosed to all Limited Partners and on terms competitive
with those which may be obtained from persons other than Affiliated Persons.
(c) No loans may be made by the Partnership to the General Partner or
any other Affiliated Person except to the extent that the General Partner has
determined that such loan is beneficial to the Partnership.
(d) The Partnership shall not borrow any money from the General Partner
or any Affiliated Person if the principal amount is scheduled to be repaid over
more than 48 months or if less than 50 percent of the principal amount is
scheduled to be repaid during the first 24 months.
(e) The General Partner shall commit a percentage of the Gross Offering
Proceeds to Investment in Hotels which is not less than the greater of 80
percent of the Gross Offering Proceeds, reduced by .1625 percent for each 1
percent of the aggregate purchase price of the Hotels represented by mortgage
indebtedness secured by such Hotels, or 67 percent of the Gross Offering
Proceeds. Further, the aggregate amount of Front-End Fees incurred in connection
with the Hotels shall not exceed the normal and competitive rate customarily
charged by others rendering similar services in the geographical location where
the services are performed.
SECTION 4.07 COMPENSATION OF AFFILIATED PERSONS.
(a) Other than as provided in this Section 4.07, no Affiliated Persons
shall be compensated for goods or services provided to the Partnership.
(b) The General Partner is expressly authorized to pay, on behalf of
the Partnership, the Sales Commissions. The Partnership shall pay to the
Managing Dealer, beginning on December 31, 1998, and continuing through December
31 of the next three Fiscal Periods thereafter (the last such date is referred
to herein as the "Final Payment Date"), an annual investor relations fee payable
from operating revenues in
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an amount equal to one quarter of one percent of the total gross offering
proceeds from the sale of Units (including the aggregate principal amount of any
Partner Notes) and one quarter of one percent of the total gross offering
proceeds from the sale of Notes. Notwithstanding the preceding sentence, the
investor relations fee shall be paid only if and to the extent that: (I) the
total amount of selling commissions (including Sales Commissions and all
investor relations fees), fees and reimbursements paid to the Managing Dealer
and any registered broker-dealers retained by the Managing Dealer in connection
with the offering does not exceed ten percent of the Gross Offering Proceeds;
and (ii) Organization and Offering Expenses (including Sales Commissions and all
investor relations fees) do not exceed fifteen percent of Gross Offering
Proceeds. The investor relations fee shall be deferred until the Limited
Partners have received the Cumulative Return due through the date of payment
thereof plus any unpaid Cumulative Return due to the Limited Partners for prior
years and shall be abated to the extent that the deferral continues after the
third anniversary of the Final Payment Date.
(c) The Partnership shall also pay to the General Partner (or any
subsequent property manager) a property management fee of four and one-half
percent of Gross Operating Revenues and any other amounts payable as provided in
the Management Agreement. The Partnership shall pay a partnership management fee
to the General Partner of one and one-quarter percent of Gross Operating
Revenues, commencing with the month of issuance of a certificate of occupancy
for the first Hotel and payable at the end of each calendar month thereafter. As
used in this paragraph 4.07(c), "Gross Operating Revenues" shall mean all
revenues and income from sales of any kind, whether derived directly or
indirectly from any source relating to the Hotels and over which the Partnership
has any direct or indirect responsibility, including, but not limited to, rental
of rooms, food and beverage sales, sales from gift or other shops which are
operated under the direction of the Partnership, and vending machine and cable
television revenue. The term "Gross Operating Revenues" shall not include
gratuities which the Partnership is obligated to pay over to employees and
excise, sales and use taxes collected from patrons or guests as part of the
sales price of any goods or services, such as gross receipts, administration,
and cabaret taxes.
(d) For its services in connection with the formation and
reorganization of the Partnership and the offering of Units and Notes, the
General Partner shall receive from the Partnership an organization and offering
management fee equal to 3.4 percent of Gross Offering Proceeds. The General
Partner may, in its sole discretion, pay all or a portion of that fee to the
Managing Dealer or other registered broker-dealers retained
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by the Managing Dealer in connection with the offering of the Units and Notes,
provided that the total amount of selling commissions, fees, and reimbursements
paid to the Managing Dealer and other broker-dealers in connection with the
offering shall not exceed ten percent of the Gross Offering Proceeds.
(e) For its services in selecting and purchasing, leasing or subleasing
the land upon which the Hotels will be constructed, the General Partner shall
receive from the Partnership an acquisition fee of $110,000 per Hotel site
acquired by the Partnership. The acquisition fee shall be payable $35,000 upon
execution of a valid purchase, lease or sublease agreement (which amount shall
be refunded to the Partnership if the transaction does not close) and the
remainder upon the closing of the purchase, lease or sublease by the Partnership
of the land upon which a Hotel is to be constructed.
(f) For its services in connection with the development of each Hotel
the General Partner shall receive from the Partnership a developer's fee of
$160,000 per Hotel, increased by 5 percent of total construction, site
development and furniture, fixtures and equipment costs in excess of $2 million,
but not to exceed $300,000 per Hotel (the "Development Fee"). The Development
Fee for each Hotel shall be payable 15 percent per month beginning on the first
day of the month following the commencement of construction and continuing for a
term not to exceed six months. The unpaid balance shall be paid upon the
obtaining of a certificate of occupancy for the Hotel.
(g) For its services in connection with the financing or refinancing of
any Hotel, the General Partner shall receive from the Partnership a refinancing
fee of one percent of the gross proceeds of the refinancing. In addition, if the
refinancing involves the sale of promissory notes to investors in a private
placement which is exempt from registration under the Securities Act of 1933, as
amended, or a public offering similar to the offering of Notes pursuant to the
Prospectus, the General Partner and the Managing Dealer shall receive from the
Partnership the fees and sales commissions customarily charged by the General
Partner and Managing Dealer for rendering comparable services on competitive
terms.
(h) Upon the closing of a sale of each Hotel, the Partnership shall pay
the General Partner a sales fee of three percent of the gross sales price,
provided that: (I) the fee and any other real estate commission paid by the
Partnership with respect to the sale do not exceed six percent of the gross sale
price; and (ii) the General Partner
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provides substantial services in connection with the sale of the Hotel. The
Partnership shall not enter into any exclusive agreement with any Affiliated
Person for the sale of any Hotel.
(i) Should the General Partner be removed as general partner of the
Partnership pursuant to a vote of the Limited Partners as provided in
subparagraph 5.01(b)(ii), any portion of the fees or commissions described in
this Section 4.07, unreimbursed expenses payable pursuant to the provisions of
Section 4.10, and other fee or commission payable to the General Partner or
other Affiliated Person pursuant to this Agreement which is then accrued and
due, but not yet paid, shall be paid by the Partnership to the General Partner
or other Affiliated Person within 30 days of the date of removal, unless such
amount is included in the purchase price of the General Partner's interest in
the Partnership as determined under paragraph 6.01(c).
SECTION 4.08 WITHDRAWAL OF THE GENERAL PARTNER. The General Partner
shall not resign or withdraw from the Partnership without obtaining a Majority
Vote of the Limited Partners.
SECTION 4.09 ASSIGNMENT OF THE GENERAL PARTNER INTEREST. The General
Partner may not transfer, assign, grant, convey, mortgage or otherwise encumber
its interest as general partner of the Partnership.
SECTION 4.10 EXPENSES OF THE PARTNERSHIP.
(a) Subject to paragraph 4.10(c), the Partnership shall pay:
(i) all expenses incurred in the organization of the
Partnership and sale of the Units, including
Organization and Offering Expenses;
(ii) all expenses incurred in the acquisition,
construction and development of the Hotels
(including, without limitation, up to $25,000 per
site, but not to exceed $60,000 in the aggregate, for
due diligence expenses paid by the General Partner to
third parties with respect to a site which is not
acquired by the Partnership);
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(iii) all expenses incurred in the administration of the
Partnership and the ownership, operation or
improvement of the Hotels (including all property
management fees and franchise or similar fees payable
in connection with the Hotels); and
(iv) all expenses incurred in the sale, refinancing or
other disposition of the Hotels (including real
estate commissions, legal and accounting fees and
escrow fees).
(b) Operational expenses payable by the Partnership shall include the
actual cost of goods, materials and services used for or by the Partnership
whether incurred directly by the Partnership, by Affiliated Persons or
non-affiliates of the General Partners in performing the following general
functions:
(i) Partnership operations, which shall include without
limitation: implementation of Partnership investment
policies, refinancing of Hotels, implementation of
periodic physical inspections and informal market
surveys, direction and review of the work of managers
of the Partnership's Hotels, payment of fees and
expenses paid to independent contractors, mortgage
brokers, real estate brokers, consultants and other
agents, property management fees payable to any
property manager engaged by the Partnership to manage
one or more of the Hotels, payment of expenses
relating to the day-to-day operation of the Hotels,
including employee wages, utilities, insurance, real
estate taxes, maintenance and repair costs,
implementation and review of Partnership reserves and
working capital and recommendations with respect to
changes thereto, conducting, supervising and
reviewing Hotel operations, including marketing,
maintenance and refurbishment, initiation and
implementation of any other action necessary to
obtain the optimal potential ownership benefits for
the Partnership, supervision and expenses of
professionals employed by the Partnership in
connection with any of the above, review and analysis
of the local, regional and national lodging markets
and initiation of
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recommendations to sell the Hotels on acceptable
terms of sale, and preparation and dissemination of
documentation relating to the potential sale,
financing or other disposition of the Hotels;
(ii) Partnership accounting, which shall include without
limitation, preparation and documentation of
Partnership accounting and audits, preparation and
documentation of budgets, economic surveys, cash flow
projections and capital requirements, preparation of
regulatory reports, and acquisition of any equipment
necessary for the maintenance of the books and
records of the Partnership;
(iii) Investor communications, which shall include without
limitation, initiation, review and approval of
Partnership reports and communications to Limited
Partners, expenses in connection with distributions
made by the Partnership to, and communications,
bookkeeping and clerical work necessary in
maintaining relations with, Limited Partners,
including the costs of design, production, printing
and mailing reports of the Partnership, conducting
elections in any circumstance requiring a vote of the
Limited Partners, holding meetings with Limited
Partners, preparing proxy statements and soliciting
proxies, and preparing and mailing reports to Limited
Partners for tax reporting and such other purposes as
the General Partner (including reports required to be
filed with the Securities and Exchange Commission and
other federal or state regulatory agencies); and such
other purposes as the General Partner deems to be in
the best interest of the Partnership;
(iv) Investor documentation, which shall include without
limitation, printing, engraving and other expenses
and taxes in connection with the issuance,
distribution, transfer, registration and recordation
of documents evidencing ownership of Units;
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(v) Legal services, which shall include without
limitation, revising and amending this Agreement or
converting, modifying or terminating the Partnership,
monitoring costs incurred in litigation in which the
Partnership is involved as well as any examination,
investigation, or other proceeding conducted by any
regulatory agency with regard to the Partnership, and
qualifying or licensing the Partnership;
(vi) tax services, which shall include without limitation
the preparation and documentation of Partnership
federal and state tax returns;
(vii) computer services, which shall include without
limitation any computer equipment or services used
for or by the Partnership, including maintenance of
investor records and processing of accounting records
related to the Partnership;
(viii) risk management, which shall include without
limitation, inspection services, special consultant
fees, premiums, loss adjustments, and such other
expenses of insurance as required in connection with
the business of the Partnership; and
(ix) such other related expenses as are necessary to the
prudent operation of the Partnership.
(c) The General Partner or other Affiliated Persons shall bear or pay:
(I) all costs incurred in the organization of the Partnership and sale of the
Units, including Organization and Offering Expenses, to the extent they exceed
fifteen percent of the Gross Offering Proceeds; (ii) costs for services for
which the General Partner or other Affiliated Persons are entitled to
compensation by way of a separate fee; (iii) costs for services other than
administrative services necessary to the prudent operation of the Partnership
which meet the requirements of paragraph 4.10(e); (iv) costs of goods and
materials purchased from Affiliated Persons; (v) any rent, depreciation,
utilities, capital equipment, or other administrative items relating to the
operations of the General Partner or other Affiliated Persons; (vi) salaries or
fringe benefits incurred by or allocated to any director or executive officer of
the Managing
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General Partner or any other Affiliated Persons; and (vii) all other expenses
which are unrelated to the business of the Partnership.
(d) Actual costs of goods and materials to the General Partner, as used
in this Section 4.10, means the actual costs to the General Partner or other
Affiliated Persons of goods and materials used for or by the Partnership and
obtained from entities not affiliated with the General Partner.
(e) Actual costs of services, as used in this Section 4. 10, means the
pro rata cost of personnel (as if such persons were employees of the
Partnership) associated therewith. The costs of such services to be reimbursed
to the General Partner or other Affiliated Persons by the Partnership shall be
at the lower of the General Partner's actual cost or the amount of the
Partnership would be required to pay to independent parties for comparable
services in the same geographic location. The obligation of the Partnership to
reimburse the General Partner or other Affiliated Persons for services (other
than for services previously rendered) may be terminated at any time by the
Partnership without penalty on 60 days' notice.
(f) Each annual report to Partners will contain a breakdown of the
costs reimbursed to the General Partner and other Affiliated Persons by the
Partnership. Within the scope of the annual audit of the financial statements of
the Partnership, the independent public accountants shall review the allocation
of such costs to the Partnership. The method of review shall at minimum provide:
(I) a review of the time records of individual employees; (ii) the costs of
whose services were reimbursed; and (iii) a review of the specific nature of the
work performed by each such employee. The method of review shall be in
accordance with generally accepted auditing standards and shall accordingly
include such tests of the accounting records and such other auditing procedures
which the independent public accountants consider appropriate in the
circumstances. The additional costs of such review will be itemized by the
accountants on an entity-by-entity basis and may be reimbursed to the General
Partners or other Affiliated Persons by the Partnership in accordance with this
paragraph 4.10(f) only to the extent that such reimbursement, when added to the
cost for administrative services rendered, does not exceed the competitive rate
for such services.
SECTION 4.11 PURCHASE OF UNITS. The General Partner, and any officer,
director, shareholder or employee of the General Partner or any Affiliated
Person, may purchase Units and will be treated for all purposes as a Limited
Partner under this Agreement with respect to the Units so purchased.
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ARTICLE V
THE LIMITED PARTNERS
SECTION 5.01 POWERS OF LIMITED PARTNERS.
(a) The Limited Partners shall take no part in the management of the
business or transact any business for the Partnership and shall have no power to
sign for or bind the Partnership.
(b) Notwithstanding paragraph 5.01(a), the Limited Partners, by a
Majority Vote of Limited Partners and without the concurrence of the General
Partner, shall have the right to: (I) amend this Agreement, but not as to the
matters specified in Section 4.01(b), which matters the General Partner alone
may amend without vote of the Limited Partners; and (ii) remove the General
Partner and elect one or more replacement general partners.
(c) As provided in paragraph 6.01(b), the Limited Partners may, by
unanimous vote, elect to continue the Partnership and elect one or more new
general partners upon an event of withdrawal with respect to the General
Partner.
(d) Notwithstanding paragraph 5.01(b), this Agreement shall in no event
be amended to modify the compensation or distributions to which the General
Partner is entitled or enlarge the obligations or liabilities of the General
Partner without the consent of the General Partner. The Limited Partners shall
have no voting rights and shall not be otherwise empowered to make any
determination on behalf of the Partnership except as expressly set forth in this
Agreement.
(e) No Limited Partner shall pledge, mortgage or otherwise encumber his
or her Units.
SECTION 5.02 LIABILITY OF LIMITED PARTNERS. Performance of one or more
of the acts described in Section 5.01 shall not cause a Limited Partner to be
subject to the liabilities of a general partner or impose any personal liability
on a Limited Partner. No Limited Partner shall be obligated to make any
contribution to the capital of the Partnership in addition to that Limited
Partner's Capital Contribution or to make up any deficit in his or her Capital
Account. No Limited Partner shall be obligated to make loans to the Partnership.
No Limited Partner have any personal liability with respect
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to the liabilities or obligations of the Partnership unless the obligation is
set forth in a writing signed by the Limited Partner.
SECTION 5.03 MEETINGS OF LIMITED PARTNERS.
(a) Meetings of the Limited Partners, to vote upon any matters as to
which the Limited Partners are authorized to take action under this Agreement,
may be called at any time by either of the General Partner or by Limited
Partners who own ten percent or more of the outstanding Units. The meeting shall
be called by delivering written notice to the Limited Partners entitled to vote
at the meeting that a meeting will be held at a designated time and place fixed
by the caller(s) of the meeting. Such meetings shall be held at a time which is
not less than 15 days nor more than 60 days after the giving of notice. Included
with the notice of a meeting shall be a detailed statement of action proposed by
the caller(s) of the meeting, including a verbatim statement of the wording of
any resolution proposed for adoption by the Limited Partners and of any proposed
amendment to this Agreement. All expenses of the meeting and notification shall
be borne by the Partnership.
(b) Any matter as to which the Limited Partners are authorized to take
action under this Agreement or under law may be acted upon by the Limited
Partners without a meeting and the action so taken shall be as valid and
effective as action taken by the Limited Partners at a meeting, if written
consents to the action so taken are signed by Limited Partners entitled to vote
upon the action so taken and holding the number of Units required to authorize
the action.
(c) Limited Partners present in person or by proxy who then own in
excess of fifty percent of the outstanding Units shall constitute a quorum at
any meeting. Attendance by a Limited Partner at any meeting and voting in person
shall revoke any written proxy submitted with respect to action proposed to be
taken at such meeting.
(d) The General Partner shall be responsible for enacting all needed
rules of order for conducting all meetings, including setting the record date
for determining the Limited Partners who will be entitled to vote at a meeting,
and shall keep, or cause to be kept, at the expense of the Partnership, an
accurate record of all matters discussed and action taken at all meetings or by
written consent. The records of all meetings and written consents shall be
maintained at the principal place of business of the Partnership and shall be
available for inspection by any Partner at reasonable times.
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SECTION 5.04 ASSIGNMENT OF UNITS.
(a) A Limited Partner shall have the right to assign his or her Units
without obtaining the consent of any other Partner, provided that:
(i) no assignment of a Unit may be made effective other than
on the first day of a fiscal quarter of the Partnership;
(ii) no assignment of any Unit may be made to any Person
unless: (a) any required consent of the Partnership's franchisor is obtained
pursuant to the terms of the franchise or similar agreement to be entered into
by the Partnership and its franchisor; and (b) the assignor pays any necessary
transfer fee and otherwise satisfies the terms and conditions of the franchise
agreement relating to such assignment;
(iii) the General Partner may prohibit any assignment of a
Unit if, in the opinion of legal counsel to the Partnership, the assignment
would violate any federal or state securities laws (including any investment
suitability standards) or regulations applicable to the Partnership or the
Units;
(iv) no purported assignment by a Limited Partner of any
fractional part of a Unit or less than five Units will be permitted or
recognized, except for assignments by inheritance or family dissolution, and
except for assignments of all of a Limited Partner's Units;
(v) no assignment of a Unit may be made if the assignment
would, in the opinion of legal counsel for the Partnership, result in the
Partnership being deemed to have been terminated or reclassified as an
association taxable as a corporation for federal or state tax purposes; and
(vi) the General Partner may prohibit any purported assignment
if: (a) it determines in its sole discretion that the transfer would create a
risk of the Partnership being a "publicly traded partnership" for income tax
purposes; (b) the Partnership is unable to satisfy one of the safe harbors or
corresponding sections of regulations or other controlling administrative
releases promulgated under Section 7704 of the Code, for the Partnership's
taxable year in which such transfer otherwise would be effective; or (c) the
Partnership is unable to obtain an opinion of counsel satisfactory to the
General Partner or a ruling from the Internal Revenue Service that
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the assignment will not result in the Partnership being classified as a
"publicly traded partnership" for income tax purposes.
In the event that an assignment is not permitted as a result of any of the
restrictions set forth in subparagraph 5.04(a)(v), the General Partner will so
notify the assignor and will permit the assignment to become effective as of the
first day of the next succeeding calendar quarter as of which such assignment
may occur without causing a termination of the Partnership for federal tax
purposes or reclassification of the Partnership as an association taxable as a
corporation for federal or state tax purposes, provided that the other
conditions of this Section 5.04 are still met as of the date of such assignment
becoming effective.
(b) The restrictions in paragraph 5.04(a) shall not apply if the
General Partner determines in its reasonable discretion that such restriction
will result in the Partnership being deemed to hold plan assets for purposes of
ERISA. The General Partner shall incur no liability to any Partner, prospective
investor or assignee for any action or inaction in connection with the preceding
sentence, provided that the General Partner acted in good faith. The General
Partner shall, from time to time, review the limitations and restrictions on the
assignment of Units then in effect and the federal income tax law, regulations,
and rulings applicable thereto, and shall eliminate or modify any the limitation
or restriction to make it less restrictive on assignment of Units if counsel to
the Partnership opines that the elimination or modification may be made without
causing the Partnership to fail to meet at least one of the Safe Harbors or be
considered an association taxable as a corporation under the applicable federal
income tax laws.
(c) Upon the bankruptcy, assignment for the benefit of creditors,
dissolution, death, disability or legal incapacity of any Limited Partner, the
Units held by that Limited Partner shall descend to and vest in his or her
successors, trustees, receivers, assignees for the benefit of creditors, heirs,
legatees or other legal representatives. The occurrence of any one of the
foregoing events shall not terminate or dissolve the Partnership.
SECTION 5.05 FORM OF ASSIGNMENT.
(a) No assignment of any Unit, though otherwise permitted by Section
5.04, shall be valid and effective, and the Partnership shall not recognize the
same for the purpose of Distributions or for the allocation of Income or Loss
with respect to
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such Unit, until there is filed with the General Partner at least fifteen days
before the first day of a fiscal quarter of the Partnership an instrument in
writing in substantially the following form, with blanks appropriately filled in
and subscribed by both parties to the conveyance:
I, ___________________, hereby assign to ________________ all of my
right, title and interest in and to ___ Units of ESSEX HOSPITALITY ASSOCIATES IV
L.P., a limited partnership organized under the laws of the State of New York,
and direct that all future distributions and allocations of income or loss on
account of such Units be paid or allocated to the assignee.
_____________________ as assignee, hereby accepts the Units subject to
and agrees to be bound by all terms, covenants and conditions of the Amended and
Restated Limited Partnership Agreement dated _______, 19___ as amended through
the date hereof and agree that I will not, directly or indirectly, create for
any of the Units, or facilitate the trading of any Units on, a "secondary market
or substantial equivalent thereof" within the meaning of Section 7704 of the
Internal Revenue Code.
Dated: _______________
Assignor
______________________________________
Assignee
______________________________________
Assignee's Address
______________________________________
Assignee's Social Security Number
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STATE OF _____________)
COUNTY OF ____________) SS.:
On this ____ day of _________, 19___, before me personally appeared
___________________ and _______________________ to me known and known to me to
be the individuals described in, and who executed, the foregoing instrument and
they duly acknowledged to me that they executed the same.
______________________________________
Notary Public
(b) After receiving an executed assignment, in the form prescribed in
paragraph 5.05(a), and upon compliance with all of the conditions set forth in
paragraph 5.04(c), the Partnership shall make all further Distributions and
allocate any Income or Loss to the assignee with respect to the Units assigned,
regardless of whether the assignment, as between the parties thereto, is or is
intended to be by way of pledge, mortgage, encumbrance or other hypothecation,
until such time as the Units assigned shall be further assigned in accordance
with the provisions of this Agreement.
SECTION 5.06 RIGHTS OF ASSIGNEE. Unless admitted to the Partnership as
a Limited Partner in accordance with Section 5.07, the transferee of Units in
the Partnership, by assignment, bequest, operation of law or otherwise, shall
not be entitled to any of the rights, powers, or privileges of his or her
predecessor in interest, except that he or she shall be entitled to receive and
have allocated his or her share of Distributions and of Income or Loss.
SECTION 5.07 ADMISSION OF LIMITED PARTNERS. The transferee of any Units
in the Partnership may be admitted to the Partnership as a Limited Partner upon
obtaining the consent of the General Partner, which consent may be withheld in
the General Partner's discretion, and furnishing to the General Partner:
(a) an acceptance, in form satisfactory to the General Partner, of all
the terms of this Agreement;
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(b) if the transferee is a corporation or similar organization, a
certified copy of a resolution of the transferee's board of directors or
comparable body authorizing it to become a Limited Partner under the terms of
this Agreement; and
(c) payment of reasonable expenses that may be incurred in connection
with his admission as a Limited Partner.
ARTICLE VI
DISSOLUTION
SECTION 6.01 DISSOLUTION.
(a) In addition to any other causes stated herein, the Partnership
shall be dissolved upon:
(i) disposal of all or substantially all of the
Partnership's assets, provided that, if the
Partnership receives non-cash consideration in
connection with the disposal, the Partnership shall
continue until the non-cash consideration is
converted into cash;
(ii) Majority Vote of the Limited Partners to dissolve and
terminate the Partnership;
(iii) occurrence of an event of withdrawal, as defined by
the New York Revised Limited Partnership Act, with
respect to a General Partner unless the Limited
Partners, within a period of 90 days from the date of
the event of withdrawal, by Majority Vote of Limited
Partners elect to continue the Partnership and elect
a successor general partner, as provided in paragraph
6.01(b); or
(iv) expiration of the term of the Partnership.
(b) If, upon the occurrence of an event of withdrawal as specified in
subparagraph 6.01(a)(iii), there is no remaining general partner, a meeting of
the Limited Partners shall be held at the principal place of business of the
Partnership (or,
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if no meeting is held, a vote of the Limited Partners shall be taken) within 90
days after the happening of the event of withdrawal to consider whether to: (I)
continue the Partnership on the same terms and conditions as are contained in
this Agreement; or (ii) wind up the affairs of the Partnership, liquidate its
assets and distribute the proceeds therefrom in accordance with Section 6.02.
The Partnership may be continued by the unanimous vote at such meeting of all of
the Limited Partners, or by unanimous written consent of the Limited Partners if
no meeting is held. If the Partnership is continued pursuant to the preceding
sentence, the Limited Partners may, by vote of all the Limited Partners or by
unanimous written consent of the Limited Partners if no meeting is held, elect a
new general partner or general partners for the Partnership.
This Agreement shall be amended to reflect any such action.
(c) Upon the occurrence of any event of withdrawal with respect to the
General Partner, the General Partner shall cease to be a general partner of the
Partnership. The Partnership shall be required to pay the terminated General
Partner any amounts then accrued and owing to it under this Agreement as of the
date of the event of withdrawal. In addition, upon the occurrence of an event of
withdrawal, the Partnership shall have the right, but not the obligation, to
terminate the General Partner's interest in Partnership capital, Income and
Loss, and Distributions upon payment to the General Partner of an amount equal
to the value of the interest as of the date of the event of withdrawal. The
payment shall be based upon the market value of the assets of the Partnership
determined as if the assets were sold for cash on the date of the event of
withdrawal, less the amount, if any, which the terminated General Partner would
be required to pay the Partnership pursuant to paragraph 2.06(a) if the
Partnership was liquidated on the date of the event of withdrawal. If the amount
which the terminated General Partner is required to pay to the Partnership
pursuant to paragraph 2.06(a) is in excess of the value of the terminated
General Partner's interest in the Partnership, the General Partner shall pay to
the Partnership an amount equal to the excess. In the event the terminated
General Partner (or its representative) and the Partnership (or its
representative appointed by a Majority Vote of the Limited Partners) cannot
mutually agree upon the value of the General Partner's interest in the
Partnership, then within 90 days following the event of withdrawal the value
shall be determined by arbitration before a panel of three appraisers, one of
whom shall be selected each by the General Partner (or its representative) and
the Partnership (or its representative appointed by a Majority Vote of the
Limited Partners) and the third of whom shall be selected by the two appraisers
so selected by the parties. The arbitration shall take place in Rochester, New
York and shall be in accordance with the rules and regulations of the American
Arbitration Association then obtaining. The cost of any
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such arbitration shall be borne equally by the Partnership and the terminated
General Partner.
(d) Payment to the General Partner of the value of its interest in
Partnership Income, Losses, Distributions and capital shall, at the option of
the Partnership, be made either: (I) in cash within 30 days following
determination of the value thereof; or (ii) by delivery of an unsecured
promissory note coming due in no less than 5 years and bearing interest at a
rate equal to the lesser of the prime rate as established from time to time by
Manufacturers and Traders Trust Company, Buffalo, New York or the maximum rate
permissible under applicable law, with interest payable annually and principal
payable, if at all, only from any cash distributions which the General Partner
would otherwise have been entitled to receive pursuant to this Agreement had its
Partnership interest not been so terminated. Notwithstanding the foregoing, in
the case of a terminated General Partner who has voluntarily withdrawn from the
Partnership, any promissory note delivered in payment of the General Partner's
interest in the Partnership shall not bear interest.
(e) In the event that the Partnership elects not to terminate the
General Partner's interest in Partnership capital, Income and Loss, and
Distributions, the General Partner (or its representative) shall: (I) retain the
same interest in Partnership capital, Income and Loss, and Distributions to
which it was entitled under this Agreement, but the interest shall then be held
as a limited partner; (ii) not be personally liable for the Partnership debts
incurred after the General Partner ceases to be a general partner; (iii) not be
entitled to vote as a Limited Partner on any matters; and (iv) have its interest
reduced pro rata with all other Partners to provide both compensation to and an
interest in the Partnership to a new general partner.
(f) Upon any event of withdrawal with respect to the General Partner,
all executory contracts between the Partnership and the General Partner or any
Affiliated Person (unless the Affiliated Person is an affiliate of a remaining
or new general partner or general partners) may be terminated and cancelled by
the Partnership without prior notice or penalty. The terminated General Partner
or any Affiliated Person of a General Partner (unless the Affiliated Person is
an affiliate of a remaining or new general partner or general partners) may also
terminate and cancel any executory contract effective upon 60 days' prior
written notice to each new general partner or the Partnership.
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SECTION 6.02 LIQUIDATION.
(a) Upon dissolution of the Partnership, the General Partner (which
terms, for the purpose of this Section 6.02, shall include any trustee, receiver
or other person required by law or selected by Majority Vote of the Limited
Partners to wind up the affairs of the Partnership) shall liquidate the assets
of the Partnership.
(b) All proceeds from liquidation and all proceeds from a sale of all
or substantially all of the assets of the Partnership shall be distributed in
the following order of priority: (I) first to the payment of the debts,
liabilities and obligations of the Partnership and the expenses of liquidation;
(ii) next to the establishment of such reserves as the General Partner may
reasonably deem necessary for any contingent liabilities of the Partnership; and
(iii) the balance, if any, to the Partners in accordance with their Capital
Account balances (determined after giving effect to all allocations of Income or
Loss for all Fiscal Periods of the Partnership and to all prior Distributions).
The liquidation of the Partnership shall be carried out in conformity with the
timing requirements of Treas. Reg. ss.1.704-1(b)(2)(b).
(c) If there shall be a deficit balance in any Partner's Capital
Account (after giving effect to all contributions, distributions and allocations
for all Fiscal Periods, including the Fiscal Period in which liquidation
occurs), the Partner shall have no obligation to make any contribution to the
capital of the Partnership with respect to the deficit balance.
SECTION 6.03 FINAL STATEMENT. As soon as practicable after the
dissolution of the Partnership, a final statement of its assets and liabilities
shall be prepared by an independent certified public accountant and furnished to
all Partners.
ARTICLE VII
BOOKS, REPORTS AND FISCAL MATTERS
SECTION 7.01 BOOKS AND RECORDS.
(a) The General Partner shall keep or cause to be kept books of account
in which shall be entered fully and accurately the transactions of the
Partnership. All books and records, and this Agreement and all amendments
thereto, shall at all times be maintained at the principal office of the
Partnership and each Partner may inspect,
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examine and copy any of them at his or her own expense at reasonable times on 24
hours notice. A list of the names and addresses and the number of Units held by
all of the Limited Partners shall be maintained as part of the books and records
and shall be mailed to any Limited Partner following receipt by the General
Partner of a written request therefor. A reasonable charge for copy work may be
charged by the Partnership.
(b) The Partnership shall maintain, or shall require the Managing
Dealer or other broker-dealers to maintain, records of the suitability of those
persons purchasing Units pursuant to the public offering described in the
Prospectus.
SECTION 7.02 REPORTS.
(a) Within 150 days after the end of each fiscal year, the General
Partner shall send to each Person who was a Limited Partner or assignee at any
time during the fiscal year then ended a report in narrative form summarizing
the status of the Partnership's investments and containing: (I) a balance sheet
as of the end of such fiscal year with related statement of income, statement of
Partners' equity, and statement of cash flow for such fiscal year, all of which
shall be prepared in accordance with generally accepted accounting principles
and accompanied by an auditor's report containing an opinion of independent
public accountants; (ii) a report of the activities of the Partnership for such
year; (iii) a statement (which need not be audited) of the distributions for
such year separately identifying distributions from: (a) cash flow from
operations during such year, (b) cash flow from operations during prior years,
(c) proceeds from disposition of the Hotels, (d) proceeds from refinancing of
the Hotels, and (e) reserves from the Gross Offering Proceeds.
(b) The General Partners shall cause to be prepared and timely filed
with appropriate state and federal regulatory and administrative bodies, at the
Partnership's expense, reports required to be filed with such entities under
then current applicable laws, rules and regulations. The reports shall be
prepared on the accounting or reporting basis required by the regulatory bodies.
Any Partner shall be provided with a copy of any of the foregoing reports (if
not previously provided), upon written request to the General Partners, at the
Partnership's expense.
(c) The General Partner shall deliver to each Partner and assignee
within 75 days after the end of each fiscal year the information necessary to
prepare his or her federal income tax return, and a state tax return to the
extent required in each state
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wherein the Partnership then owns a Hotel, for the calendar year during which
such fiscal year was ended.
(d) The General Partner shall prepare and deliver to each Partner, at
least semi-annually, a report on the operation of the Hotels.
SECTION 7.03 BANK ACCOUNTS. The General Partner or its designee shall
open and maintain in the name of the Partnership accounts with one or more
financial institutions in which shall be deposited all funds of the Partnership.
Amounts on deposit in such Partnership accounts shall be used solely for the
business of the Partnership. Withdrawals from such accounts may be made only
upon the signature of any Person authorized by the General Partner to make
withdrawals.
ARTICLE VIII
GENERAL
SECTION 8.01 OTHER BUSINESS INTERESTS. Each Partner may have other
business interests and may engage in any other business, trade, profession, or
employment whatsoever, on his or her own account or in partnership, or as an
employee, officer, director, or stockholder of any other Person. Nothing in this
Agreement shall be deemed to prohibit any Affiliated Person from dealing, or
otherwise engaging in business with Persons transacting business with the
Partnership or from providing services relating to the purchase, sale,
financing, management, development or operation of hotels, motels or other
lodging facilities and receiving compensation therefor, even if competitive with
the business of the Partnership.
SECTION 8.02 NOTICES. Unless otherwise specified in a writing sent to
the Partnership, the address of each Partner for all purposes shall be as set
forth on Schedule A to this Agreement. Any notices and demands required to be
given hereunder shall be in writing and delivered in person, sent by certified
or registered mail or by recognized overnight delivery service to such address
or addresses. Any notice shall be deemed to be given as of the date so
delivered, if delivered personally, or as of the date on which it was sent.
SECTION 8.03 CAPTIONS. The Article and Section titles and captions
contained in this Agreement are for convenience only and shall not be deemed
part of the context of this Agreement.
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SECTION 8.04 PRONOUNS AND PLURALS. Whenever the context may require,
any pronoun used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
SECTION 8.05 ENTIRE AGREEMENT. This Agreement and the subscription
agreements signed by all Limited Partners contain the entire understanding among
the Partners and supersede any prior understandings or written or oral
agreements between or among any of them respecting the within subject matter.
There are no representations, agreements, arrangements or understandings, oral
or written, between or among any of the Partners relating to the subject matter
of this Agreement which are not fully expressed herein.
SECTION 8.06 FURTHER ACTION. The Partners shall execute and deliver all
documents, provide all information and take or forebear from all such action as
may be necessary or appropriate to achieve the purpose of this Agreement.
SECTION 8.07 BINDING EFFECT. This Agreement shall be binding on and
inure to the benefit of the Partners and their heirs, executors, administrators,
successors, legal representatives and assigns.
SECTION 8.08 CREDITORS. None of the provisions of this Agreement shall
be for the benefit of, or enforceable by, any creditor of the Partnership.
SECTION 8.09 VALIDITY. In the event that any provision of this
Agreement shall be held to be invalid, the same shall not affect in any respect
whatsoever the validity of the remainder of this Agreement.
SECTION 8.10 GOVERNING LAW. This Agreement shall be governed by the
laws of the State of New York.
SECTION 8.11 ACCOUNTING METHOD. The Partnership shall use the accrual
method of accounting.
SECTION 8.12 AMENDMENT. Except as provided in paragraphs 4.01(b) and
5.01(a), this Agreement may be amended or modified only by the affirmative
written consent of the General Partners and the Majority Vote of the Limited
Partners.
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SECTION 8.13 POWER OF ATTORNEY.
(a) Each of the Limited Partners hereby irrevocably constitutes and
appoints the General Partner as his true and lawful attorney-in-fact, in his
name, place and stead, to make, execute, acknowledge any amendments to this
Agreement (including without limitation those authorized by Sections 2.07, 4.01,
5.01, 5.07 and 8.12) and any other certificate or document which may be required
to be filed by the Partnership under the laws of any state or by any
governmental agency, or which the General Partner deems advisable to file or to
execute, to reflect actions properly taken by the Partners and any continuation,
dissolution or termination of the Partnership.
(b) The power of attorney is coupled with an interest and shall survive
an assignment by any Limited Partner of all or any part of his Units until such
time as the General Partner has taken the action necessary or appropriate to
effect the substitution of the assignee as a Limited Partner.
(c) The power of attorney shall, to the extent permitted by law,
survive any death, disability, incompetence, merger, bankruptcy, receivership or
dissolution of a Limited Partner.
(d) Each Limited partner shall execute such instruments as the General
Partner may request in order to give evidence of, and to effectuate, the
granting of this power of attorney, whether by executing a separate counterpart
thereof or otherwise.
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IN WITNESS WHEREOF, this Agreement is signed this _____ day of
___________ 1995.
GENERAL PARTNER
PRINCIPAL PLACE OF BUSINESS OR RESIDENCE
Essex Partners Inc.
100 Corporate Woods
Rochester, New York 14623
By: _______________________________
John E. Mooney,
President
WITHDRAWING ORIGINAL LIMITED PARTNER
RESIDENCE
66 Castlebar Road
Barbara J. Purvis
Rochester, New York 14610
___________________________________
Barbara J. Purvis
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AMENDMENT NO. 1
TO
THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
ESSEX HOSPITALITY ASSOCIATES IV L.P.
This amendment (the "Amendment") amends the Amended and Restated
Limited Partnership Agreement (the "Partnership Agreement") among Essex Partners
Inc. (the "General Partner") and the limited partners of ESSEX HOSPITALITY
ASSOCIATES IV L.P. (the "Partnership").
1. DEFINITIONS. Capitalized terms used here in shall have the meanings
ascribed to them in the Agreement.
2. AMENDMENTS The Partnership Agreement is hereby amended in the
following respects:
(a) A new Section 4.01(c) is added as follows: "(c) the
General Partner, acting for and on behalf of the Partnership, is expressly
authorized to convey, contribute or otherwise transfer assets of the Partnership
to other Persons controlled by or under common control with the Partnership to
the extent it deems necessary or desirable so as to accommodate borrowings by
the Partnership or such Persons."
(b) Section 2.03 is hereby deleted and replaced in its
entirety with the following: "SECTION 2.03 PURPOSE. The purposes of the
Partnership are: (i) to construct, own (either directly or indirectly), operate,
mortgage, dispose of and otherwise deal in two Hotels, including the Hotel owned
by the Partnership and located in Solon, Ohio; (ii) to own (either directly or
indirectly), dispose of and otherwise deal in certain real property in Warwick,
Rhode Island; and (iii) to hold an investment in Essex Glenmaura L.P."
(c) Subparagraph (c) of Section 5.01 is hereby deleted and the
following substituted in its place: "(c) As provided in paragraph 6.01(b), the
Limited Partners may, by a Majority Vote, elect to continue the Partnership and
elect one or more new general partners upon an Event of Withdrawal with respect
to the General Partner."
(d) Subsection 6.01(b) is hereby amended to provide that the
Partnership may be continued and a new general partner or general partners may
be elected by Majority Vote.
IN WITNESS WHEREOF, this Agreement is executed as of the 7th day of
June, 1997.
ESSEX PARTNERS INC. (General Partner)
By: /s/ Barbara J. Purvis
Its: Senior Vice President
LIMITED PARTNERS
BY: Essex Partners Inc., as Attorney-in-Fact
By: /s/ Barbara J. Purvis
Its: Senior Vice President
<PAGE>
EXHIBIT B
[FORM OF SUBORDINATED NOTE]
NO INTEREST IN THIS NOTE MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THE PARTNERSHIP RECEIVES AN
OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THIS NOTE STATING THAT SUCH
TRANSACTION IS EXEMPT FROM APPLICABLE STATE SECURITIES LAWS
REQUIREMENTS AND SUCH OPINION IS IN FORM AND SUBSTANCE SATISFACTORY TO
THE PARTNERSHIP AND FROM COUNSEL SATISFACTORY TO THE PARTNERSHIP OR (B)
THE PARTNERSHIP OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS
EXEMPT FROM SUCH REQUIREMENTS.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
------------------------------------
10.5% SUBORDINATED NOTES DUE DECEMBER 31, 2001
UNLESS EXTENDED TO DECEMBER 31, 2002
(UPON PAYMENT OF AN EXTENSION FEE EQUAL TO .5%
OF THE OUTSTANDING PRINCIPAL AMOUNT)
$_____________ Rochester, New York
________ , 19__
Essex Hospitality Associates IV L.P., a New York limited partnership
(hereinafter called the "Partnership"), for value received hereby promises to
pay to _________________________________ residing or maintaining an address at
or registered assigns, the principal amount set forth above, on December 31,
2001, unless extended by the Partnership for up to one-year period as provided
in Section 1.5 hereof, or unless this Note shall have been called for redemption
and the redemption price, if any, shall have been duly paid or provided for, in
lawful money of the United States, at the office of the Paying Agent
(hereinafter called the "Paying Agent's Office"). Interest at a rate of ten and
one half percent (10.5%) per annum (computed on the basis of a 360-day year and
twelve 30-day months) on said principal amount shall accrue from the date hereof
and be paid in like currency monthly in arrears beginning on the first day of
the second complete calendar month after the date hereof and ending with the
last payment on the date of payment of principal. Interest and any late charges
thereon shall be payable at the Paying Agent's Office and the Paying Agent shall
promptly send such payment to the Holder of Record at the close of business on
the Record Date for such payment by first-class mail to the address set forth
above or such other place in the United States as the Holder of Record may from
time to time in writing designate by notice to the Trustee at least ten (10)
days before such interest payment is due. The Record Date with respect to the
payment of any
<PAGE>
installment of interest shall be the first day of the calendar month next
preceding the date upon which such installment of interest is due and payable
hereunder. Payment of interest and late charges thereon shall be made without
surrender or presentation of this Note. This Note must be surrendered to the
Paying Agent to collect payments of principal and premium, if any, on this Note.
The Paying Agent may treat the Holder of Record as contained in the records
maintained by the Trustee as the owner hereof for the purposes of receiving and
distributing payments as herein provided and for all other purposes, and the
Paying Agent shall not be affected by any notice to the contrary.
This Note is issued in connection with the Partnership's Prospectus
dated ________________, 1995 (the "Prospectus").
1. THE NOTES EXCHANGES AND REDEMPTIONS.
1.1 NOTES. This Note is one of an authorized issue of 10.5%
Subordinated Notes (herein called the "Notes") made or to be made by the
Partnership and limited to an aggregate principal amount not to exceed Six
Million Dollars ($6,000,000.00). This Note is an unsecured general obligation of
the Partnership and this Note is non-recourse. This Note is held subject to the
terms of an Indenture dated as of , 1995 between the Partnership and
Manufacturers and Traders Trust Company, Buffalo, New York, as Trustee, Paying
Agent, and Registrar ("the Indenture"). A copy of the Indenture is on file in
the principal office of the Partnership. Reference is hereby made to the
Indenture, the terms of which are incorporated by reference herein, for a
statement of the terms and conditions upon which the Notes are or are to be
issued and protected, the nature of the security for the Notes, the rights and
remedies of the Holders of Record of the Notes under the Indenture, and the
rights and obligations of the Partnership and the Trustee under the Indenture.
1.2 SUBORDINATION This Note is a general unsecured obligation
of the Partnership and is subordinated in payment of principal and interest to
all Senior Indebtedness. The term "Senior Indebtedness" is defined in the
Indenture to mean all indebtedness of the Partnership, whether outstanding on
the date of the Indenture or thereafter created, which is evidenced by the
Mortgage Notes or arises as a result of External Financing. There is no
limitation or restriction herein or in the Indenture on the creation of Senior
Indebtedness by the Partnership or on the amount of such Senior Indebtedness to
which this Note may be subordinated. There is also no limitation on the creation
or amount of indebtedness which is pari passu with (i.e. having no priority of
payment over and not subordinated in right of payment to this Note)("Pari Passu
Indebtedness").
2
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Upon any distribution of assets of the Partnership in connection with
any dissolution, winding up, liquidation or reorganization of the Partnership,
the holders of all Senior Indebtedness will first be entitled to receive payment
in full of the principal and premium, if any, thereof and any interest due
thereon, before the Holder of this Note is entitled to receive any payment upon
the principal of or interest on this Note, and thereafter payments to the Holder
of this Note will be pro rata with payments to holders of Pari Passu
Indebtedness. In the absence of any such events, the Partnership is obligated to
pay principal of and interest on this Note in accordance with its terms.
1.3 LOSS THEFT DESTRUCTION OF NOTES. Upon receipt of evidence
satisfactory to the Partnership of the loss, theft, destruction or mutilation of
this Note and an indemnity and/or bond satisfactory to the Partnership and the
Trustee or, in the case of mutilation, upon surrender and cancellation of this
Note, the Partnership shall issue and the Registrar shall authenticate and
deliver a replacement Note in lieu of such lost, stolen, destroyed or mutilated
Note, which shall be of like tenor and unpaid principal amount and dated as of
the date from which unpaid interest has then accrued thereon.
1.4 REDEMPTIONS.
(a) The Partnership shall have the right to call all
or any portion of this Note for redemption in accordance with the Indenture (i)
if it is required to return non-utilized capital pursuant to Section 2.08 of the
Partnership Agreement, or (ii) at any time, without payment of any premium or
penalty, together with accrued interest to the redemption date.
(b) At least thirty (30) days but not more than 90
days prior to the date fixed for redemption, the Partnership shall give the
Holder of Record written notice of such date and the principal amount of this
Note to be redeemed. Such notice shall be given by certified mail at the address
set forth above or at such other address as the Holder of Record shall have
designated in writing by notice to the Trustee. If such notice of redemption is
given, the Holder of Record shall, on the date fixed for redemption specified in
the notice, deliver this Note to the Paying Agent's Office. The Paying Agent
shall deliver to the Holder of Record the principal amount of this Note to be
redeemed and interest accrued on such principal amount to the date fixed for
redemption (provided that payments of interest and any late charges thereon will
be payable to the person who is the Holder of Record as of the close of business
on the Record Date for such interest payment as provided herein).
1.5 INTEREST AFTER DATE FIXED FOR REDEMPTION. Provided notice
of redemption has been given as herein provided, this Note shall cease to bear
interest on and after the date fixed for redemption unless, upon presentation
for redemption,
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the Paying Agent shall fail to make payment in accordance with Section 1.3, in
which event this Note shall continue to bear interest thereafter and until paid.
1.6 EXTENSION OF MATURITY DATE. Subject to the right of the
Partnership to extend the maturity date of the Notes for up to one-year period
as provided herein, the principal amount of the Notes shall be payable on
December 31, 2001 unless the date for payment of the principal amount of the
Notes is accelerated pursuant to the Mortgage or the Notes are redeemed as
provided herein. The Partnership shall have the right to extend the maturity
date of the Notes to December 31, 2002, by giving written notice on or before
December l, 2001 to each Holder of Record and the Trustee and paying to the
Paying Agent (on or before the date of such notice) on behalf of each Holder of
Record an extension fee in an amount equal to one half of one percent (.5%) of
the principal amount of the Notes outstanding as of the date of such notice.
1.7 LATE CHARGES. If any payment of principal, premium, if
any, or interest required to be made under this Note shall be overdue in excess
of 15 days, a late charge of $.04 for each $1.00 so overdue will be paid by the
Partnership to the Paying Agent on behalf of the Holder of Record hereof as
provided herein. Payments shall be deemed made when received by the Paying Agent
in collected funds. If the Partnership is acting as Paying Agent, payments shall
be deemed made when the Partnership segregates the amounts payable and holds
them as a separate trust fund for the Holders of Record of the Notes.
1.8 NON-RECOURSE OBLIGATION. The principal amount of this
Note, premium, if any, interest and all other sums due hereon are unsecured
obligations of the Partnership. Notwithstanding any other provision of this
Note, the General Partner of the Partnership shall not be liable to the Trustee,
the Holders of Record of the Notes or any other person for repayment of the
indebtedness secured thereby or performance of any other obligations set forth
therein or in this Note, and upon a default in the payment or performance
thereof, the Trustee and the Holders of Record shall have the right to seek
recovery solely from assets of the Partnership; PROVIDED HOWEVER, that if, for
any reason, the Partnership does not purchase, lease or sub-lease land
sufficient for the construction of at least one hotel and subject such land to
the lien of a Mortgage within 24 months after the initial effective date of the
Registration Statement filed by the Partnership with the Securities and Exchange
Commission on Form S-I, the Partnership shall offer to refund to each Holder of
Record of a Note, the face amount of such Note without interest thereon (except
that any interest payments previously received may be retained by such Holder)
and shall make such refund to each Holder of Record who accepts such offer, and
if the Partnership does not fulfill such obligation, the General Partner shall
offer to refund such amounts and shall make such refund to each Holder of Record
who accepts such offer.
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2. REPRESENTATIONS. The Partnership represents and warrants to the
purchaser hereof:
2.1 ORGANIZATION. The Partnership is a limited partnership
duly organized, existing and in good standing under the laws of the State of New
York and qualified to transact business in the State of New York.
2.2 AUTHORITY; VALIDITY. The Partnership has full power and
authority to execute and deliver this Note and to incur the obligations provided
for herein, which actions have been duly authorized by all necessary partnership
action and do not contravene the Partnership's partnership agreement or any law,
regulation or contractual provision binding on the Partnership, and this Note
constitutes the legal, valid and binding obligation of the Partnership
enforceable in accordance with its terms.
2.3 PENDING LITIGATION. There are no actions, suits or
proceedings pending, or to the knowledge of the Partnership, threatened against
or affecting the Partnership or any property or rights of the Partnership in any
court or by or before any governmental authority or arbitration board, tribunal
or governmental instrumentality or agency which could, if decided adversely,
have a materially adverse effect on the Partnership.
2.4 NO DEFAULTS. No event has occurred and no condition exists
which, upon execution and delivery of this Note, would constitute an Event of
Default.
3. COVENANTS. The Partnership covenants and agrees that so long
as this Note shall be outstanding:
3.1 PAYMENT OF PRINCIPAL AND INTEREST. The Partnership shall
punctually pay or cause to be paid the principal and interest to become due in
respect of this Note according to the terms hereof.
3.2 MAINTENANCE OF OFFICE. The Partnership shall maintain its
principal office in the County of Monroe, New York at which notices,
presentations and demands to or upon the Partnership in respect of this Note may
be given or made. The Partnership shall promptly give written notice to the
Trustee and any Holder of Record of this Note of any change in the address of
said office.
3.3 FINANCIAL STATEMENTS AND INFORMATION. Within one hundred
fifty (150) days after the end of each fiscal year of the Partnership, the
Partnership shall furnish to the Holder of Record of this Note an audited
balance sheet of the Partnership as of the close of such fiscal year, an audited
statement of income and statement of partners' equity for such fiscal year and
an audited statement of cash flow for such
5
<PAGE>
fiscal year, all in reasonable detail, prepared in accordance with generally
accepted accounting principles and certified by an independent certified public
accountant. Concurrently with the delivery of such audited financial statements,
the Partnership shall also deliver to the Holder of Record of this Note and the
Trustee a statement of the general partner of the Partnership advising whether
any Event of Default exists, or whether any event has occurred which would
constitute an Event of Default with giving of notice or lapse of time, or both,
and, if so, the nature thereof, its period of existence and the action being
taken by the Partnership for the correction thereof.
3.4 DISTRIBUTIONS AND REDEMPTIONS. The Partnership shall not
make any distributions to its partners (a) at a time when an Event of Default
has occurred and is continuing, or (b) unless it has established an adequate
reserve to pay any amounts payable under the Notes during the month in which any
such proposed distribution is to occur. The Partnership shall not redeem or
acquire for value or contract to acquire any outstanding limited partnership
interests of the Partnership.
4. DEFAULTS AND REMEDIES.
4.1 EVENTS OF DEFAULT; RIGHT TO CURE; ACCELERATION.
(a) If an Event of Default occurs and is continuing,
then, subject to the right of the Partnership to cure the default, the Holders
of Record of not less than a majority in aggregate principal amount of the Notes
at the time outstanding may by notice in writing to the Trustee direct the
Trustee to declare the entire unpaid balance of and accrued interest on all of
the Notes to be immediately due and payable as provided herein.
6
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(b) An "Event of Default" occurs if:
(1) the Partnership defaults in the payment of the principal
of any Note when and as the same shall become due and payable, whether at its
stated maturity or otherwise; or
(2) the Partnership defaults in the payment of any installment
of interest or payment of premium, if any, on any Note when and as the same
shall become due and payable; or
(3) the making of an assignment for the benefit of creditors
by the Partnership, the filing of a petition in bankruptcy by the Partnership,
the filing of a petition in bankruptcy against the Partnership if such case or
proceeding is consented to by the Partnership or remains undismissed for a
period of forty (40) days or results in the entry of an order for relief against
the Partnership, or the application for the appointment of a receiver of the
property of the Partnership; or
(4) notice to the Partnership by the Trustee that the
Partnership has breached or failed to keep, observe and perform any of its
representations, warranties, covenants, conditions or agreements contained in
the Indenture or this Note; or
(5) the occurrence of an Event of Default under the Mortgage
Notes.
The Partnership shall have not less than thirty (30) days after the
occurrence of any Event of Default in which to cure or remedy the same to the
reasonable satisfaction of the Trustee or the Holders of Record of at least a
majority in principal amount of the Notes and, in addition, if any Event of
Default (other than one curable by the payment of money) may be cured but not
within such 30-day period, and so long as any delay in curing does not, in the
judgment of the Trustee, (1) result in the inability of the Partnership to meet
its monetary obligations under the Notes or (2) adversely affect the
availability of any remedies available hereunder or under the Indenture, the
Trustee and the Holders of Record of the Notes shall not accelerate payment of
the indebtedness secured hereby if the Partnership commences to cure promptly
during such 30-day period and thereafter diligently prosecutes such efforts to
cure to completion.
4.2 ENFORCEMENT OF REMEDIES. In case any one or more Events of
Default shall have occurred and the principal amount of the Notes shall have
been accelerated as provided herein, the Holders of Record of not less than a
majority in aggregate principal amount of the Notes may proceed to protect and
enforce their rights under the Notes, subject to compliance with Article 5,
Section 5.06 of the
7
<PAGE>
Indenture; provided, however, that, in order to be entitled to so proceed
each said Holder of Record shall be a holder of, or shall be joined in such
proceeding by other Holders of Record who together with him hold, a majority in
aggregate principal amount of all Notes at the time outstanding.
4.3 REMEDIES CUMULATIVE. No remedy herein conferred upon the
Holder of Record of this Note is intended to be exclusive of any other remedy
and each and every such remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise.
4.4 REMEDIES NOT WAIVED. No course of dealing between the
Partnership and the Holder of Record hereof or any delay on the part of such
holder hereof in exercising any rights hereunder shall operate as a waiver of
any rights of any Holder of Record of this Note.
4.5 COST AND EXPENSE OF COLLECTION. The Partnership covenants
and agrees that if default be made in any payment or prepayment of principal of,
premium, if any, or interest on, this Note, it will, to the extent permitted
under applicable law, pay to the Holders of Record of the Notes such additional
amount as shall be sufficient to cover the cost and expense of collection,
including reasonable compensation to the attorneys of the Holder of Record.
5. CONSENTS WAIVERS AND MODIFICATIONS. Notwithstanding any provision to
the contrary contained in the Notes, any of the provisions in the Notes or the
Indenture may be amended or deleted and additions may be made to the Notes or
the Indenture and compliance by the Partnership with any covenant, agreement or
condition set forth in the Notes or the Indenture may be waived, if the
Partnership shall obtain the written consent thereto of the Holder of Record or
Holders of Record, or their agents, who are holders of not less than a majority
in principal amount of all of the Notes at the time outstanding; provided,
however, that without the consent of the Holders of Record of all the Notes at
the time outstanding no such amendment, deletion, supplement or waiver shall
reduce the rate of or extend the time for payment of interest hereunder, or
reduce the principal of or extend the stated time of payment of the principal
amount hereof, or impose any condition with respect to such payments, or reduce
the redemption price hereof, or reduce the principal amount of Notes whose
Holders of Record must consent to an amendment, deletion, supplement or waiver.
In the event of any such amendment, deletion, supplement or waiver, the Holder
of Record or Holders of Record of the Notes, upon the request of the
Partnership, shall surrender them to the Partnership, which shall thereupon
issue and deliver, without charge to such holder, new Notes for the unpaid
principal balance of the Notes, dated as of the date to which interest shall
last have been paid, reflecting such amendment, deletion, supplement or waiver,
or shall present the Notes to the Trustee for a notation
8
<PAGE>
hereon of such amendment, deletion, supplement or waiver, and the Notes shall
thereupon be returned to the Holder of Record or Holders of Record thereof.
6. DEFINITIONS. The following words and terms as used in this Note
shall have the following meanings unless the context or use indicates another or
different meaning or intent:
6.1 "External Financing" shall have the meaning set forth in
the Prospectus.
6.2 "First Closing" shall have the meaning set forth in the
Prospectus.
6.3 "General Partner" means Essex Partners Inc., a New York
corporation and the sole general partner of the Partnership.
6.4 "Holder of Record" means, in connection with any Note, the
payee thereof registered on the Trustee's books unless the requirements of
Section 2.08 of the Indenture have been satisfied and a subsequent holder shall
have presented to the Trustee such Note, duly assigned to him, for inspection
and delivered to the Trustee a written notice of his acquisition of the Note and
designated in writing an address to which payments and notices in respect of the
Note shall be mailed, in which case the term shall mean such subsequent holder.
6.5 "Mortgaged Notes" means the Mortgage Notes (up to
$10,000,000) being offered by the Partnership pursuant to the Partnership's
Prospectus.
6.6 "Paying Agent" shall have the meaning set forth in Section
2.03 of the Indenture.
6.7 "Partnership Agreement" means the Amended and Restated
Limited Partnership Agreement of the Partnership dated as of __________________,
1995.
6.8 "Registrar" shall have the meaning set forth in Section
2.03 of the Indenture.
6.9 "Trustee" means Manufacturers and Traders Trust Company,
Buffalo, New York, and its successors and any corporation resulting from or
surviving any consolidation or merger to which it or its successors may be a
party and any successor trustee at the time serving as such under the Indenture.
9
<PAGE>
7. COVENANTS BIND SUCCESSORS AND ASSIGNS. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Partnership shall bind its successors and assigns, whether so expressed or
not.
8. GOVERNING LAW AND FORUM. This Note shall be construed and
interpreted in accordance with the laws of the State of New York without regard
to its conflicts of laws rules, and any suit hereon may be brought only in such
state and in the County of Monroe.
IN WITNESS WHEREOF, ESSEX HOSPITALITY ASSOCIATES IV L.P. has caused
this Note to be signed, the corporate seal of its managing general partner to be
affixed by its officers thereunto duly authorized, and to be dated as of the day
and year first above written.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
By: Essex Partners Inc.,
General Partner
By:__/s/ John E. Mooney, President
John E. Mooney, President
Attest:
/s/ Barbara J. Purvis, Secretary
- ---------------------------------
Barbara J. Purvis, Secretary
10
<PAGE>
EXHIBIT C
SUBSCRIPTION AGREEMENT FOR ESSEX
HOSPITALITY ASSOCIATES IV L.P.
- --------------------------------------------------------------------------------
SECTION 1. REPRESENTATIONS, AGREEMENTS AND
ACKNOWLEDGEMENTS OF SUBSCRIBERS
By executing this Subscription Agreement and submitting the payment enclosed
herewith, the undersigned hereby subscribes for the number of Limited
Partnership Units of Essex Hospitality Associates IV L.P. (the "Partnership") as
set forth in Section 3 below (the "Units"), at a purchase price of $ 1,000 per
Unit, subject to the timing and volume discounts and in accordance with the
instructions set forth in the current prospectus (the "Prospectus") under the
captions "Investor Suitability Standards" and "The Offering," and/or subscribes
for a Mortgage Note of the Partnership in the principal amount set forth in
Section 3 below (the "Mortgage Note"), and/or subscribes for a Subordinated Note
of the Partnership in the principal amount set forth in Section 3 below (the
"Subordinated Notes") and further:
(a) acknowledges receipt of a copy of the Prospectus, and understands
that the Units and/or Mortgage Note and/or Subordinated Note being acquired will
be governed by the terms of such Prospectus and the Partnership Agreement set
forth as Exhibit A to the Prospectus, or the Subordinated Note or Mortgage Note,
Indenture and, with respect to the Mortgage Note, Mortgage, all as described in
the Prospectus;
(b) accepts and agrees to be bound by the Partnership Agreement if
subscribing for Units and accepts and agrees to be bound by the terms of the
Subordinated Note or Mortgage Note, Indenture if subscribing for a Note, and,
with respect to the Mortgage Note, Mortgage if subscribing for a Mortgage Note;
(c) acknowledges that there is not expected to be any public market for
the Units, Subordinated Note, or Mortgage Note, that the General Partners may
attempt to prevent any such market from developing and that there are certain
other risks involved in investing in the Partnership as described in the
Prospectus under "Risk Factors," "Conflicts of Interest," and "Tax
Considerations"
(d) represents that the undersigned is a United States person, as that
term is defined in Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended (the "Code");
(e) represents, if the undersigned is a tax exempt investor, that in
making the proposed investment the undersigned is aware of and has taken into
consideration that income from the Partnership resulting from the ownership of
Units will be considered unrelated business taxable income under Section 512 of
the Code and may be subject to federal income taxation or other adverse tax
consequences as described in the Prospectus under "Special Considerations For
Tax Exempt Investors";
1
<PAGE>
(f) represents, if the undersigned is subject to the Employee
Retirement Income Security Act of 1974 ("Act"), that in making the proposed
investment the undersigned is aware of and has taken into consideration the
diversification requirements of Section 404(a)(I)(C) of the Act and that the
undersigned has concluded that the proposed investment in the Partnership is a
prudent one;
(g) represents that the undersigned has due authority to execute this
Subscription Agreement and to thereby legally bind the undersigned or the trust,
partnership, corporation or other entity of which the undersigned is the
trustee, general partner, officer, or other authorized agent;
(h) agrees to fully indemnify' and hold the Partnership, the General
Partners and their affiliates and employees, harmless from any and all claims,
actions and causes of action whatsoever which may result from a breach or an
alleged breach of the representation contained in (g) above;
(i) represents that the undersigned has (a) a net worth (exclusive of
home, home furnishings and automobiles) of $100,000 or more, or (b) a net worth
(exclusive of home, home furnishings and automobiles) of at least $35,000 and
had during the last tax year, and expects to have during the current tax year,
gross annual income of at least $35,000, and further represents that if a higher
suitability standard has been established for residents of the state in which
the undersigned resides, then the undersigned has the higher net worth and/or
the higher income required for residents of such state as set forth in the
Prospectus; or represents, in the case of a partnership investor, that each of
the partners, in the case of a corporate investor, that each of the
shareholders, and in the case of a trust investor, that each of the
beneficiaries, satisfy the suitability standards set forth in (a) or (b) above
and any higher standard required by the state of residence of such entity
(j) acknowledges and agrees that the undersigned is not entitled to
cancel, terminate, or revoke this subscription or any agreements of the
undersigned hereunder until twenty-four months from the date of the Prospectus,
or such earlier date as may be determined by Essex Partners Inc. (the "General
Partner"), and that such subscription and agreements shall survive the death or
disability of the undersigned; and
(k) acknowledges and agrees that all subscription proceeds shall be
deposited in an escrow account as described in the Prospectus until such time as
(i) the subscriber is either admitted as a limited partner of the Partnership,
(ii) the Subordinated Note and/or Mortgage Note is issued to the subscriber or
(iii) this subscription is rejected by the General Partner; that a subscriber
shall have no right to withdraw an investment during the period in which
subscription proceeds are held in such escrow account; that if for any reason
whatsoever the General Partner has not
2
<PAGE>
received and accepted subscriptions to purchase Units, Unsecured Notes, and
Mortgage and Notes with an aggregate purchase price of at least $1,980,000
within eighteen months from the date of the Prospectus, all monies theretofore
deposited in such escrow account shall be promptly refunded to the subscribers
together with interest, if any, earned thereon (after reduction of certain fees
and expenses of the escrow agent from the interest earned); and that if
subscriptions for Units, Subordinated Notes, and Mortgage Notes in such amount
are received and accepted by the General Partner within such time period, a
subscriber's investment may be held in such escrow account until up to
twenty-four months from the date of the Prospectus.
Subscribers should be aware that the General Partner has the right to accept or
reject this subscription in whole or in part in its sole and absolute discretion
and that, to the extent permitted by applicable law, the Partnership intends to
assert the foregoing representations, acknowledgements and agreements as a
defense to any claim based on factual assertions contrary to those set forth
above. Subscribers should also be aware that no federal or state agency has made
any finding or determination as to the fairness for public investment, nor any
recommendation or endorsement, of the Units, Subordinated Notes, or Mortgage
Notes and that investors must have adequate means of providing for their current
needs and possible personal contingencies and have no need for liquidity in this
investment.
- --------------------------------------------------------------------------------
SECTION 2. POWER OF ATTORNEY (Applicable only if subscribing for Units) If
subscribing for Units, the undersigned, by executing this Subscription
Agreement, hereby grants to the General Partner a special power of attorney (the
"Power of Attorney") irrevocably making, constituting and appointing the General
Partner as the undersigned's true and lawful attorney-in-fact with power and
authority to act in the undersigned's name and on the undersigned's behalf to
make, execute, acknowledge and file the following documents: (a) the Partnership
Agreement, any separate certificates of limited partnership, any document
required to be filed in any public office or with any public official in any
jurisdiction to protect the limited liability of the Limited Partners and any
amendments to any of the foregoing, which, under the laws of the State of New
York or the laws of any other jurisdiction, are required to be filed or which
the General Partner deems it advisable to file; (b) any other instrument or
document which may be required to be filed by the Partnership in any public
office or with any public official under the laws of any jurisdiction or by any
governmental agency or which the General Partner deems it is advisable to file;
(c) any instrument or document which may be required to effect the continuation
of the Partnership not in excess of the term set forth in Section 2.05 of the
Partnership Agreement, the assignment of Units, the admission of Limited
Partners and the liquidation and winding up of the Partnership (provided such
continuation, admission or dissolution and winding up are in accordance with the
terms of the Partnership Agreement); and (iv) any instrument or document which
may be necessary or desirable to effect the
3
<PAGE>
amendments contemplated by Sections 2.07, 4.01(b), 5.01(b), 5.07 or 8.12 of the
Partnership Agreement or any other actions properly taken by the Partners.
The Power of Attorney granted hereby (a) is a special power of attorney coupled
with an interest, is irrevocable, and, to the extent permitted by law, shall
survive the death, disability, incompetence, merger, bankruptcy, receivership or
dissolution of a Limited Partner and is limited to those matters herein set
forth; (b) may be exercised by the General Partner acting alone for each Limited
Partner by a facsimile signature of the General Partner or by any one of its
officers, acting alone, or by listing all of the Limited Partners executing any
instrument with a single signature of the General Partner or one of its
officers, acting as an attorney-in-fact for all of them; and (c) shall survive
an assignment by a Limited Partner of all or any portion of such Limited
Partner's Units until such time as the General Partner has taken the action
necessary or appropriate to effect the substitution of the assignee as a Limited
Partner.
SECTION 3. INVESTMENT
Checks should be made payable to "M & T Bank as Escrow Agent for Essex
Hospitality Associates IV L.P."
Number of Units: _________ x ($1,000) or [($990)($980)-volume discount] or
[($950)($960)($970)($980)($990)-timing discount] = $ _______________ (minimum of
5 Units, except that the minimum is 2 Units for IRA, Keogh and qualified plans);
except that if the subscriber is purchasing 20 or more Units, the subscriber may
deliver a check for one-half of the subscription price and a Partner Note for
the balance. Principal Amount of Mortgage Note: $ _____________ (minimum of
$5,000, except (that the minimum is $2,000 for IRA, Keogh and qualified plans;
additional increments of $1,000))
Principal Amount of Subordinated Note: $__________ (minimum of $5,000, except
(that the minimum is $2,000 for IRA, Keogh and qualified plans; additional
increments of $1,000))
- --------------------------------------------------------------------------------
SECTION 4. INFORMATION REGARDING REGISTERED OWNER
This is the official registration that will be used in the Partnership's
records. Checks and tax information will be issued in the name(s) indicated in
this Section 4.
___________________________ ____________________________
Individual, Partnership, Trust Social Security/Taxpayer ID#
or Corporation Name
Type of Ownership (Check One)
___ Individual
___ Tenants in Common*
4
<PAGE>
___________________________ ____________________________
Name of Joint/Common Social Security/Taxpayer ID#
Tenant, if applicable
___ Joint Tenants with Right
Of Survivorship*
___ Trust*
___ Partnership
___ Corporation
___________________________ ____________________________
Principal Residence/ Business Phone
business Address
___________________________ ____________________________
City, State, Zip Home Phone
* All owners/trustees must sign
- --------------------------------------------------------------------------------
SECTION 5. BENEFICIAL OWNER MAILING
All correspondence will be directed to the registered owner at the address in
Section 4 above. If the subscriber is a trust and the beneficial owner would
like copies of investor correspondence, please complete this section.
______________________________________________
Name
______________________________________________
Street Address
______________________________________________
City, State, Zip
______________________________________________
Business Phone
______________________________________________
Home Phone
SECTION 6. DISTRIBUTION AND PAYMENT CHECKS
To direct distribution and payment checks to a party other than the registered
owner, please complete this section.
______________________________________________
Name of firm (bank, brokerage)
______________________________________________
Account Name
5
<PAGE>
______________________________________________
Account Number Phone
______________________________________________
Street Address
______________________________________________
City, State, Zip
- --------------------------------------------------------------------------------
SECTION 7. INVESTOR SIGNATURES
The undersigned is (are) the person(s) or entity named as the registered owner
in Section 4 above, or alternatively, the undersigned has the full power and
authority to execute this Subscription Agreement on behalf of such person(s).
Execution of this Subscription Agreement by a registered representative will not
be accepted.
Under the penalties of perjury, the undersigned certifies that (I) the Social
Security/Taxpayer Identification Number(s) indicated in Section 4 above is the
true and correct Social Security/Taxpayer Identification Number of the
registered owners; and (ii) the registered owner is not subject to backup
withholding either because such person has not been notified that he/she/it is
subject to backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified such person that
he/she/it is no longer subject to backup withholding. The
6
<PAGE>
undersigned further acknowledges that the undersigned has received a copy of the
Prospectus of the Partnership and meets the suitability standards for the
undersigned's state of residence.
X ________________________________ X ________________________________________
Signature of owner Date Signature of joint owner Date
or trustee or trustee
(Must be signed by all trustees if
the investor is a trust)
________________________________ ________________________________________
Title or capacity if partnership, State of Residence
corporation or other non-individual
entity
- --------------------------------------------------------------------------------
BROKER DEALER STATEMENT
To substantiate compliance with the prospectus delivery requirements under the
Securities Act of 1933, as amended, the undersigned hereby certifies that the
above-named subscriber received the Prospectus of the Partnership before any
order was taken. The undersigned further certifies that: I have reasonable
grounds to believe that the above-named subscriber meets the applicable
suitability standards as set forth in the Prospectus and is otherwise suitable
for the investment. I have also informed the investor that the Units and Notes
are subject to transfer restrictions and that no public market for the Units or
Notes is likely to develop. My firm will maintain records regarding suitability
in accordance with the NASD's rules and will execute transactions in
discretionary accounts only in accordance with the NASD's rules.
[ ] Check if the subscriber is an investor in a previous partnership sponsored
by Essex.
________________________________ ________________________________________
Broker/Dealer Registered Representative
________________________________ ________________________________________
Street Address of Branch Office Representative's Signature Date
________________________________ ________________________________________
City, State, Zip Dealer's Authorized Date
Return to: ESSEX CAPITAL MARKETS INC. 100 Corporate Woods, Suite 300 Rochester,
New York 14623 (716) 272-2300
7
<PAGE>
PROMISSORY NOTE
(Partner Note)
$ , 19
-------------------------- -------------------------
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Essex Hospitality Associates IV L.P. (the "Partnership") at its offices at 100
Corporate Woods, Rochester, New York 14623, the principal sum of __________ and
00/100 Dollars ($__________ ) (one-half of the purchase price if the undersigned
is purchasing 20 or more Limited Partnership Units).
Payment under this Note shall become due and payable upon the demand by
Essex Partners Inc. (the "General Partner") made at least six months after
acceptance of the subscription to which this Note relates; provided, that (a) a
property has been identified for acquisition by the Partnership and a date for
closing of the purchase has been scheduled and (b) within 30 days prior to the
scheduled closing date, the General Partner, in its sole and absolute
discretion, has determined that the Partnership has insufficient cash gross
offering proceeds to consummate the purchase and/or commence construction on the
hotel to be built on such property. The General Partner may, in its discretion,
demand only a portion of the amount payable hereunder. In such an event, the
General Partner shall promptly notate the amount of such payment on Schedule A
hereto and deliver a copy thereof to the undersigned.
All amounts due hereunder, to the extent not previously paid pursuant to the
foregoing paragraph, shall became immediately due and payable in full at the
earlier of:
(1) Two years from the date of the acceptance of the subscription to which
this Note relates; or
(2) Three years from the effective date of the Registration Statement filed in
connection with the Limited Partnership Unit(s) to which this Note relates.
This Note shall be payable in lawful money of the United States of
America. If the date upon which any payment is due is not a business day, such
payment shall be due on the last business day immediately preceding such date.
This Note or any payment described above may be prepaid, without
penalty, in whole or in part (in increments of $1,000) at any time. In the event
of a partial prepayment, the General Partner shall notate the amount of such
payment on Schedule A hereto and furnish a copy thereof to the undersigned.
<PAGE>
If legal proceedings are instituted to collect any amount due under
this Note, the undersigned agrees to pay the holder hereof, in addition to the
unpaid principal balance, all costs and expenses of such proceedings, including
attorneys' fees.
Any of the following events shall constitute an Event of Default
hereunder:
(1) The undersigned shall fail to make payment under this Note for thirty days
after such payment has become due; or
(2) The undersigned shall: (a) make an assignment for the benefit of
creditors; (b) admit in writing his/her/its inability to pay his/her/its debts
as they become due; or (c) commence (as the debtor) a case in bankruptcy or any
proceeding under any other insolvency law; or
(3) A case in bankruptcy or any proceeding under any other insolvency law
shall be commenced against the undersigned (as the debtor) and: (a) a court of
competent jurisdiction enters an order for relief against the undersigned (as
the debtor); (b) the case or proceeding remains undismissed for forty days; or
(c) the undersigned admits or consents to the material allegations against it in
any such case or proceeding; or
(4) A trustee, receiver, agent or custodian (however named) is appointed or
authorized to take charge of substantially all of the property of the
undersigned for the purpose of enforcing a lien against such property or for the
purpose of general administration of such property; or
(5) If the undersigned is a corporation, it ceases doing business as a going
concern or takes any action looking to its dissolution or liquidation.
Upon the occurrence of an Event of Default hereunder, all amounts
owing under this Note shall become immediately due and payable without notice,
presentment or demand of any kind, all of which are hereby waived. The
undersigned shall nevertheless remain liable for payment on the Note until it
has been paid in full or cancelled.
Any payment not made when due hereunder shall, from and after the due
date, bear interest at a rate which shall automatically increase or decrease so
that at all times such rate shall be equal to two percent per annum in excess of
the Prime Rate of Manufacturers and Traders Trust Company; provided, however,
that the undersigned shall not be required to pay any amount pursuant to this
Note which is in excess of the maximum amount permitted under applicable law.
2
<PAGE>
The provisions of this Note shall inure to the benefit of and be
binding on any successor to the undersigned, or any assignee thereof, and shall
extend to any holder hereof. This Note shall in all respects be governed by, and
construed in accordance with, the laws of the State of New York, including all
matters of construction, performance and validity. The undersigned waives
presentment and demand for payment, notice of dishonor, protest and notice of
protest of this Note. No failure or delay by the Partnership in the exercise of
any power or right in this Note shall operate as a waiver thereof, and no
exercise or waiver of any single power or right, or the partial exercise
thereof, shall affect the Partnership's rights with respect to any and all other
rights and powers.
None of the Partnership's right, title and interest in and under this
Note, including but not limited to, its right to all moneys due or to become due
hereunder, may be assigned to another party.
The liability of the undersigned, if more than one person or entity,
shall be joint and several.
The number of Limited Partnership Units of the Partnership being
purchased in connection herewith is .
___________________________________
Print or Type Name of Maker
___________________________________
Signature if Individual
By: ___________________________________
(Signature of Authorized Officer,
Trustee or General Partner if Promisor
is a Corporation, Trust or Partnership)
___________________________________
(Name and Title of Signatory if Promisor
is a Corporation, Trust or Partnership)
3
<PAGE>
SCHEDULE A
----------
DATE OF AMOUNT OF SIGNATURE OF OFFICER OF REMAINING
PAYMENT PAYMENT GENERAL PARTNER BALANCE
- ------- ------- --------------- -------
_________ $ _________ _______________________ $ __________
_________ $ _________ _______________________ $ __________
_________ $ _________ _______________________ $ __________
4
<PAGE>
EXHIBIT D
PRIOR PERFORMANCE TABLES
ESSEX PARTNERS INC. AND AFFILIATES
INTRODUCTION
Essex Partners Inc. has been a general partner in eleven real estate
syndications with investment objectives similar to the Partnership. The prior
partnerships were organized to provide capital appreciation and cash
distributions from investments in hotels. These syndications are:
Essex Microtel 1989 L.P.
Essex Microtel Associates L.P.
Essex Microtel Lehigh L.P.
Essex Microtel LeRay L.P.
Hagel-Essex Microtel L.P.
Essex Microtel Carrier Circle L.P.
Essex Charleston Associates L.P.
Essex Microtel Associates II L.P.
Essex Knoxville Associates L.P.
Essex Hospitality Associates III L.P.
Essex Glenmaura L.P.
Nine of the above partnerships involved construction of new facilities. Essex
Microtel Lehigh L.P. purchased a hotel that had been in operation for fifteen
months. Essex Microtel LeRay L.P. purchased a hotel after construction was
completed but before operations began.
This offering is the fourth publicly registered program sponsored by Essex
Partners Inc. or its affiliates.
<PAGE>
TABLE I
ESSEX AND AFFILIATES
EXPERIENCE IN RAISING AND INVESTING FUNDS
(THREE YEARS ENDING DECEMBER 31, 1996)
Table I sets forth information with respect to the offerings of real
estate limited partnership interests with similar investment objectives as
the Partnership in which Essex Partners or affiliates acted as general
partners and which closed in the three year period ending December 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
TABLE I
ESSEX AND AFFILIATES
EXPERIENCE IN RAISING AND INVESTING FUNDS
(Three Years Ending December 31, 1996)
Essex Essex Essex Hospitality
Glenmaura L.P. (6) Glenmaura L.P. (6) Associates III L.P. (5)
------------------ ------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Dollar amount offered 2,500,000 1,500,000 13,986,320
Dollar amount raised 2,300,000 92.0% 1,500,000 100.0% 13,986,320 100.0%
Less offering expenses:
Selling commissions paid
to affiliates 12,000 0.5% 60,000 4.0% 856,000 6.1%
Organizational and syndication
expenses (1) 15,400 0.7% 34,500 2.3% 767,000 5.5%
----------- ----- ----------- ----- ----------- ------
Available for investment $ 2,272,600 98.8% $ 1,405,500 93.7% $12,363,320 88.4%
Acquisition and Development costs:
Pre-paid items and fees related
to purchase of property -- -- -- -- -- --
Cash downpayment (2) -- -- 1,033,600 68.9% 1,366,000 9.8%
Acquisition and Developer fees:
Paid to affiliates 256,500 11.2% 225,000 15.0% 870,000 6.2%
Paid to non-affiliates -- -- -- -- -- --
Other acquisition and development
expenses (2) 2,009,100 87.4% 143,900 9.6% 9,442,000 67.5%
----------- ----- ----------- ----- ----------- ------
Total acquisition cost $ 2,265,600 98.5% $ 1,402,500 93.5% $11,678,000 83.5%
Non-recurring management and
organization fees to affiliates 7,000 0.3% -- -- -- --
Other requirements (3) -- -- 3,000 0.2% 685,320 4.9%
----------- ----- ----------- ----- ----------- ------
Total $ 2,300,000 100.0% $ 1,500,000 100.0% $13,986,320 100.0%
Purchase price (including
brokerage fees) 8,381,000 8,381,000 11,679,000
Percent leverage (4) 77.6% 77.6% 85.6%
Date offering began 05/25/95 05/10/95 11/17/93
Length of offering (months) N/A 2 22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE I
ESSEX AND AFFILIATES
EXPERIENCE IN RAISING AND INVESTING FUNDS
(THREE YEARS ENDING DECEMBER 31, 1996)
<S> <C> <C> <C> <C> <C> <C>
Essex Knoxville Essex Knoxville Essex Knoxville
Associates L.P. (7) Associates L.P. (7) Associates L.P. (7)
------------------- ------------------- -------------------
Dollar amount offered 1,000,000 2,000,000 500,000
Dollar amount raised 1,000,000 100.0% 2,000,000 100.0% 500,000 100.0%
Less offering expenses:
Selling commissions paid
to affiliates 20,000 2.0% 100,000 5.0% 27,500 5.5%
Organizational and syndication
expenses (1) 15,900 1.6% 39,800 2.0% 13,000 2.6%
---------- ----- ---------- ----- -------- -----
Available for investment $964,100 96.4% $1,860,200 93.0% $459,500 91.9%
Acquisition and Development costs:
Pre-paid items and fees related
to purchase of property - - - - - -
Cash downpayment (2) 430,000 43.0% - - - -
Acquisition and Developer fees:
Paid to affiliates 200,000 20.0% - - - -
Paid to non-affiliates - - - - - -
Other acquisition and development
expenses (2) 304,100 30.4% 1,820,700 91.0% 396,600 79.3%
---------- ----- ---------- ----- -------- -----
Total acquisition cost $934,100 93.4% $1,820,700 91.0% $396,600 79.3%
Non-recurring management and
organization fees to affiliates 30,000 3.0% 25,000 1.3% 25,000 5.0%
Other requirements (3) - - 14,500 0.7% 37,900 7.6%
---------- ----- ---------- ----- -------- -----
Total $1,000,000 100.0% $2,000,000 100.0% $500,000 100.0%
Purchase price (including
brokerage fees) 3,118,000 3,118,000 3,118,000
Percent leverage (4) 80.2% 80.2% 80.2%
Date offering began 12/03/92 06/22/93 05/24/94
Length of offering (months) 13 6 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE I
ESSEX AND AFFILIATES
EXPERIENCE IN RAISING AND INVESTING FUNDS
(THREE YEARS ENDING DECEMBER 31, 1996)
Essex Real Estate
Partnership Notes (8)
---------------------
<S> <C> <C>
Dollar amount offered $976,000
Dollar amount raised $976,000 100.0%
Less offering expenses:
Selling commissions paid
to affiliates 48,800 5.0%
Organizational and syndication
expenses (1) 27,200 2.8%
Available for investment $900,000 92.2%
Acquisition and Development costs:
Pre-paid items and fees related
to purchase of property - -
Cash downpayment (2) - -
Acquisition and Developer fees:
Paid to affiliates - -
Paid to non-affiliates - -
Other acquisition and development
expenses (2) 95,000 9.7%
Total acquisition cost $95,000 9.7%
Non-recurring management and
organization fees to affiliates
Other requirements (3) 805,000 82.5%
Total $976,000 100.0%
Purchase price (including
brokerage fees) -
Percent leverage (4) -
Date offering began 03/01/95
Length of offering (months) 2
</TABLE>
<PAGE>
TABLE I
ESSEX PARTNERS AND AFFILIATES
EXPERIENCE IN RAISING AND INVESTING FUNDS
(Three Years Ending December 31, 1996)
(1) Includes any legal, accounting, blue sky and publication costs as well as
other fees incurred with the offering.
(2) The cash downpayment represents the land cost. Proceeds used in property
construction are included in other acquisition and development expenses.
(3) Inclues amounts of working capital reserves and other carrying costs.
(4) For each partnership, percent leverage equals: (i) the total amount of
mortgages and other financing outstanding on the property owned by the
partnership, divided by (ii) the purchase price.
(5) Both limited partnership interests and debt were included in the offerings
by Essex Charleston Associates L.P. and Essex Hospitality Associates III
L.P.
(6) Essex Glenmaura L.P. was financed through two offerings, an equity offering
of $2,500,000 and a note offering of $1,500,000. Each offering is presented
separately in Table I.
(7) Essex Knoxville L.P. was financed through three offerings, an equity
offering of $1,000,000, a mortgage note offering of $2,000,000 and a note
offering of $500,000. Each offering is presented separately in Table I.
(8) The Essex Real Estate Notes offering raised debt financing for three real
estate partnerships, Essex Microtel Associates L.P. and Essex Microtel
LeRay, which own hotel properties and Essex Geneseo Associates, which owns
non-hotel property. Of the total amount raised, $434,000 was used for Essex
Microtel Associates L.P. to replace existing debt, $217,000 was used for
Essex Microtel LeRay L.P. to replace existing debt and provide working
capital and $325,000 was for Essex Geneseo Associates to replace existing
debt and complete construction of two apartment buildings.
<PAGE>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(THREE YEARS ENDING DECEMBER 31, 1996)
Table II provides information as to the cumulative compensation paid to
sponsors for a three year period ending December 31, 1996 (or from partnership
inception, if later) from both offering proceeds and property operations.
None of the programs for which information is presented in Table II has been
liquidated and there have been no sales or maturities of any of the program's
investments.
<PAGE>
<TABLE>
<CAPTION>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(Cumulative Through December 31, 1996)
Essex Hospitality Essex Knoxville
Essex Associates III Associates L.P.
Glenmaura L.P. L.P. (1) (2)
-------------- ----------------- ----------------
<S> <C> <C> <C>
Date offering commenced var 11/17/93 var
Dollar amount raised 3,800,000 13,986,320 3,500,000
Amount paid to sponsor from proceeds of offering:
Underwriting fees 83,300 477,000 32,500
Acquisition and development fees
- real estate commissions - - -
- advisory fees 481,500 514,000 100,000
- other - - -
Organization fees 24,000 270,000 -
Other 10,000 - 25,000
Dollar amount of cash generated from operations
before deducting payments to sponsor: (358,350) 223,800 379,800
Amount paid to sponsor from operations:
Property management fees 24,900 326,400 127,000
Partnership management fees 3,600 79,700 37,000
Reimbursements - - -
Leasing commissions - - -
Other - - -
Dollar amount of property sales and refinancing
before deducting payments to sponsor: - - -
- cash - - -
- notes - - -
Amount paid to sponsor from property sales
and refinancing: - - -
- Real estate commissions - - -
- Incentive fees - - -
- Other - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(Cumulative Through December 31, 1996)
Essex Microtel Essex Microtel
Associates II Essex Charleston Carrier Circle
L.P. Associates L.P. L.P.
------------- --------------- ---------------
<S> <C> <C> <C>
Date offering commenced 11/18/92 8/27/92 var
Dollar amount raised 10,487,000 3,390,000 3,400,000
Amount paid to sponsor from proceeds of offering:
Underwriting fees - - -
Acquisition and development fees
- real estate commissions - - -
- advisory fees - 10,000 -
- other - - -
Organization fees - - -
Other - - -
Dollar amount of cash generated from operations
before deducting payments to sponsor: 800,800 444,700 380,500
Amount paid to sponsor from operations:
Property management fees 452,200 141,700 109,000
Partnership management fees 127,200 39,300 44,100
Reimbursements - - -
Leasing commissions - - -
Other - - -
Dollar amount of property sales and refinancing
before deducting payments to sponsor: - - -
- cash - - -
- notes - - -
Amount paid to sponsor from property sales
and refinancing: - - -
- Real estate commissions - - -
- Incentive fees - - -
- Other - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(Cumulative Through December 31, 1996)
Essex Microtel Essex Microtel Hagel-Essex
Associates L.P. LeRay L.P. L.P.
--------------- -------------- --------------
<S> <C> <C> <C>
Date offering commenced 06/19/90 10/19/90 03/29/91
Dollar amount raised 3,083,000 1,531,254 1,012,750
Amount paid to sponsor from proceeds of offering:
Underwriting fees - - -
Acquisition and development fees
- real estate commissions - - -
- advisory fees - - -
- other - - -
Organization fees - - -
Other - - -
Dollar amount of cash generated from operations
before deducting payments to sponsor: 983,500 (204,435) 409,200
Amount paid to sponsor from operations:
Property management fees 148,500 - -
Partnership management fees 26,600 10,265 36,500
Reimbursements - - -
Leasing commissions - - -
Other - - -
Dollar amount of property sales and refinancing
before deducting payments to sponsor: - - -
- cash - - -
- notes - - -
Amount paid to sponsor from property sales
and refinancing: - - -
- Real estate commissions - - -
- Incentive fees - - -
- Other - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(Cumulative Through December 31, 1996)
Essex Microtel Essex Microtel Other
Lehigh L.P. 1989 L.P. Programs (3)
----------- -------------- ------------
<S> <C> <C> <C>
Date offering commenced var var
Dollar amount raised $3,161,480 $2,687,000 7,346,460
Amount paid to sponsor from proceeds of offering:
Underwriting fees - - 512,100
Acquisition and development fees
- real estate commissions - - -
- advisory fees - - 285,000
- other - - -
Organization fees - - 107,200
Other - - 60,000
Dollar amount of cash generated from operations
before deducting payments to sponsor: 550,300 480,800 68,500
Amount paid to sponsor from operations:
Property management fees 126,000 137,700 9,000
Partnership management fees 38,400 38,400 900
Reimbursements - - -
Leasing commissions - - -
Other - - -
Dollar amount of property sales and refinancing
before deducting payments to sponsor: - - -
- cash - - -
- notes - - -
Amount paid to sponsor from property sales
and refinancing: - -
- Real estate commissions - - -
- Incentive fees - - -
- Other - - -
</TABLE>
<PAGE>
TABLE II
ESSEX PARTNERS INC. AND AFFILIATES
COMPENSATION TO SPONSOR
(Cumulative Through December 31, 1996)
(1) Essex Hospitality Associates III opened one of its three properties in
September, 1994. The remaining properties opened in 1995.
(2) Essex Knoxville Associates had three offerings. The first commenced in
December, 1992 and raised $1,000,000 in equity financing. The second
commenced in June, 1993 and raised $2,000,000 in first mortgage financing.
The final offering commenced May, 1994 and raised $500,000 in unsecured
notes.
(3) This category includes all other programs syndicated by Essex Partners from
1994 through 1996.
<PAGE>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS
(Through December 31, 1996)
Table III presents operating information from the opening of the
property through December 31, 1996 for the programs in which Essex Partners or
affiliates acted as general partners and which closed in the five year period
ending December 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
-----------------------------------------
ESSEX MICROTEL CARRIER CIRCLE L.P.
-----------------------------------------
1992
(2 MOS) 1993 1994 1995 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues 101.7 846.1 967.9 925.4 948.4
Profit on sale of properties -- (36.4) -- -- --
Less: operating expenses 88.2 560.3 615.5 587.9 634.1
---- ----- ----- ----- -----
Operating income (loss) 13.5 249.5 352.4 337.6 314.3
Less: interest expense 37.0 225.5 225.5 225.5 226.5
depreciation 77.2 247.6 218.2 197.5 187.5
---- ----- ----- ----- -----
Net income (loss) (100.6) (223.7) (91.3) (85.4) (99.7)
Cash generated from operations (13.9) 40.1 125.7 123.2 53.7
Cash generated from sales -- 66.0 -- -- --
Cash generated from financing activities 3,153.5 (66.3) (105.0) (117.1) (55.1)
Plus:cash distributions -- 66.3 105.0 117.1 91.5
-------------------------------------------
Cash generated from operations, sales and financing 3,139.5 106.1 125.8 123.2 90.1
Less: cash distributions to investors
--from operating cash flow -- 40.1 67.0 117.1 91.5
--from sales and financing activities -- 26.2 38.0 - -
--from other -- -- -- -- --
-------------------------------------------
Cash generated (deficiency) after cash distributions 3,139.5 39.8 20.8 6.1 (1.4)
Less: special items - capital improvements (3,116.6) (2.2) (30.1) (16.9) (28.2)
-------------------------------------------
Cash generated (deficiency) after cash 22.9 37.6 (9.3) (10.7) (29.6)
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations (75.8) (168.5) (68.8) (64.4) (75.1)
-- from recapture -- -- -- -- --
Capital gain -- -- -- -- --
Cash distributions to investors
Source: (on a GAAP basis) -- investment income -- -- -- --
-- return of capital -- 50.0 79.1 88.2 68.9
Source: (on a cash basis) -- sales -- 19.7 28.6 -- --
-- financing activities -- -- -- -- --
-- operations -- 30.2 50.5 88.2 68.9
-- other -- -- -- -- --
Amounts (in percentage terms) remaining invested in program
properties at the end of the last year reported in the table
(original total acquisition cost of properties retained divided
by original total acquisition cost of all properties in program) 98%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
----------------------------------------------
ESSEX CHARLESTON ASSOCIATES L.P.
----------------------------------------------
1992 1993
(1) (8 MOS) 1994 1995 1996
----- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues 13.3 483.2 829.1 866.0 916.0
Profit on sale of properties - - - - -
Less: operating expenses 2.2 339.3 577.1 578.0 629.1
--- ----- ----- ----- -----
Operating income (loss) 11.1 143.9 252.0 288.0 286.9
Less: interest expense - 116.7 175.0 175.0 175.0
depreciation 12.8 167.1 239.1 202.9 177.6
---- ----- ----- ----- -----
Net income (loss) (1.7) (139.9) (162.1) (89.9) (65.7)
Cash generated from operations 10.4 (5.4) 84.0 118.5 113.5
Cash generated from sales - - - - -
Cash generated from financing activities 2,539.0 456.2 (68.0) (106.4) (110.0)
Plus:cash distributions - 25.0 68.0 106.4 111.1
------------------------------------------------
Cash generated from operations, sales and financing 2,549.4 475.8 84.0 118.5 114.6
Less: cash distributions to investors
--from operating cash flow - - 68.0 106.4 111.1
--from sales and financing activities - 25.0 - - -
--from other - - - - -
------------------------------------------------
Cash generated (deficiency) after cash distributions 2,549.4 450.8 16.0 12.1 3.5
Less: special items - capital improvements (901.0) (2,065.2) (16.3) (10.6) (25.4)
------------------------------------------------
Cash generated (deficiency) after cash 1,648.4 (1,614.4) (0.3) 1.5 (21.9)
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations (1.1) (84.9) (98.3) (54.6) (39.9)
-- from recapture - - - - -
Capital gain - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - -
-- return of capital - 15.2 41.3 64.6 67.4
Source: (on a cash basis) -- sales - - - - -
-- financing activities - 15.2 - - -
-- operations - - 41.3 64.6 67.4
-- other - - - - -
Amounts (in percentage terms) remaining invested in program
properties at the end of the last year reported in the table
(original total acquisition cost of properties retained divided
by original total acquisition cost of all properties in program). 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
--------------------------------------------------
ESSEX MICROTEL ASSOCIATES II L.P.
--------------------------------------------------
1992 1993
(1) (3 MOS) 1994 1995 1996
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues - 272.7 2,569.6 2,925.5 2,959.8
Profit on sale of properties - - - - -
Less: operating expenses 2.5 308.9 1,693.2 1,803.9 1,868.7
--- ----- ------- ------- -------
Operating income (loss) (2.5) (36.2) 876.4 1,121.6 1,091.1
Less: interest expense - 372.7 785.8 785.8 785.8
depreciation - 255.1 676.1 687.0 690.0
- ----- ----- ----- -----
Net income (loss) (2.5) (664.0) (585.5) (351.2) (384.7)
Cash generated from operations (0.4) (452.2) 135.2 378.3 275.4
Cash generated from sales - - - - -
Cash generated from financing activities 3,707.6 5,304.0 (78.0) (312.9) (341.9)
Plus:cash distributions - 100.2 273.5 315.5 341.9
-------------------------------------------------------
Cash generated from operations, sales and financing 3,707.2 4,952.0 330.7 380.9 275.4
Less: cash distributions to investors
--from operating cash flow - - 135.2 315.5 341.9
--from sales and financing activities - 100.2 138.3 - -
--from other - - - - -
-------------------------------------------------------
Cash generated (deficiency) after cash distributions 3,707.2 4,851.8 57.2 65.4 (66.4)
Less: special items - capital improvements (1,051.5) (6,830.8) (422.4) (75.0) (40.2)
-------------------------------------------------------
Cash generated (deficiency) after cash 2,655.7 (1,979.0) (365.3) (9.6) (106.6)
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations (0.9) (252.6) (222.7) (133.6) (146.3)
-- from recapture - - - - -
Capital gain - - - - - --
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - -
-- return of capital - - 104.0 120.0 130.0
Source: (on a cash basis) -- sales -- - - - - -
-- financing activities - - 52.6 - -
-- operations - - 51.4 120.0 130.0
-- other - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties 100%
in program)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
------------------------------------------ ----------------
ESSEX HOSPITALITY ASSOCIATES III (2) ESSEX GLENMAURA
------------------------------------------ ----------------
1993 1994 1995
(1) (3 MOS) 1995 1996 (1) 1996
----- ------- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues - 128.7 2,498.8 3,741.1 2.4 486.3
Profit on sale of properties - - - (67.2) - -
Less: operating expenses - 167.1 1,849.4 2,664.9 2.4 864.6
----- ------- ------- --- -----
Operating income (loss) - (38.4) 649.4 1,008.9 (0.0) (378.3)
Less: interest expense - 242.4 750.4 1,000.0 5.5 162.8
depreciation - 151.3 483.4 667.1 - 273.5
----- ----- ----- -----
Net income (loss) - (432.0) (584.5) (658.1) (5.5) (814.6)
Cash generated from operations - (299.6) (67.9) 239.6 (5.6) (381.3)
Cash generated from sales - - -
Cash generated from financing activities 1,593.0 7,026.1 3,258.6 (281.2) 2,068.6 5,784.3
Plus:cash distributions - 62.3 314.4 423.3 - -
------------------------------------------- ------------------
Cash generated from operations, sales and
financing 1,593.0 6,788.8 3,505.2 381.7 2,063.0 5,403.1
Less: cash distributions to investors
--from operating cash flow - - - 239.6 - -
--from sales and financing activities - 62.3 314.4 183.7 - -
--from other - - - - - -
------------------------------------------- ------------------
Cash generated (deficiency) after cash distributions 1,593.0 6,726.5 3,190.8 (41.6) 2,063.0 5,403.1
Less: special items - capital improvements (575.4) (5,195.2) (5,615.9) (54.4) (1,814.5) (5,623.4)
------------------------------------------- ------------------
Cash generated (deficiency) after cash 1,017.6 1,531.3 (2,425.1) (96.0) 248.5 (220.4)
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations - (202.4) (146.6) (165.1) (5.8) (370.3)
-- from recapture - - - - - -
Capital gain - - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - - -
-- return of capital - 29.18 78.88 106.20 0.0 0.0
Source: (on a cash basis) -- sales - - - - - -
-- financing activities - 29.18 78.88 46.09 - -
-- operations - - - - 0.0 0.0
-- other - - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program). 99% 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
------------------------------------------
ESSEX MICROTEL ASSOCIATES L.P.
------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues 745.4 832.5 892.0 923.6 969.5
Profit on sale of properties - - - - -
Less: operating expenses 564.1 599.9 603.6 616.5 593.7
----- ----- ----- ----- -----
Operating income (loss) 181.4 232.6 288.4 307.1 375.8
Less: interest expense 41.6 46.5 47.2 43.3 44.4
depreciation 155.4 145.4 125.3 115.7 117.9
----- ----- ----- ----- -----
Net income (loss) (15.7) 40.8 115.9 148.1 213.4
Cash generated from operations 195.2 167.1 261.2 268.6 319.5
Cash generated from sales - - - - -
Cash generated from financing activities 125.0 (226.3) (240.0) (256.3) (266.5)
Plus:cash distributions 406.4 227.1 240.0 252.0 279.8
------------------------------------------
Cash generated from operations, sales and financing 726.6 167.9 261.2 264.3 332.8
Less: cash distributions to investors
--from operating cash flow 144.2 179.7 240.0 252.0 279.8
--from sales and financing activities 262.2 47.4 0.0 0.0 0.0
--from other 0.0 0.0 0.0 0.0 0.0
------------------------------------------
Cash generated (deficiency) after cash distributions 320.2 (59.2) 21.2 24.3 53.0
Less: special items - capital improvements (463.4) (12.9) (5.3) (8.9) (26.7)
------------------------------------------
Cash generated (deficiency) after cash (143.1) (72.2) 15.9 15.4 26.3
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations (5.1) 13.2 37.6 48.0 69.2
-- from recapture - - - - -
Capital gain - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - -
-- return of capital 131.8 73.7 77.8 81.7 90.8
Source: (on a cash basis) -- sales - - - - -
-- financing activities 85.0 15.4 - - -
-- operations 46.8 58.3 77.8 81.7 90.8
-- other - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program). 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
--------------------------------------------
ESSEX MICROTEL 1989 L.P.
--------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues 1,148.2 1,105.3 1,036.0 1,025.0 1,058.9
Profit on sale of properties - - - - -
Less: operating expenses 644.6 660.3 634.5 636.4 625.3
----- ----- ----- ----- -----
Operating income (loss) 503.6 445.0 401.5 388.5 433.6
Less: interest expense 271.0 292.1 290.4 288.5 260.1
depreciation 172.5 190.7 192.2 168.7 152.7
----- ----- ----- ----- -----
Net income (loss) 60.1 (37.8) (81.1) (68.8) 20.8
Cash generated from operations 218.1 156.0 97.0 104.2 161.3
Cash generated from sales - - - - -
Cash generated from financing activities (253.9) (134.6) (112.7) (75.0) (106.5)
Plus:cash distributions 795.5 121.2 97.8 58.2 78.2
------------------------------------------
Cash generated from operations, sales and financing 759.7 142.6 82.1 87.3 133.0
Less: cash distributions to investors
--from operating cash flow 253.9 121.2 97.8 58.2 78.2
--from sales and financing activities 541.6 - - - -
--from other - - - - -
------------------------------------------
Cash generated (deficiency) after cash distributions (35.8) 21.3 (15.7) 29.2 54.9
Less: special items - capital improvements (13.8) (8.6) (14.2) (10.3) (33.3)
------------------------------------------
Cash generated (deficiency) after cash (49.6) 12.7 (29.8) 18.8 21.5
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations 40.1 (25.2) (54.1) (45.8) 13.9
-- from recapture - - - - -
Capital gain - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - -
-- return of capital 530.3 80.8 65.2 38.8 52.1
Source: (on a cash basis) -- sales - - - - -
-- financing activities 361.1 - - - -
-- operations 169.3 80.8 65.2 38.8 52.1
-- other - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program). 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
---------------------------------------------
ESSEX MICROTEL LEHIGH L.P.
---------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues 1,144.7 1,164.8 1,121.6 1,105.5 1,074.3
Profit on sale of properties - - - - -
Less: operating expenses 690.4 716.6 707.3 683.1 698.6
----- ----- ----- ----- -----
Operating income (loss) 454.3 448.1 414.3 422.4 375.7
Less: interest expense 185.0 223.3 234.2 252.1 268.4
depreciation 162.1 176.0 166.2 169.5 193.4
----- ----- ----- ----- -----
Net income (loss) 107.2 48.9 13.9 0.7 (86.2)
Cash generated from operations 258.1 225.2 170.8 194.3 101.2
Cash generated from sales - - - - -
Cash generated from financing activities (233.8) (192.1) (189.9) (193.3) (72.1)
Plus:cash distributions 662.2 139.7 143.1 139.9 76.5
---------------------------------------------
Cash generated from operations, sales and financing 686.5 172.9 124.1 140.8 105.7
Less: cash distributions to investors
--from operating cash flow 233.8 139.7 143.1 139.9 76.5
--from sales and financing activities 428.4 - - - -
--from other - - - - -
---------------------------------------------
Cash generated (deficiency) after cash distributions 24.3 33.1 (19.0) 1.0 29.2
Less: special items - capital improvements (21.0) (23.4) (15.8) (23.2) (41.5)
---------------------------------------------
Cash generated (deficiency) after cash 3.3 9.7 (34.8) (22.2) (12.3)
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations 57.2 26.1 7.4 0.4 (46.0)
-- from recapture - - - - -
Capital gain - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - -
-- return of capital 353.2 74.5 76.3 74.6 40.8
Source: (on a cash basis) -- sales - - - - -
-- financing activities 228.5 - - - -
-- operations 124.7 74.5 76.3 74.6 40.8
-- other - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program). 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
---------------------------------- -----------------
ESSEX KNOXVILLE ASSOCIATES L.P. ESSEX HOSPITALITY
---------------------------------- ASSOCIATES IV L.P.
-----------------
1993 1994
(1) (5 MOS) 1995 1996 1995 1996
---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
8.8 350.7 1,053.8 1,078.2 - 483.1
Gross Revenues - - - - - -
Profit on sale of properties 0.5 237.1 658.9 696.1 - 886.2
--- ----- ----- ----- -----
Less: operating expenses 8.3 113.6 394.9 382.1 - (403.1)
Operating income (loss)
0.0 137.5 270.0 270.0 - 474.6
Less: interest expense - - - - - 356.5
depreciation 8.9 145.7 252.1 218.9 - 345.8
--- ----- ----- ----- -----
Net income (loss) (0.6) (169.5) (127.2) (106.8) - (866.9)
Cash generated from operations 7.8 (27.7) 149.6 117.6 - (737.1)
Cash generated from sales - - - - - -
Cash generated from financing activities 2,757.4 397.7 (132.5) (122.0) 1,985.3 8,504.9
Plus:cash distributions - 30.0 121.0 123.2 - 113.6
--------------------------------- ------------------
Cash generated from operations, sales and financing 2,765.2 400.0 138.1 118.8 1,985.3 7,881.4
Less: cash distributions to investors
--from operating cash flow - - 121.0 123.2 - -
--from sales and financing activities - 30.0 - - - 113.6
--from other - - - - - -
--------------------------------- ------------------
Cash generated (deficiency) after cash distributions 2,765.2 370.0 17.1 (4.4) 1,985.3 7,767.8
Less: special items - capital improvements (763.2)(2,323.7) (1.7) (22.0) (1,356.4) (5,881.0)
--------------------------------- ------------------
Cash generated (deficiency) after cash 2,002.0 (1,953.6) 15.4 (26.5) 628.9 1,886.8
distributions and special items
Tax and distribution data per $1,000 invested
Federal income tax results:
Ordinary income (loss) -- from operations (0.6) (169.5) (127.2) (106.8) - (403.7)
-- from recapture - - - - - -
Capital gain - - - - - -
Cash distributions to investors
Source: (on a GAAP basis) -- investment income - - - - - -
-- return of capital - 30.0 121.0 123.2 - 52.9
Source: (on a cash basis) -- sales - - - - - -
-- financing activities - 30.0 - - - 52.9
-- operations - - - - - -
-- other
- - - - - -
Amounts (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program). 100% 100%
</TABLE>
<PAGE>
TABLE III
ESSEX PARTNERS AND AFFILIATES
OPERATING RESULTS OF PRIOR PROGRAMS (000)
(Through December 31, 1996)
NOTES
-----
(1) These partnerships participated in fundraising and construction activities
in the year indicated. The properties owned by the partnerships opened in
the following year. If the property operated for less than twelve months in
its first year of operations, the number of months the property was open is
noted.
(2) There are three properties in Essex Hospitality Associates III L.P.. The
first opened in September, 1994, the second in April, 1995 and the third in
September, 1995. The first full year of operations for all properties is
1996.
(3) Essex Hospitality Associates IV is still in the fund raising and
development stage. Only one property was open in 1996, and it was a hotel
which opened in September, 1996 owned by a partnership in which Essex
Hospitality Associates IV owns a majority interest.
<PAGE>
TABLE IV
ESSEX PARTNERS INC. AND AFFILIATES
RESULTS OF COMPLETED PROGRAMS
TABLE IV
Table IV presents a summary of operating and disposition results of the prior
partnerships sponsored by either Essex Partners or affiliates which have sold
all their properties as of December 31, 1996. Table IV presents tax, cash
distributions and holding period information with respect to the disposition of
such properties.
As of December 31, 1996, no hotel properties have been sold.
<PAGE>
TABLE V
ESSEX PARTNERS AND AFFILIATES
SALES AND DISPOSALS OF PROPERTIES
Table V presents information on the sales or dispositions of property for the
three years ending December 31, 1996 by programs in which Essex Partners or
affiliates acted as general partners and that have similiar investment
objectives to the Partnership.
As of December 31, 1996, no hotel properties have been sold or disposed of.
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Furnish exhibits as required by Item 601 of Regulation S-K.
3. Amended and Restated Limited Partnership Agreement,
is appended to the Prospectus as Exhibit A.
10.1 Mortgage Note given by Solon Hotel LLC to GMAC
Commercial Mortgage Corporation, dated July 7, 1997.
10.2 Open-End Mortgage, Assignment of Leases and Profits,
Security Agreement and Fixture Filing given by Solon
Hotel LLC to GMAC Commercial Mortgage, dated July 7,
1997.
10.3 Guaranty Agreement given by Essex Partners Inc. to
GMAC Commercial Mortgage Corporation, dated July 7,
1997.
10.4 Pledge and Assignment of Membership Interests given
by the Partnership and Essex Hotels LLC to GMAC
Commercial Mortgage Corporation, dated July 7, 1997.
10.5 Pledge and Assignment of Membership Interests given
by the Partnership to GMAC Commercial Mortgage
Corporation dated July 7, 1997.
23. Consents of KPMG Peat Marwick LLP.
27. Article 5 Financial Data Schedule
99.1 Articles of Organization of Solon Hotel LLC.
99.2 Articles of Organization of Erie Hotel LLC.
99.3 Article of Organization of Essex Hotels LLC, as
amended.
99.4 Articles of Organization of Essex Hotels II LLC.
99.5 Prior Performance Table VI - Essex and Affiliates
Acquisitions of Properties by Programs.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933, the Registrant has duly caused this
Post-Effective Amendment No. 5 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester,
State of New York on August 8, 1997.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
By: Essex Partners Inc.
Its: General Partner
By: _____________________________
John E. Mooney
President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints JOHN E. MOONEY and RICHARD C. BRIENZI, and any
one of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution for him or her, and in his or her
name, place and stead, in any and all capacities, to sign any and all
post-effective amendments to Registration Statement on Form S-1 and amendments
to this Post-Effective Amendment No. 5 and to file the same, with all exhibits
thereto and other documents in connection therewith, with the United States
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 5 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Principal Executive Officer of
General Partner:
Dated: August 8, 1997 ____________________________________
John E. Mooney
President and Chief Executive Officer
Principal Financial and Accounting Officer
of General Partner:
Dated: August 8, 1997 ____________________________________
Richard C. Brienzi
Vice President and Treasurer
Executive Vice President of General Partner:
Dated: August 8, 1997 ____________________________________
Jerald P. Eichelberger
Executive Vice President
<PAGE>
The Board of Directors of General Partner:
Dated: August 8, 1997 ____________________________________
John E. Mooney, Director
Dated: August 8, 1997 ____________________________________
Jerald P. Eichelberger, Director
Dated: August 8, 1997 ____________________________________
Barbara J. Purvis, Director
Dated: August 8, 1997 ____________________________________
Thomas W. Blank, Director
Dated: August 8, 1997 ____________________________________
Richard C. Brienzi, Director
EXHIBIT 10.1
MORTGAGE NOTE
$4,500,000.00 July 7, 1997
FOR VALUE RECEIVED, SOLON HOTEL LLC, a New York limited liability
company ("MAKER"), promises to pay to the order of GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation ("PAYEE"), at one of its principal places
of business at 8614 Westwood Center Drive, Suite 630, Vienna, Virginia
22182-2233, or at such place as the holder hereof may from time to time
designate in writing, the principal sum of FOUR MILLION FIVE HUNDRED THOUSAND
AND NO/100 DOLLARS ($4,500,000.00) (the "LOAN"), or so much thereof as may be
advanced to Maker and may be outstanding from time to time, in lawful money of
the United States of America, with interest thereon to be computed on the unpaid
principal balance from time to time outstanding at the Adjustable Rate (as such
term is defined in Section 2 hereof), and to be paid in monthly installments on
the first day of each calendar month as follows:
(a) Commencing on the first day of the first full calendar month after
the date hereof through August 1, 1998 (the "CUT-OFF DATE"), interest only is
payable, in arrears, at the Adjustable Rate, calculated from time to time in
accordance with Section 3 hereof; and
(b) From and after the Cut-Off Date, monthly installments are payable
in an amount equal to (i) interest, in arrears, at the Adjustable Rate,
calculated from time to time in accordance with Section 3 hereof, PLUS (ii)
principal in an amount sufficient to fully amortize the principal balance of the
Loan over a period of twenty-five (25) years, adjusted monthly to the current
Adjustable Rate, on a self-amortizing basis.
The entire outstanding principal balance, together with accrued and
unpaid interest and any other amounts due under this Mortgage Note (this
"NOTE"), shall be due and payable on the Applicable Maturity Date (as such term
is defined in Section 1(b) hereof) of the Loan, as determined in accordance with
Section 1 hereof or any earlier acceleration of sums due hereunder.
1. LOAN TERM.
a. The Loan shall be for a term of four (4) years, and shall mature on
the fourth (4th) anniversary of the first (1st) day of the first (1st) full
calendar month following the date hereof, July 1, 2001 (the "INITIAL MATURITY
DATE").
b. Subject to satisfaction of the following conditions, Maker shall
have one (1)
- 1 -
<PAGE>
option to extend the term of the Loan for an additional twelve (12) month
period, with such extension period pursuant to the valid exercise of such
extension option beginning on the first (1st) day following the Initial Maturity
Date (the "EXTENSION PERIOD") and, if so extended, the Loan shall mature on the
fifth (5th) anniversary of the first (1st) full calendar month following the
date hereof, July 1, 2002 (the "EXTENDED MATURITY DATE"; the Initial Maturity
Date or the Extended Maturity Date, as applicable, is hereinafter referred to as
the "APPLICABLE MATURITY DATE"). Maker's option to exercise such extension of
the term of the Loan is subject to satisfaction of the following conditions:
(i) Not less than forty-five (45) days prior to the Initial Maturity
Date, Maker shall give Payee written notice of its election to extend the term
of the Loan (the "ELECTION NOTICE");
(ii) The payment by Maker to Payee in immediately available funds of an
extension fee (the "EXTENSION FEE") in an amount equal to one-half of one
percent (0.5%) of the Loan on or before the Initial Maturity Date;
(iii) At the time the Election Notice is given and on the Initial
Maturity Date, no Event of Default (as such term is defined in Section 7 hereof)
shall have occurred and be continuing beyond any applicable cure period, and no
event which, with the passage of time or the giving of notice, or both, would
constitute an Event of Default, shall have occurred and be continuing;
(iv) The DSCR (as such term is defined in clause (c) below) for the
twelve (12) month period immediately preceding the Extension Period shall not be
less than 1.30:1.0; PROVIDED, HOWEVER, that Maker shall be entitled to prepay
principal sums due under the Loan, without premium, on or before the Initial
Maturity Date in order to satisfy the foregoing ratio and such prepayment shall
be made without the payment of premiums or additional fees, including the
Deferred Financing Fee, unless Maker pays in full all amounts due under this
Note;
(v) If so requested by Payee, Maker shall have provided Payee with (1)
an updated title report and/or endorsement reasonably acceptable to Payee; (2)
an estoppel from the manager under that certain Management Agreement dated as of
June 25, 1997 by and between Maker and Essex Partners Inc. (the "MANAGEMENT
AGREEMENT") reasonably acceptable to Payee; (3) an estoppel from the franchisor
under that certain License Agreement by and between Maker and Promus Hotels,
Inc., a Delaware corporation, reasonably acceptable to Payee, and (4) such other
updated information as Payee shall reasonably request;
(vi) Maker shall execute and deliver such documentation in connection
with the extension of the Loan as Payee reasonably may request, including,
without limitation, such modifications to the Loan Documents as Payee, its
counsel or title agent may reasonably request.
(c) As used herein, "DSCR" shall mean Debt Service Coverage Ratio for
the Property (as hereinafter defined), which shall be the ratio of (i) NOI (as
defined in EXHIBIT A attached
- 2 -
<PAGE>
hereto and made a part hereof) produced by the operation of the Property during
the twelve (12) calendar month period immediately preceding the calculation to
(ii) the projected payments of principal and interest due under this Note for
the twelve (12) calendar month period immediately following the calculation, as
reasonably calculated by Payee.
2. ADJUSTABLE RATE.
For the purpose of computing interest due on this Note, the Adjustable
Rate shall be the sum of (i) the Current Index (defined below) plus (ii) the
Margin (defined below) (the "ADJUSTABLE RATE"). For purposes of this Section,
the following definitions shall apply:
(a) As used herein, the term "BUSINESS DAY" shall mean any day on which
banks are not required or authorized to close.
(b) As used herein, the term "CURRENT INDEX" shall mean the published
Index (defined below) that is available on the Rate Adjustment Date (defined
below).
(c) As used herein, the term "INDEX" shall mean the average of London
interbank offered rates ("LIBOR") for a term of one month. The one month LIBOR
(in U.S. dollar deposits) is obtained from the appropriate Bloomberg display
page available as of the close of business on the first Business Day immediately
preceding the Rate Adjustment Date. In the event the LIBOR cannot be obtained
from Bloomberg, then THE WALL STREET JOURNAL is an acceptable substitute for
obtaining the LIBOR rate.
(d) As used herein, the term "INTEREST PERIOD" shall mean the period
commencing on each Rate Adjustment Date and ending on the last day prior to the
next succeeding Rate Adjustment Date.
(e) As used herein, the term "MARGIN" shall mean three hundred
twenty-five (325) basis points, which is equivalent to three and one-fourth of
one percent (3.25%).
(f) As used herein, the term "RATE ADJUSTMENT DATE" shall mean the
first day of each month.
If Lender at any time determines, in its sole but reasonable
discretion, that is has miscalculated the amount of the Adjustable Rate, then
Lender shall give notice to Maker of the corrected amount of the Adjustable
Rate, and (i) if the corrected Adjustable Rate represents an increase in the
applicable monthly payment, Maker shall, within ten (10) calendar days
thereafter, pay to Lender any sums that Maker would have otherwise been
obligated under this Note to pay to Lender had the amount of the Adjustable Rate
not been miscalculated, or (ii) if the corrected amount of the Adjustable Rate
results in an overpayment by Maker to Lender, and Maker is not otherwise in
breach or default under any of the terms and provisions of the Note, the
Mortgage or any other Loan Document evidencing or securing the Note, then Lender
shall
- 3 -
<PAGE>
thereafter pay to Maker the sums that Maker would not have otherwise been
obligated to pay to Lender had the amount of the Adjustable Rate not been
miscalculated.
3. CALCULATION OF INTEREST; APPLICATION OF PAYMENTS.
(a) Interest on the outstanding principal balance of this Note shall be
calculated on the basis of the actual number of days elapsed on a three hundred
sixty (360) day year.
(b) The Adjustable Rate and the amount of interest payable monthly,
shall be recalculated by Payee at each Rate Adjustment Date.
(c) Payments under this Note shall be applied in accordance with the
Mortgage (as such term is defined in Section 5(a) hereof). All amounts due under
this Note shall be payable without setoff, counterclaim or any other deduction
whatsoever.
4. BALLOON PAYMENT. MAKER UNDERSTANDS AND ACKNOWLEDGES THAT THIS NOTE
AND THE OTHER LOAN DOCUMENTS (AS SUCH TERM IS DEFINED IN SECTION 5(C) HEREOF) DO
NOT PROVIDE FOR FULL AMORTIZATION OF THE PRINCIPAL SUM AND, THEREFORE, UPON THE
APPLICABLE MATURITY DATE OR EARLIER ACCELERATION, A BALLOON PAYMENT OF THE THEN
OUTSTANDING BALANCE OF THE PRINCIPAL SUM WILL BE REQUIRED, ALONG WITH PAYMENT IN
FULL OF OTHER SUMS DUE HEREUNDER.
5. SECURITY FOR THE LOAN.
(a) This Note is secured by: (i) that certain Open-End Mortgage,
Assignment of Leases and Profits, Security Agreement and Fixture Filing dated as
of the date hereof from Maker for the benefit of Payee (the "MORTGAGE")
affecting the fee simple land and improvements to be constructed and known as
the "Hampton Inn" and located at 6035 Enterprise Parkway, in the City of Solon,
County of Cuyahoga, and State of Ohio (the "PROPERTY"), (ii) an Environmental
Indemnity Agreement dated as of the date hereof from Essex Partners Inc.
("GUARANTOR") and Maker for the benefit of Payee (the "ENVIRONMENTAL
AGREEMENT"); (iii) a Guaranty Agreement dated as of the date hereof from
Guarantor to Payee (the "GUARANTY AGREEMENT"); (iv) an Assignment of Contracts,
Licenses, Permits, Agreements, Warranties and Approvals (the "ASSIGNMENT") dated
as of the date hereof from Maker to Payee; (v) an Assignment of Construction
Agreements, Plans and Property Agreements; (vi) a Replacement Reserve Agreement
(the "RESERVE") dated as of the date hereof from Maker to Payee; and (vii) such
other documents now or hereafter executed by Maker and/or Guarantor and by or in
favor of Payee, which wholly or partially secure, evidence, govern or guarantee
payment of this Note including, without limitation, any collateral assignments
and reserve and/or escrow accounts (such other documents, collectively, the
"OTHER SECURITY DOCUMENTS").
- 4 -
<PAGE>
(b) All the covenants, conditions and agreements contained in the
Mortgage, the Environmental Agreement, the Guaranty Agreement, the Assignment,
the Reserve and the Other Security Documents (the foregoing documents, together
with this Note, are sometimes herein referred to collectively as the "LOAN
DOCUMENTS") are hereby made a part of this Note to the same extent and with the
same force as if fully set forth herein.
6. LATE CHARGE. If any sum payable under this Note is not paid on or
before the fifth (5th) day after the date such payment is due, Maker shall pay
to Payee on demand an additional amount equal to the lesser of: (a) the maximum
amount permitted by applicable law; or (b) five percent (5%) of such unpaid sum,
to defray the expenses incurred by Payee in handling and processing such
delinquent payment and to compensate Payee for the loss of the use of such
delinquent payment, and such additional amount shall be secured by the Mortgage
and the other Loan Documents. The additional payments required under this
paragraph shall be in addition to and shall in no way limit any other rights and
remedies provided for in this Note, the Mortgage or any of the Loan Documents,
as well as all other remedies provided by law.
7. EVENTS OF DEFAULT. The entire outstanding principal balance of
this Note, together with all accrued and unpaid interest thereon and all other
sums due under the Loan Documents (all such sums, collectively, the "DEBT"), or
any portion thereof, shall without notice become immediately due and payable at
the option of Payee: (a) if any payment required in this Note is not paid on or
before the fifth (5th) day after the date when due or on the Applicable Maturity
Date; (b) upon the occurrence of any other default under this Note which
continues for ten (10) days after written notice by Payee to Maker at the
address and in accordance with the notice provisions set forth in the Mortgage;
or (c) upon the happening of any other Event of Default under and as defined in
the Mortgage or any default beyond applicable grace and/or cure periods under
any other Loan Document (each of the foregoing, an "EVENT OF DEFAULT"). In the
event that Payee retains counsel to collect the Debt or to protect or foreclose
the security provided in connection herewith, Maker also agrees to pay on demand
all costs of collection incurred by Payee, including reasonable attorneys' fees,
for the services of counsel whether or not suit be brought.
8. DEFAULT RATE INTEREST. Maker does hereby agree that upon the
occurrence and continuation of an Event of Default beyond any applicable cure
period, including Maker's failure to pay the Debt in full on the Applicable
Maturity Date, Payee shall be entitled to receive, and Maker shall pay, interest
on the entire outstanding principal balance and any other amounts due at the
rate equal to the lesser of: (a) the maximum rate permitted by applicable law;
or (b) the variable Adjustable Rate then in effect on the Debt calculated
monthly as set forth above PLUS five percent (5%) per annum (the lesser of such
rates in (a) or (b) being hereinafter referred to as the "DEFAULT RATE").
Interest shall accrue and be payable at the Default Rate from the occurrence of
the Event of Default until all such Events of Default have been fully cured.
Interest at the Default Rate shall be added to the Debt, and shall be deemed
secured by the Mortgage and the other Loan Documents. This provision, however,
shall not be construed as an agreement or privilege to extend the date of the
payment of the Debt, nor as a waiver of any other right or
- 5 -
<PAGE>
remedy accruing to Payee by reason of the occurrence of any Event of Default.
The additional payments required under this paragraph shall be in addition to
and shall in no way limit any other rights and remedies provided for in this
Note, the Mortgage or any of the Loan Documents, as well as all other remedies
provided by law.
9. PREPAYMENT.
(a) The principal balance of this Note may be prepaid, in whole or
(subject to the provisions of subsection (b) of this Section) in part, upon: (i)
not less than thirty (30) days prior written notice to Payee specifying the date
on which prepayment is to be made (the "PREPAYMENT DATE"); (ii) payment of
accrued interest to and including the Prepayment Date; and (iii) payment of all
other sums then due under this Note, the Mortgage and the other Loan Documents
to the extent then payable, including, without limitation, sums specified in
Section 10 hereof.
(b) Provided that no Event of Default exists, partial prepayments of
principal may be made in increments of One Hundred Thousand and 00/100 Dollars
($100,000.00) in accordance with subsection (a) of this Section.
10. DEFERRED FINANCING FEE. Upon the earlier to occur of (i) payment
in full of all amounts due under this Note, (ii) the Applicable Maturity Date,
or (iii) acceleration of payment of all amounts due under this Note in
accordance with Section 7 above, Maker shall pay to Payee an amount (the
"DEFERRED FINANCING FEE") equal to one percent (1%) of the Loan; PROVIDED,
HOWEVER, that if Maker procures and closes new financing with Payee for the
Property to repay the Loan or, if at the time of refinancing, repayment or
maturity, Payee does not offer or provide a long-term fixed-rate hotel loan
program, then the foregoing Deferred Financing Fee shall be waived.
11. LIMITATIONS ON RECOURSE.
(a) Subject to the qualifications set forth in this Section, neither
Maker nor Guarantor nor any member, manager, partner, shareholder, officer or
director of either of them shall be personally liable either at law or in equity
for the repayment of the Debt or the failure of performance of any other
obligation evidenced by this Note or contained in the Mortgage or the other Loan
Documents, and Payee will satisfy any judgments, orders or decrees on account of
the failure to repay the Debt and/or the failure to perform any such obligation,
from the Property and any other real or personal property, tangible or
intangible, as the Maker, Guarantor or any other entity shall have pledged or
assigned to secure this Note by any of the Loan Documents, except that Payee may
bring a foreclosure action, an action for specific performance or any other
appropriate action or proceeding to enable Payee to enforce and realize upon
this Note, the Mortgage, the other Loan Documents, and the interests in the
Property and any other collateral given to Payee pursuant to the Mortgage and
the other Loan Documents; PROVIDED, HOWEVER, that, except as specifically
provided in this Section, any judgment in any such action or proceeding shall be
enforceable against Maker only to the extent of Maker's interest in the
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<PAGE>
Property and in any other collateral given to Payee. Payee, by accepting this
Note, the Mortgage,and the other Loan Documents, agrees that it shall not sue
for, seek or demand any deficiency judgment against Maker in any such action or
proceeding, under, by reason of or in connection with the Mortgage, the other
Loan Documents or this Note. The provisions of this Section shall not, however:
(1) constitute a waiver, release or impairment of any obligation evidenced or
secured by the Mortgage, the Assignment, the Environmental Agreement, the
Guaranty Agreement, the Reserve or the Other Security Documents or this Note;
(2) impair the right of Payee to name Maker as a party defendant in any action
or suit for foreclosure and sale under the Mortgage; (3) affect the validity or
enforceability of any of the Loan Documents or the guaranty or indemnity made in
connection therewith; (4) impair the right of Payee to obtain the appointment of
a receiver; (5) impair the enforcement of the Assignment; or (6) impair the
right of Payee to bring suit with respect to fraud or misrepresentation by
Maker, any Guarantor or any other person or entity in connection with the
Mortgage, this Note, the Assignment, the Environmental Agreement, the Guaranty
Agreement, the Reserve or the Other Security Documents.
(b) Nothing herein shall be deemed to be a waiver of any right which
Payee may have under Section 506(a), 506(b), 1111(b) or any other provisions of
the U.S. Bankruptcy Code to file a claim for the full amount of the Debt secured
by the Mortgage or to require that all collateral shall continue to secure all
of the debt owing to Payee in accordance with this Note and other the other Loan
Documents.
(c) Notwithstanding the foregoing provisions of this Section or any
other provision in the Loan Documents, Maker and Guarantor, jointly and
severally, shall be fully liable for and shall indemnify Payee for any or all
loss, cost, liability, judgment, claim, damage or expense sustained, suffered or
incurred by Payee (including, without limitation, Payee's attorneys' fees)
arising out of or attributable or relating to (collectively and inclusive of (i)
through (xiv) hereof):
(i) fraud or misrepresentation by Maker or Guarantor in connection
with the Loan;
(ii) the gross negligence or willful misconduct of Maker or
Guarantor, their respective agents, managers or officers with respect to their
obligations to Payee or with respect to the operation of the Property, or the
physical waste of the Property;
(iii) the breach of provisions in the Mortgage concerning
Environmental Laws or Hazardous Substances, and any indemnification of Payee
therein, in the Environmental Agreement or in any other Loan Document with
respect to such Environmental Laws or Hazardous Substances;
(iv) the removal or disposal of any portion of the Property after
default under this Note, the Mortgage or any other Loan Document;
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<PAGE>
(v) the misapplication or conversion by Maker of: (A) any insurance
proceeds paid by reason of any loss, damage or destruction to the Property; (B)
any awards or other amounts received in connection with the condemnation of all
or a portion of the Property; or (C) rents, issues, profits, proceeds, accounts
or other amounts received by Maker (in the case of clause (C), following an
Event of Default under this Note, the Mortgage or any of the other Loan
Documents);
(vi) Maker's failure to pay taxes, assessments, charges for labor
or materials or other charges that result in liens on any portion of the
Property; provided, however, that Maker's and Guarantors' liability hereunder
shall cease with respect to such amounts incurred from and after such time, if
any, that Payee obtains legal and beneficial title to the Property;
(vii) the deductible amount in respect of any insurance maintained
in respect of the Property; provided, however, that Maker's and Guarantor's
liability hereunder shall cease with respect to such amounts incurred from and
after such time, if any, that Payee obtains legal and beneficial title to the
Property;
(viii) the costs incurred by Payee (including attorneys' fees) in
connection with the collection or enforcement of the Debt;
(ix) any security deposits, advance deposits or retained rents and
profits collected with respect to the Property which are not delivered to Payee
upon a foreclosure of the Property or action in lieu thereof;
(x) the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release of any Hazardous Substance
or Asbestos on, from, or affecting the Property or any other property,
regardless of when discovered, which occurs prior to foreclosure, transfer by
deed in lieu of foreclosure or the appointment of a receiver by Payee;
(xi) any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to such Hazardous Substance
or Asbestos;
(xii) any lawsuit brought or threatened, settlement reached, or
government order relating to such Hazardous Substance or Asbestos;
(xiii) any violation of the Environmental Laws, regardless of when
discovered, which occurs prior to foreclosure, transfer by deed in lieu of
foreclosure or the appointment of a receiver by Payee, and which are based upon
or in any way related to such Hazardous Substance or Asbestos including, without
limitation, the costs and expenses of any remedial action, reasonable
out-of-pocket attorney's and consultant's fees, investigation and laboratory
fees, court costs, and litigation expenses; and
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<PAGE>
(xiv) Maker fails to comply with the provisions of Sections 11 or
13 of the Mortgage.
In addition to the foregoing, the agreement of Payee not to pursue recourse
liability as set forth in subsection (b)(i) above SHALL BE AND BECOME NULL AND
VOID and shall be of no further force or effect if: (1) Maker fails to permit
reasonable on-site inspections of the Property upon reasonable advance oral
notice or to provide financial reports and information pertaining to the
Property as required by any Loan Document, unless such failure is the result of
a good faith error and such failure is cured within ten (10) days after notice;
(2) any financial information concerning Maker or Guarantor provided by Maker or
Guarantor (or their respective agents, employees, or authorized representatives)
is fraudulent in any respect, contains any fraudulent information or
misrepresents in any material respect the financial condition of Maker or
Guarantor; (3) Maker fails to obtain Payee's prior written consent, if consent
is required under any Loan Document, to any subordinate financing; (4) Maker
fails to obtain Payee's prior written consent, if consent is required under any
Loan Document, to any transfer of the Property or of any ownership interest in
Maker; and (5) Maker or its Managing Member files for relief or protection under
any federal, state or other bankruptcy, insolvency, reorganization or other
creditor-relief laws, or an involuntary filing or petition is made under any of
such laws, against Maker by any of its creditors (other than Payee) and such
involuntary filing is not unconditionally dismissed or vacated within ninety
(90) days.
(d) Nothing in this Section shall be interpreted or construed to
impair, limit the liability of or otherwise affect the terms, conditions,
requirements and obligations of Guarantor under that certain Guaranty Agreement
dated as of the date hereof or Maker or Guarantor under the Environmental
Agreement.
12. NO USURY. This Note is subject to the express condition that at
no time shall Maker be obligated or required to pay interest on the Debt or loan
charges at a rate which could subject the holder of this Note to either civil or
criminal liability as a result of being in excess of the maximum interest rate
which Maker is permitted by applicable law to contract or agree to pay. If by
the terms of this Note, Maker is at any time required or obligated to pay
interest or loan charges on the Debt or loan charges at a rate in excess of such
maximum rate, the rate of interest or loan charges under this Note shall be
deemed to be immediately reduced to such maximum rate and the interest or loan
charges payable shall be computed at such maximum rate and all prior interest
payments in excess of such maximum rate shall be applied and shall be deemed to
have been payments or loan charges in reduction of the principal balance of this
Note. All sums paid or agreed to be paid to Payee 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 stated term of
the Debt until payment in full so that the rate or amount of interest on account
of the Debt does not exceed the maximum lawful rate from time to time in effect
and applicable to the Debt for so long as the Debt is outstanding.
13. TRANSFERS NOT PERMITTED. Without the prior written consent of
Payee,
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<PAGE>
Maker shall not sell, convey, alienate, mortgage, encumber, pledge or otherwise
transfer, or permit the transfer of, directly or indirectly, the Property or
ownership interests of Maker, except as permitted in the Mortgage.
14. AUTHORITY. Maker represents that Maker has full power, authority
and legal right to execute, deliver and perform its obligations pursuant to this
Note, the Mortgage and the other Loan Documents and that this Note, the Mortgage
and the other Loan Documents constitute valid and binding obligations of Maker.
15. NOTICE. All notices or other communications required or permitted
to be given pursuant hereto shall be given in the manner specified in the
Mortgage directed to the parties at their respective addresses as provided
therein.
16. WAIVER OF JURY TRIAL. MAKER AND PAYEE EACH HEREBY AGREE NOT TO
ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT
TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST WITH REGARD TO THIS NOTE, THE MORTGAGE, OR THE OTHER LOAN DOCUMENTS, OR
ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS
WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY MAKER AND
PAYEE, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS
TO WHICH RIGHT TO TRIAL BY JURY WOULD OTHERWISE ACCRUE. MAKER AND PAYEE EACH ARE
HEREBY AUTHORIZED TO FILE A COPY OF THIS SECTION IN ANY PROCEEDING AS CONCLUSIVE
EVIDENCE OF THIS WAIVER BY EACH OTHER.
17. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Ohio, without regard to conflicts of
laws principles, and the applicable laws of the United States of America.
18. EXTENSION OF TIME. Maker consents to any extension of time for
the payment hereof, release of all or any part of the security for the payment
hereof or release of any party liable for Maker's liabilities or Maker's
obligations under the Loan Documents. Any such extension or release may be made
without notice to Maker and without discharging Maker's liability.
19. TIME OF ESSENCE. Time is of the essence of each liability and
obligation of Maker hereunder.
20. CERTAIN WAIVERS. To the fullest extent permitted by law, Maker
and all guarantors, sureties and endorsers, severally waive all applicable
exemption rights, whether under any state constitution, homestead laws or
otherwise, and also severally waive diligence,
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<PAGE>
valuation and appraisement, presentment for payment, protest and demand, notice
of protest, notice of default, notice of intention to accelerate all sums under
this Note or the Loan Documents, notice of acceleration of all sums under this
Note or the Loan Documents, demand and dishonor and diligence in collection and
nonpayment of this Note and all other notices in connection with the delivery,
acceptance, performance, default, or enforcement of the payment of this Note
(except notice of default as specifically provided for in the Mortgage or the
Loan Documents and any notices which may not be lawfully waived under applicable
Ohio law). To the fullest extent permitted by law, Maker further waives all
benefit that might accrue to Maker by virtue of any present or future laws
exempting the Property, or any other property, real or personal, or the proceeds
arising from any sale of any such property, from attachment, levy, or sale under
execution, or providing for any stay of execution to be issued on any judgment
recovered on this Note or in any action to foreclose the Mortgage, injunction
against sale pursuant to power of sale, exemption from civil process or
extension of time for payment.
21. EFFECT OF WAIVER. No failure to exercise, and no delay in
exercising any right, power or remedy hereunder or under any other Loan Document
shall impair any right, power or remedy which Payee may have, nor shall any such
delay be construed to be a waiver of any of such rights, powers or remedies, or
an acquiescence in any breach or default under this Note or any other Loan
Document, nor shall any waiver of any breach or default of Maker hereunder or
under any other Loan Document be deemed a waiver of any default or breach
subsequently occurring. The rights and remedies herein specified are cumulative
and not exclusive of any rights or remedies which Payee would otherwise have.
22. SEVERABILITY OF PROVISIONS. In case any one or more of the
provisions contained in this Note should be invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
23. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of Maker, Payee and their respective successors and
assigns; provided, however, that, except as specifically provided herein or in
the Mortgage, Maker may not, directly or indirectly, sell, assign or otherwise
transfer all or any part of the Property or any interest therein, or any of
Maker's rights and obligations under this Agreement, or take or permit any other
action prohibited by Section 8 of the Mortgage, without the prior written
consent of Payee, which Payee may give or withhold in its absolute discretion.
24. TRANSFER OF LOAN. Maker acknowledges that Payee may (a)
fund the Loan through an affiliate, (b) sell or transfer interests in the Loan
and the Loan Documents to one or more participants or special purpose entities,
(c) pledge Payee's interests in the Loan and the Loan Documents as security for
one or more loans obtained by Payee or (d) sell or transfer Payee's interests in
the Loan and the Loan Documents in connection with a securitization transaction
at no cost to Maker. All documentation, financial statements, appraisals,
reports and other data, or copies thereof, related to any loan application or
commitment for the Loan, Maker,
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<PAGE>
Guarantor, the Property or the Loan, may be exhibited to and reviewed by any
party that is reviewing the Loan for the purposes of purchasing, valuing or
rating the Loan, provided that such reviewing party shall agree to keep such
information strictly confidential to itself and its advisors. Upon any transfer
or proposed transfer contemplated above and by the Loan Documents, at Payee's
request, Maker shall provide an estoppel certificate to the investor or any
prospective investor in such form, substance and detail as Payee, such investor
or prospective investor may reasonably require.
25. REMEDIES AVAILABLE. The remedies of Payee, as provided herein or
in any other Loan Document, shall be cumulative and concurrent, and may be
pursued singularly, successively or together, at the sole discretion of Payee,
and may be exercised as often as occasion therefor shall arise. No act of
omission or commission of Payee, including specifically any failure to exercise
any right, remedy or recourse, shall be deemed to be a waiver or release of the
same, and any waiver or release with reference to any one event shall not be
construed as continuing or as a bar to, or as a waiver or release of, any
subsequent right, remedy or recourse as to a subsequent event.
26. MAKER'S COVENANTS. Maker agrees that (a) the obligation evidenced
by this Note is an exempted transaction under the Truth-in-Lending Act, 15
U.S.C. ss. 1601, et seq. (1982); (b) said obligation constitutes a business loan
within the purview of applicable Ohio law for the purpose of the application of
any laws that distinguish between consumer loans and business loans and that
have as their purpose the protection of consumers in the State of Ohio; and (c)
it hereby waives any objections to venue.
27. MISCELLANEOUS.
(a) No release of any security for the Debt or any person liable for
payment of the Debt, no extension of time for payment of this Note or any
installment hereof, and no alteration, amendment or waiver of any provision of
the Loan Documents made by agreement between Payee and any other person or party
shall release, modify, amend, waive, extend, change, discharge, terminate or
affect the liability of Maker, and any other person or party who might be or
become liable for the payment of all or any part of the Debt, under the Loan
Documents.
(b) This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Maker or Payee, but only by an agreement in writing signed by the party against
whom enforcement of any modification, amendment, waiver, extension, change,
discharge or termination is sought.
(c) Whenever used, the singular number shall include the plural, the
plural the singular, and the words "Payee" and "Maker" shall include their
respective successors, assigns, heirs, executors and administrators, all to the
extent provided in Section 23 hereof.
(d) If Maker consists of more than one person or party, the obligations
and liabilities
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<PAGE>
of each such person or party shall be joint and several.
28. SUBMISSION TO JURISDICTION. MAKER AND PAYEE EACH HEREBY
IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY OHIO STATE OR FEDERAL COURT
SITTING IN CUYAHOGA COUNTY OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS NOTE AND HEREBY AGREE NOT TO ASSERT THAT IT IS NOT SUBJECT TO
THE JURISDICTION OF THE FOREGOING COURTS. EITHER MAKER OR PAYEE MAY, AT ITS SOLE
DISCRETION, ELECT THE STATE OF OHIO, CUYAHOGA COUNTY, OR THE UNITED STATES OF
AMERICA FEDERAL DISTRICT COURT HAVING CUYAHOGA COUNTY AS THE VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING. MAKER AND PAYEE EACH HEREBY IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE
TO SUCH VENUE AS BEING AN INCONVENIENT FORUM OR IMPROPER VENUE.
29. SERVICE OF PROCESS. Process in any suit, action or proceeding of
the nature referred to in Section 28 hereof may be served in any manner
permitted by law and nothing herein shall limit Payee's right to bring
proceedings against Maker in the courts of any other jurisdiction.
[SIGNATURE APPEARS ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, Maker has duly executed and delivered this Mortgage
Note under seal on the day and year first above written.
MAKER:
SOLON HOTEL LLC, a New York limited liability company
By: Essex Hotel LLC, a New York limited liability company,
its managing member
By: Essex Hospitality Associates IV L.P., a New York
limited partnership, its managing member
By: Essex Partners Inc., a New York
corporation, its general partner
By: /s/ Barbara J. Purvis
(SEAL)
Name: Barbara J. Purvis
Title: Senior Vice President
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<PAGE>
EXHIBIT A
"NOI" means, for any period of time, the excess of Gross Revenues for
the period over Deductions for the period adjusted by the Underwriting
Standards.
"DEDUCTIONS" shall mean the aggregate of the following items
actually incurred by Maker, whether or not paid, during the twelve (12) month
period ending one (1) month prior to the date on which NOI is to be calculated:
(a) the cost of sales including, without limitation, salaries,
wages, employee benefits, payroll taxes and other costs related to the
Property's employees;
(b) departmental expenses incurred at departments within the
Property, administrative and general expenses and the cost of marketing incurred
by the Property, advertising and business promotion incurred by the Property,
all utility costs (including, without limitation, heat, light, power, water, and
telephone), computer line charges, and routine repairs, maintenance and minor
alterations treated as Deductions under the License Agreement (as defined
below), or the Management Agreement (as defined below);
(c) the cost of inventories and fixed asset supplies consumed in
the operation of the Property;
(d) a reasonable reserve for uncollectible accounts receivable;
(e) all costs and fees of independent professionals or other third
parties who are retained by the Licensor to perform services required or
permitted under the License Agreement;
(f) all costs and fees of technical consultants and operational
experts who are retained or employed by the Licensor for specialized services
(including, without limitation, quality assurance inspectors) and the cost of
attendance by employees of the Property at training and manpower development
programs sponsored by the Licensor;
(g) the base management fee under the Management Agreement and the
base license fee under the License Agreement;
(h) the Property's pro rata share of costs and expenses of the
national and regional reservations system service under the License Agreement;
(i) insurance costs and expenses as provided in the Mortgage or
the License Agreement;
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<PAGE>
(j) taxes, if any, payable by or assessed against the Manager
related to the Manager's operation of the Property (exclusive of the Manager's
income taxes and any franchise, corporate, estate, inheritance, succession,
capital levy or transfer tax imposed on the Manager) and all impositions;
(k) transfers to any reserve account required pursuant to the
Mortgage or the License Agreement;
(l) lease payments and associated costs on any operating (as
opposed to capital) leases of FF&E;
(m) common area maintenance fees and improvement district
assessments;
(n) costs and expenses incurred by the Licensor in terminating its
employees at the Property pursuant to the License Agreement; and
(o) such other costs and expenses incurred by the Licensor or the
Manager as are otherwise reasonably necessary for the proper and efficient
operation of the Property.
The term "Deductions" shall not include (a) debt service payments
pursuant to any mortgage financing on the Property, (b) payments pursuant to
equipment leases or other forms of financing obtained for the initial FF&E
located in or connected with the Property or (c) rental payments pursuant to any
ground lease.
"GROSS REVENUES" shall mean all revenues and receipts of every kind
derived from operating the Property and all departments and parts thereof,
including, but not limited to: income (from both cash and credit transactions)
from rental of guest rooms, telephone charges, stores, offices, exhibit or sales
space of every kind; license, lease and concession fees and rentals (not
including gross receipts of licensees, lessees and concessionaires); income from
vending machines; health club membership fees; food and beverage sales;
wholesale and retail sales of merchandise; service charges; and proceeds, if
any, from business interruption or other loss of income insurance; provided,
however, that Gross Revenues shall not include the following: gratuities to
employees of the Property; federal, state or municipal excise, sales or use
taxes or any other taxes collected directly from patrons or guests or included
as part of the sales price of any goods or services; proceeds from the sale of
FF&E; interest received or accrued with respect to the funds in any required
reserve accounts or the other operating accounts of the Property; any refunds,
rebates, discounts and credits of a similar nature, given, paid or returned in
the course of obtaining Gross Revenues or components thereof; insurance proceeds
(other than proceeds from business interruption or other loss of income
insurance); condemnation proceeds (other than for a temporary taking); or any
proceeds from any sale of the Property or from the refinancing of any debt
encumbering the Property.
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<PAGE>
"UNDERWRITING STANDARDS" shall mean the underwriting standards
utilized to adjust the actual net operating income of the Property to comply
with the Underwriting Standards of Payee for the Property, as follows:
1. Gross Revenues shall not include interest or investment income. In
addition, Gross Revenues shall be adjusted as may be reasonably
required to normalize Gross Revenues in a manner in which a prudent
"institutional hotel investor" would reasonably expect, and the
Gross Revenues shall be further adjusted for underwriting purposes
by multiplying the Gross Revenues, as adjusted above, times the
ratio of (1) the Underwriting Occupancy Rate to (2) the Property
Occupancy Rate (although in no event shall the ratio be greater
than 1.00). Underwriting Occupancy Rate shall mean an occupancy
rate equal to the lesser of the Property Occupancy Rate or 85% for
the underwriting period. Property Occupancy Rate shall mean the
actual occupancy rate for the Property for the underwriting period
and shall be calculated by the rooms occupied by guests (including
paid rooms occupied and complimentary rooms occupied) divided by
the rooms actually available for rent during the underwriting
period.
2. Deductions shall be adjusted as follows:
(i) all real estate taxes, personal property taxes, sales, use or
any other taxes attributable to the Property or the operations
of the Property (collectively, the "Taxes") shall be based on
a fully completed, occupied, functioning and assessed Property
(including, without limitation, all build-out, personal
property in place).
(ii) if any ratio percentages used to calculate fees or
contributions (including, without limitation, the base and
incentive management fees, base and incentive franchise fees,
and the replacement reserve contribution, if any) under the
Management Agreement, the License Agreement or under the
Mortgage for the Property shall be scheduled to increase
during any portion of the 24 month period following the
Underwriting Period (the increased amount shall be the
"Increased Fees and Contribution"), then the higher Increased
Fees and Contribution on an annualized basis shall be used to
calculate the Deductions with respect to the Property.
3. In addition to, but not in duplication of, the adjustments set
forth above, NOI for the Property may be further adjusted to
reflect (1) the growth and/or decline in demand, (2) additions
and/or deletions to supply and (3) penetration of the Property for
the three year period commencing on the date of determination of
the trailing 12 month period. The Property's stabilized NOI shall
be adjusted, on a constant dollar basis, for the average daily rate
and occupancy rate projected over the three year period commencing
on the date of determination of the trailing 12 month period.
4. In the event that Maker disputes Payee's calculation of adjustments
set forth in paragraph 3 above, it shall submit its calculation to
Payee with supporting detail and Payee shall
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<PAGE>
have the right to either accept Maker's calculation or to submit
both Payee's and Maker's adjustments as set forth in paragraph 3
above to the arbitrator (as selected below) to resolve the dispute.
In the event Payee shall elect to submit a dispute to the
arbitrator, Maker and Payee shall have ten (10) days to designate
one and only one person to act as an arbitrator by written notice
given to the other within such ten (10) day period. In the event
that either side shall fail to select an arbitrator within such ten
(10) day period, the arbitrator selected by the other shall be
deemed the arbitrator to resolve the dispute. If both Maker and
Payee timely select an arbitrator as stated above, the arbitrators
so selected shall, within ten (10) days of their appointment,
select a third arbitrator who shall resolve the dispute. Any
arbitrator selected above shall be an appraiser with at least ten
(10) years experience in appraising hotel properties. The cost of
the arbitrator shall be shared equally between Maker and Payee.
"LICENSE AGREEMENT" means the License Agreement to be issued
under that Commitment Agreement to issue a Hampton Inn License Agreement dated
as of November 6, 1995 ("License Commitment"), by and between Licensor and EHA
IV, which, in accordance with that certain letter from Licensor to Lender dated
June 27, 1997, will be reissued in the name of Mortgagor, pursuant to which
Mortgagor has the right to operate the hotel located on the Property under a
name and/or hotel system controlled by Licensor, or any successor agreement
between Mortgagor and Licensor.
"MANAGER" means Essex Partners Inc. a New York corporation.
"LICENSOR" means Promus Hotels, Inc., a Delaware corporation.
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EXHIBIT 10.2
OPEN-END MORTGAGE,
ASSIGNMENT OF LEASES AND PROFITS, SECURITY AGREEMENT
AND FIXTURE FILING
from
SOLON HOTEL LLC
as Mortgagor
to
GMAC COMMERCIAL MORTGAGE CORPORATION
as Mortgagee
Dated: July 7, 1997
PREPARED BY AND AFTER RECORDATION RETURN TO:
Katten Muchin & Zavis
1025 Thomas Jefferson Street, N.W.
Suite 700, East Tower
Washington, D.C. 20007
Attn: Christopher J. Hart, Esq.
- -------------------------------------------------------------------------------
THE MAXIMUM AMOUNT OF PRINCIPAL TO BE SECURED
AT ANY ONE TIME UNDER THIS MORTGAGE
IS $4,500,000.00
<PAGE>
TABLE OF CONTENTS
Section Page
1. DEFINED TERMS........................................................ 5
2. THE LOAN..............................................................14
3. WARRANTY OF TITLE.................................................... 14
4. INSURANCE............................................................ 14
5. PAYMENT OF TAXES..................................................... 20
6. ESCROW FUND.......................................................... 20
7. COMPLIANCE WITH LAWS................................................. 21
8. CONDEMNATION......................................................... 22
9. LEASES AND PROFITS................................................... 25
10. REPRESENTATIONS CONCERNING LOAN..................................... 26
11. SINGLE PURPOSE ENTITY; AUTHORIZATION................................ 31
12. MAINTENANCE OF PROPERTY............................................. 33
13. TRANSFER OR ENCUMBRANCE OF THE PROPERTY............................. 34
14. ESTOPPEL CERTIFICATES: AFFIDAVITS................................... 35
15. CHANGES IN THE LAWS REGARDING TAXATION.............................. 36
16. NO CREDITS ON ACCOUNT OF THE DEBT................................... 36
17. DOCUMENTARY STAMPS.................................................. 37
18. CONTROLLING AGREEMENT............................................... 37
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19. BOOKS AND RECORDS................................................... 37
20. PERFORMANCE OF OTHER AGREEMENTS..................................... 38
21. FURTHER ASSURANCES.................................................. 39
22. RECORDING OF MORTGAGE............................................... 40
23. REPORTING REQUIREMENTS.............................................. 41
24. EVENTS OF DEFAULT................................................... 41
25. LATE PAYMENT CHARGE: SERVICING FEES................................ 43
26. RIGHT TO CURE DEFAULTS.............................................. 44
27. REMEDIES............................................................ 44
28. RIGHT OF ENTRY...................................................... 48
29. SECURITY AGREEMENT.................................................. 48
30. ACTIONS AND PROCEEDINGS............................................. 49
31. WAIVER OF SETOFF AND COUNTERCLAIM................................... 49
32. CONTEST OF CERTAIN CLAIMS........................................... 49
33. RECOVERY OF SUMS REQUIRED TO BE PAID................................ 50
34. MARSHALING AND OTHER MATTERS........................................ 50
35. HAZARDOUS SUBSTANCES................................................ 50
36. ASBESTOS............................................................ 51
37. ENVIRONMENTAL MONITORING............................................ 52
38. MANAGEMENT OF THE PROPERTY.......................................... 53
39. HANDICAPPED ACCESS.................................................. 55
40. ERISA............................................................... 55
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41. INDEMNIFICATION..................................................... 55
42. LIMITATIONS ON RECOURSE............................................. 57
43. NOTICE.............................................................. 60
44. AUTHORITY........................................................... 60
45. WAIVER OF NOTICE.................................................... 60
46. REMEDIES OF MORTGAGOR............................................... 61
47. SOLE DISCRETION OF MORTGAGEE........................................ 61
48. NON-WAIVER.......................................................... 61
49. NO ORAL CHANGE...................................................... 62
50. LIABILITY........................................................... 62
51. INAPPLICABLE PROVISIONS............................................. 62
52. SECTION HEADINGS.................................................... 62
53. COUNTERPARTS........................................................ 62
54. HOMESTEAD........................................................... 62
55. ASSIGNMENTS......................................................... 63
56. SUBMISSION TO JURISDICTION.......................................... 63
57. SERVICE OF PROCESS.................................................. 63
58. WAIVER OF JURY TRIAL................................................ 63
59. CHOICE OF LAW....................................................... 64
60. TIME OF ESSENCE..................................................... 64
61. SURVIVAL............................................................ 64
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62. NO THIRD-PARTY BENEFICIARY RIGHTS CREATED........................... 65
63. DISCHARGE........................................................... 65
64. MAINTAINING PRIORITY OF MORTGAGE.................................... 65
65. USURY SAVINGS....................................................... 65
66. COSTS............................................................... 66
67. LOCAL LAW PROVISIONS.................................................. 66
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OPEN-END MORTGAGE,
ASSIGNMENT OF LEASES AND PROFITS, SECURITY AGREEMENT
AND FIXTURE FILING
This OPEN-END MORTGAGE, ASSIGNMENT OF LEASES AND PROFITS, SECURITY
AGREEMENT AND FIXTURE FILING (this "MORTGAGE") is dated as of the 7th day of
July, 1997 from SOLON HOTEL LLC, a New York limited liability company, having an
address at c/o Essex Partners Inc., 100 Corporate Woods, Rochester, New York
14623 ("MORTGAGOR") to GMAC COMMERCIAL MORTGAGE CORPORATION, a California
corporation, having an address at 8614 Westwood Center Drive, Suite 630, Vienna,
Virginia 22182-2233 ("MORTGAGEE").
MORTGAGOR, in consideration of the indebtedness herein recited, and in
consideration of the sum of Ten and No/100 Dollars ($10.00) in hand paid by
Mortgagee, the receipt of which is hereby acknowledged, does hereby irrevocably
mortgage, grant, bargain, sell, pledge, assign, warrant, transfer and convey to
Mortgagee, its successors and assigns forever, all of Mortgagor's right, title
and interest in and to certain lands in Cuyahoga County, Ohio, more particularly
described in EXHIBIT A attached hereto and made a part hereof (collectively, the
"LAND"; together with all of the following described property, collectively, the
"PROPERTY");
TOGETHER WITH all machinery, furnishings and equipment including,
without limitation, all furnaces, boilers, oil burners, radiators and piping,
coal stokers, refrigeration and sprinkler systems, wash-tubs, sinks, gas and
electric fixtures, awnings, window shades, kitchen cabinets, plants and
shrubbery and all other equipment and machinery, appliances, fittings and
fixtures of every kind in or used in the operation of the Land and the
Improvements, together with any and all replacements thereof and additions
thereto, fixtures (including, without limitation, all heating, air conditioning,
plumbing and bathroom, lighting, communications and elevator fixtures),
inventory and articles of personal property and accessions thereof and renewals,
replacements thereof and substitutions therefor (including, without limitation,
beds, bureaus, chiffonniers, chests, chairs, desks, lamps, mirrors, bookcases,
tables, rugs, carpeting, drapes, draperies, curtains, shades, venetian blinds,
screens, paintings, hangings, pictures, divans, couches, luggage carts, luggage
racks, stools, sofas, chinaware, linens, pillows, blankets, glassware,
foodcarts, cookware, dry cleaning facilities, dining room wagons, keys or other
entry systems, bars, bar fixtures, liquor and other drink dispensers, icemakers,
radios, clock radios, television sets, intercom and paging equipment, electric
and electronic equipment, dictating equipment, private telephone systems,
medical equipment, potted plants, heating, lighting and plumbing fixtures, fire
prevention and extinguishing apparatus, cooling and air conditioning systems,
elevators, escalators, fittings, plants, apparatus, stoves, ranges,
refrigerators, laundry machines, tools, machinery, engines, dynamos, motors,
boilers, incinerators, switchboards, conduits, compressors, vacuum cleaning
systems, floor cleaning, waxing and
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polishing equipment, call systems, brackets, electrical signs, bulbs, bells,
fuel, conveyors, cabinets, lockers, shelving, spotlighting equipment,
dishwashers, garbage disposals, washer and dryers), other customary equipment
and other property of every kind and nature, whether tangible or intangible,
whatsoever owned by Mortgagor, or in which Mortgagor has or shall have an
interest, now or hereafter located upon the Land and the buildings, structures
and improvements now or hereafter erected or located thereon or appurtenant
thereto, including without limitation that "Hampton Inn" hotel, the construction
of which is nearing completion, on the Land and all related amenities and
improvements (collectively, the "IMPROVEMENTS"), and usable in connection with
the present or future operation and occupancy of the Land and the Improvements
and all equipment, materials and supplies of any nature whatsoever owned by
Mortgagor, or in which Mortgagor has or shall have an interest, now or hereafter
located upon the Land and the Improvements, or appurtenant thereto, or usable in
connection with the present or future operation, enjoyment and occupancy of the
Land and the Improvements (collectively, the "PERSONAL PROPERTY"), and the
right, title and interest of Mortgagor in and to any of the Personal Property
which may be subject to any security interests, as defined in the Uniform
Commercial Code, as adopted and enacted by the state or states where any of the
Property is located (the "UNIFORM COMMERCIAL CODE"), superior in lien to the
lien of this Mortgage and all proceeds and products of the above; Mortgagor
acknowledges that, as of the date hereof, it has entered into a certain letter
agreement with Mortgagee (the "FF&E SIDE LETTER") confirming, among other
things, that after Mortgagor has acquired all Personal Property necessary to
operate the Property, it shall execute such additional security agreements,
UCC-1 financing statements and other instruments as may be reasonably requested
by Mortgagee to reflect that Mortgagee holds a valid, perfected first-lien
security interest in all such Personal Property;
TOGETHER WITH all accounts, escrows (including, without limitation, the
Replacement Reserve Account and the Escrow Fund), documents, instruments,
chattel paper, claims, deposits and general intangibles of Mortgagor, as such
terms are defined in the Uniform Commercial Code, and all agreements, contracts,
certificates, instruments, and other documents, now or hereafter entered into,
including, without limitation, the Management Agreement and the License
Agreement (to the extent permitted thereby), and all proceeds, substitutions and
replacements thereof, all of Mortgagor's interest in contract rights, insurance
proceeds, security deposits, franchises, books, records, appraisals,
architectural and engineering plans, specifications, environmental and other
reports relating to the Land, trademarks (to the extent assignable), trade names
(to the extent assignable), servicemarks, logos, copyrights, goodwill, symbols,
permits, licenses (to the extent assignable), approvals, actions, tenant or
guest lists, advertising materials and telephone exchange numbers as identified
in such materials, all refunds, rebates or credits in connection with a
reduction in real estate taxes and assessments charged against the Land as a
result of tax certiorari or any applications or proceedings for reduction, and
causes of action which now or hereafter relate to, are derived from or are used
in connection with the Land, or the use, operation, maintenance, occupancy or
enjoyment thereof or the conduct of any business or activities thereon
(collectively, "INTANGIBLES");
TOGETHER WITH all leases and other agreements affecting the use,
enjoyment or occupancy of the Land or the Improvements heretofore or hereafter
entered into (including,
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without limitation, subleases, licenses, concessions, tenancies and other
occupancy agreements covering or encumbering all or any portion of the Land),
together with any guarantees, supplements, amendments, modifications, extensions
and renewals of any thereof, and all additional remainders, reversions, and
other rights and estates appurtenant thereto, as the same may be amended from
time to time (collectively, "LEASES");
TOGETHER WITH all of Mortgagor's right, title and interest in
and to the Operating Agreements (defined herein), together with any amendments,
modifications, extensions and renewals of any thereof, and all subordinations,
estoppels and other rights in connection therewith;
TOGETHER WITH all agreements (including, without limitation, the
Management Agreement, the License Agreement and all agreements now or hereafter
entered into for the use and enjoyment of all food, liquor and other beverage
licenses), contracts, certificates, instruments, franchises, permits, licenses
(including, without limitation, food, liquor and other beverage licenses, to the
extent assignable), plans, specifications and other documents, now or hereafter
entered into, together with any amendments, modifications, extensions and
renewals of any thereof, and all subordinating estoppel rights therein and
thereto, respecting or pertaining to the use, occupation, construction,
management or operation of the Land and any part thereof and any Improvements or
respecting any business or activity conducted on the Land and any part thereof
and all right, title and interest of Mortgagor therein and thereunder,
including, without limitation, the right, while an Event of Default remains
uncured, to receive and collect any sums payable to Mortgagor thereunder;
TOGETHER WITH all of Mortgagor's right, title and interest in and to
any easements and appurtenances affecting the Property;
TOGETHER WITH the right, in the name and on behalf of Mortgagor, to
commence any action or proceeding to protect the interest of Mortgagee in the
Property and while an Event of Default remains uncured, to appear in and defend
any action or proceeding brought with respect to the Property;
TOGETHER WITH all (i) income, rents, room rates, receipts, issues,
profits, revenues (including all oil and gas or other mineral royalties and
bonuses), deposits and other benefits now due or which may become due or to
which Mortgagor is now or hereafter may become entitled or which Mortgagor may
demand or claim arising or issuing from or out of the operation of the business
at the Land or any part thereof and all amounts paid as rents for such Land or
the fees, charges, accounts or other payments for the use or occupancy of rooms
and other public facilities in hotels, motels or other lodging facilities,
including, without limitation, all revenues and credit card receipts collected
from guest rooms, restaurants, bars, mini-bars, meeting rooms, banquet rooms,
recreational facilities and otherwise; and (ii) receivables, customer
obligations, installment payment obligations and other payment obligations
whether already accrued, now accruing or to accrue in the future for the
occupancy or use of the Property or any part thereof, or arising or created out
of the sale, lease, sublease, license, concession or other grant of the right of
the possession, use or
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occupancy of all or any portion of the Land or personalty located thereon, or
the rendering of services by Mortgagor or any operator or manager of the hotel
or the commercial space located in the Improvements or acquired from others
including, without limitation, from the rental of any office space, retail
space, commercial space, parking space, guest rooms or other space, halls,
stores or offices, including any deposits securing reservations of such space,
exhibit or sales space of every kind, license, lease, sublease and concession
fees and rentals, health club membership fees, food and beverage wholesale and
retail sales, service charges, vending machine sales and proceeds, if any, from
business interruption or other loss of income insurance relating to the use,
enjoyment or occupancy of the Land, regardless of whether the revenues described
in the preceding clauses (i) and (ii) are paid or accrued before or after the
filing by or against Mortgagor of any petition for relief under any state or
federal bankruptcy or insolvency laws (collectively, "PROFITS");
TOGETHER WITH all additional lands, estates and development rights
hereafter acquired by Mortgagor for use in connection with the Land and the
development of the Land that may, from time to time, by supplemental mortgage or
otherwise be expressly made subject to the lien of this Mortgage;
TOGETHER WITH all awards heretofore and hereafter made to Mortgagor for
taking by eminent domain the whole or any part of the Land or any easement
therein, including any awards for changes of grade of streets; and
TOGETHER WITH any and all other rights of Mortgagor in and to the
foregoing.
TO HAVE AND TO HOLD the Property unto Mortgagee and unto its successors
and assigns in fee simple forever with all appurtenances hereunto belonging,
together with all Profits therefrom.
PROVIDED, HOWEVER, that upon full payment of all indebtedness hereby
secured, and upon performance of all covenants, obligations and indemnities
hereby secured, the Property shall be released to Mortgagor.
TO SECURE to Mortgagee:
(a) Payment of all indebtedness evidenced by an interest-bearing
loan and debt in the original principal sum of Four Million Five Hundred
Thousand and No/100 Dollars ($4,500,000.00) (the "LOAN") evidenced by that
certain Mortgage Note dated as of the date hereof from Mortgagor, as Maker, to
Mortgagee, as Payee (the "NOTE"), the terms of which are incorporated herein by
reference as well as all renewals, extensions, modifications and recastings of
the Note.
(b) The performance of all covenants, obligations, indemnities and
agreements required of Mortgagor under the Note, this Mortgage, any indemnity
executed in connection with the Loan, and all other agreements, documents and
instruments evidencing or securing the indebtedness hereby secured (the Note,
this Mortgage, the Assignment, the Document Assignment,
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the Financing Statements, Environmental Agreement, the Replacement Reserve
Agreement, the Guaranty Agreement, and all such other agreements, documents and
instruments are hereinafter referred to collectively as the "LOAN DOCUMENTS").
(c) The payment of (i) interest, default interest, late charges
and other sums as provided in the Loan Documents; (ii) any Extension Fee or
Deferred Financing Fee (as each such term is defined in the Note; and (iii) all
other monies agreed or provided to be paid by Mortgagor in the Loan Documents.
(d) The payment of any and all future advances made to Mortgagor
hereunder or under any Loan Document.
(e) The performance of all obligations of any surety, guarantor or
indemnitor of any of the obligations of Mortgagor under the Loan Documents.
(f) The payment of all costs and expenses, including court costs,
attorneys' fees, witness fees (including fees of expert witnesses), paid,
advanced or incurred by Mortgagee pursuant to the Loan Documents to protect or
preserve the Property or the validity or priority of this Mortgage or to enforce
the remedies of Mortgagee as provided for herein or in the other Loan Documents.
1. DEFINED TERMS
The following terms shall have the following meanings:
(a) "ACCESS LAWS" has the meaning set forth in Section 39(a)
hereof.
(b) "ACCOUNTS" has the meaning set forth in Section 6(b) hereof.
(c) "AFFILIATE" means, with respect to a specified person or
entity, another person or entity who: (i) directly or indirectly through one or
more intermediaries controls, is controlled by, or is under common control, with
the specified person or entity; (ii) is a partner, director, officer or trustee
of the specified person or entity or of any person or entity described in clause
(i) above; (iii) is a partner of a partnership or joint venture which owns, or
is a beneficiary or trustee of a trust which owns, or other owner of any stock
or other evidences of beneficial ownership in, the specified person or entity or
any person or entity as described in clause (i) above; or (iv) is related to the
specified person by blood (including grandparents of the specified person and of
his or her spouse and all lineal descendants of such grandparents) or marriage
to the specified person or to any person described in (i) above or of the spouse
of any of the foregoing persons. For purposes of this definition, the term
"control" with respect to a specified person or entity means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of the specified person or entity, whether through the
ownership of voting stock, by contract or otherwise.
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(d) "APPLICABLE LAWS" has the meaning set forth in Section 7(a)
hereof.
(e) "ASBESTOS" has the meaning set forth in Section 36 hereof.
(f) "ASSIGNMENT" has the meaning set forth in Section 2(b) hereof.
(g) "BUDGET" means the budget for the use and application of the
Loan and Gross Revenues derived from the operation of the Property, including
all expenses to be satisfied from the Accounts, as set forth in the budget
delivered by Mortgagor to Mortgagee on the date hereof with respect to the
balance of the current calendar year, and the annual budget to be delivered in
accordance with the terms hereof for each subsequent calendar year for so long
as any portion of the Debt remains outstanding.
(h) "BUSINESS DAY" means a day on which commercial banks are not
authorized or required by law to close in the State of Ohio.
(i) "CAPITAL EXPENSES" means all payments for any fixed assets or
improvements, or for replacements, substitutions or additions thereto, that have
a useful life of more than one year and that are required to be capitalized
consistent with accounting methods employed by Mortgagor for the Property.
(j) "COLLATERAL" has the meaning set forth in Section 29 hereof.
(k) "CONDEMNATION" has the meaning set forth in Section 8(a)
hereof.
(l) "DEBT" means the outstanding principal balance of the Note
from time to time, with all accrued and unpaid interest thereon, and all other
sums now or hereafter due under the Loan Documents, as well as the last
paragraph of this Section.
(m) "DEBT SERVICE COVERAGE RATIO" shall mean the ratio of:
(i) the NOI produced by the operation of the Property during
the twelve (12) calendar month period immediately preceding the
calculation, to
(ii) the projected payments of principal and interest
due under the Note for the twelve (12) calendar month period
immediately following the calculation, as reasonably calculated by
Mortgagee.
(n) "DEFAULT RATE" has the meaning set forth in Section 25(b)
hereof.
(o) "DOCUMENT ASSIGNMENT" has the meaning set forth in Section
2(b) hereof.
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(p) "EHA IV" means Essex Hospitality Associates IV L.P., a New
York limited partnership and the ninety-nine percent (99%) member of Borrower.
(q) "ENVIRONMENTAL AGREEMENT" has the meaning set forth in Section
2(b) hereof.
(r) "ENVIRONMENTAL LAWS" has the meaning set forth in Section 35
hereof.
(s) "ERISA" has the meaning set forth in Section 40(a) hereof.
(t) "ESCROW AGREEMENT" means that Escrow Agreement between the
Title Company, Mortgagor and Mortgagee dated of even date herewith, which sets
forth the schedule of and conditions precedent to the disbursement of the Loan
proceeds.
(u) "ESCROW FUND" has the meaning set forth in Section 6(a)
hereof.
(v) "EVENT OF DEFAULT" has the meaning set forth in Section 24
hereof.
(w) "EXCULPATED PARTIES" has the meaning set forth in Section
42(b) hereof.
(x) "EXPENSES" means the aggregate of the following items actually
incurred by Mortgagor, whether or not paid, during the twelve (12) month period
ending one (1) month prior to the date on which the NOI is to be calculated:
(i) the cost of sales including, without limitation,
salaries, wages, employee benefits, payroll taxes and
other costs related to the Property's employees;
(ii) departmental expenses incurred at departments within the
Property, administrative and general expenses and the
cost of marketing incurred by the Property, advertising
and business promotion incurred by the Property, all
utility costs (including, without limitation, heat,
light, power, water, and telephone), computer line
charges, and routine repairs, maintenance and minor
alterations treated as Expenses under the License
Agreement or the Management Agreement;
(iii) the cost of inventories and fixed asset supplies
consumed in the operation of the Property;
(iv) a reasonable reserve for uncollectible accounts
receivable;
(v) all costs and fees of independent professionals or other
third parties who are retained by Licensor to perform
services required or permitted under the License
Agreement;
(vi) all costs and fees of technical consultants and
operational experts who are retained or employed by
Licensor for specialized services (including, without
limitation, quality
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assurance inspectors) and the cost of attendance by
employees of the Property at training and manpower
development programs sponsored by the Licensor;
(vii) the base management fee under the Management Agreement
and the base license fee under the License Agreement;
(viii) the Property's pro rata share of costs and expenses of
the national and regional reservations system service
under the License Agreement;
(ix) Insurance Premiums, as provided herein or in the License
Agreement;
(x) taxes (exclusive of the Manager's income taxes and any
license, corporate, estate, inheritance, succession,
capital levy or transfer tax imposed on the Manager) and
all impositions;
(xi) transfers to any reserve account required pursuant
hereto or to the License Agreement;
(x) lease payments and associated costs on any operating (as
opposed to capital) leases of FF&E;
(xi) common area maintenance fees and improvement district
assessments;
(xii) costs and expenses incurred by Licensor in terminating
its employees at the Property pursuant to the License
Agreement; and
(xiii) such other costs and expenses incurred by Licensor or
Manager as are otherwise reasonably necessary for the
proper and efficient operation of the Property.
The term "Expenses" shall not include (a) debt service payments
pursuant to any mortgage financing on the Property, (b) payments pursuant to
equipment leases or other forms of financing obtained for the initial FF&E
located in or connected with the Property or (c) rental payments pursuant to any
ground lease.
(y) "FF&E SIDE LETTER" has the meaning set forth in the recitals
of this Mortgage.
(z) "FINANCING STATEMENTS" means any and all UCC financing
statements filed by or on behalf of Mortgagee as additional security hereunder.
(aa) "GROSS REVENUES" shall mean all revenues and receipts of
every kind derived from operating the Property and all departments and parts
thereof, including, but not limited to: income (from both cash and credit
transactions) from rental of guest rooms, telephone charges, stores, offices,
exhibit or sales space of every kind; license, lease and concession fees and
rentals
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(not including gross receipts of licensees, lessees and concessionaires); income
from vending machines; health club membership fees; food and beverage sales;
wholesale and retail sales of merchandise; service charges; and proceeds, if
any, from business interruption or other loss of income insurance; PROVIDED,
HOWEVER, that Gross Revenues shall not include the following: gratuities to
employees of the Property; federal, state or municipal excise, sales or use
taxes or any other taxes collected directly from patrons or guests or included
as part of the sales price of any goods or services; proceeds from the sale of
FF&E; interest received or accrued with respect to the funds in any required
reserve accounts or the other operating accounts of the Property; any refunds,
rebates, discounts and credits of a similar nature, given, paid or returned in
the course of obtaining Gross Revenues or components thereof; insurance proceeds
(other than proceeds from business interruption or other loss of income
insurance); condemnation proceeds (other than for a temporary taking); or any
proceeds from any sale of the Property or from the refinancing of any debt
encumbering the Property.
(bb) "GUARANTOR" means Essex Partners Inc., a New York
corporation.
(cc) "GUARANTY AGREEMENT" has the meaning set forth in
Section 2(b) hereof.
(dd) "HAZARDOUS SUBSTANCES" has the meaning set forth in
Section 35 hereof.
(ee) "INDEMNIFIED PARTIES" has the meaning set forth in Section
41(b) hereof.
(ff) "IMPROVEMENTS" has the meaning set forth in the recitals of
this Mortgage.
(gg) "INSURANCE PREMIUMS" has the meaning set forth in
Section 4(d) hereof.
(hh) "INSURED CASUALTY" has the meaning set forth in Section
4(e)(ii) hereof.
(ii) "INTANGIBLES" has the meaning set forth in the recitals of
this Mortgage.
(jj) "INVESTOR" has the meaning set forth in Section 21(b) hereof.
(kk) "LAND" has the meaning set forth in the recitals of this
Mortgage.
(ll) "LEASES" has the meaning set forth in the recitals of this
Mortgage.
(mm) "LICENSE AGREEMENT" means the License Agreement to be issued
under that Commitment Agreement to issue a Hampton Inn License Agreement dated
as of November 6, 1995 ("LICENSE COMMITMENT"), by and between Licensor and EHA
IV, which, in accordance with that certain letter from Licensor to Lender dated
June 27, 1997, will be reissued in the name of Mortgagor, pursuant to which
Mortgagor has the right to operate the hotel located on the Property under a
name and/or hotel system controlled by Licensor, or any successor agreement
between Mortgagor and Licensor.
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<PAGE>
(nn) "LICENSOR" means Promus Hotels, Inc., a Delaware corporation.
(oo) "LOAN" has the meaning set forth in the recitals of this
Mortgage, together with any renewals, extensions, amendments, modifications,
supplements or restatements thereof.
(pp) "LOAN DOCUMENTS" has the meaning set forth in the recitals of
this Mortgage, together with any renewals, extensions, amendments,
modifications, supplements or restatements of such instruments.
(qq) "LOAN-TO-VALUE RATIO" means the ratio of: (i) the Debt, plus
all other debt (or other liquidated economic obligations) which is then
outstanding and secured by the Property or any part thereof, to (ii) the
appraised value of the Property as estimated by an appraiser acceptable to
Mortgagee. Any appraisal for purposes of calculating the Loan-to-Value Ratio
shall be performed in accordance with the then-approved standards under the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended
("FIRREA").
(rr) "MANAGEMENT AGREEMENT" means the Management Agreement dated
as of June 25, 1997 between Mortgagor and Manager.
(ss) "MANAGER" means Essex Partners Inc., a New York corporation.
(tt) "MANAGING MEMBER" means Essex Hotels LLC, a New York limited
liability partnership.
(uu) "MATURITY DATE" means the Applicable Maturity Date (as such
term is defined in the Note) or any earlier acceleration of sums due under the
Note pursuant to Mortgagee's declaration of an Event of Default.
(vv) "MORTGAGE" has the meaning set forth in the recitals of this
Mortgage, together with any renewals, extensions, amendments, modifications,
supplements or restatements hereof.
(ww) "MORTGAGEE" has the meaning set forth in the preamble to this
Mortgage as well as the last paragraph of this Section.
(xx) "MORTGAGOR" has the meaning set forth in the preamble to this
Mortgage as well as the last paragraph of this Section.
(yy) "NOI" means for any period of time, the excess of Gross
Revenues for such period over Expenses for such period adjusted by the
Underwriting Standards. NOI shall include only Profits and such other income,
including any rent loss, business interruption insurance proceeds, vending or
concession income, late fees, forfeited security deposits and other
miscellaneous tenant charges, which are accrued and Expenses actually incurred
or payable during the period for which
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the NOI is being calculated, as set forth on operating statements satisfactory
to Mortgagee. NOI shall be calculated on an accrual basis in accordance with
generally accepted accounting principles consistently applied, based on the
Uniform System of Accounts; PROVIDED, HOWEVER, that notwithstanding the
foregoing, Mortgagee reserves the right as aforesaid and as specified in
subsection 1(v) above to adjust Gross Revenues and Expenses based on the
Underwriting Standards.
(zz) "NOTE" has the meaning set forth in the recitals of this
Mortgage, together with any renewals, extensions, amendments, modifications,
supplements or restatements of such instrument.
(aaa) "OPERATING AGREEMENTS" has the meaning set forth in Section
20 hereof.
(bbb) "OTHER CHARGES" has the meaning set forth in Section 5
hereof.
(ccc) "PERSONAL PROPERTY" has the meaning set forth in the
recitals of this Mortgage.
(ddd) "POLICIES" has the meaning set forth in Section 4(d) hereof.
(eee) "PROFITS" has the meaning set forth in the recitals of this
Mortgage.
(fff) "PROPERTY" has the meaning set forth in the recitals of
this Mortgage, as well as the last paragraph of this Section.
(ggg) "REMEDIAL WORK" has the meaning set forth in Section 37
hereof.
(hhh) "REPLACEMENT RESERVE AGREEMENT" has the meaning set forth in
Section 2(b) hereof.
(iii) "REPLACEMENT RESERVE ACCOUNT" has the meaning set forth in
Section 6(b) hereof.
(jjj) "SECURITIES" has the meaning set forth in Section 21(b)
hereof.
(kkk) "TAXES" has the meaning set forth in Section 5 hereof.
(lll) "UCC FINANCING STATEMENTS" has the meaning set forth in
Section 2(b) hereof.
(mmm) "UNDERWRITING STANDARDS" means shall mean the
underwriting standards utilized to adjust the actual net operating income of the
Property to comply with the Underwriting Standards of Mortgagee for the
Property, as follows:
(i) Gross Revenues shall not include any interest or
investment income. In addition, Gross Revenues shall be
adjusted as may be reasonably
F:\HOME\LORRIE\WORDPFT\ESSXGMAC.DOC
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required to normalize Gross Revenues in a manner in
which a prudent "institutional hotel investor" would
reasonably expect, and the Gross Revenues shall be
further adjusted for underwriting purposes by
multiplying the Gross Revenues, as adjusted above, times
the ratio of (1) the Underwriting Occupancy Rate to (2)
the Property Occupancy Rate (although in no event shall
the ratio be greater than 1.00). Underwriting Occupancy
Rate shall mean an occupancy rate equal to the lesser of
the Property Occupancy Rate or 85% for the underwriting
period. Property Occupancy Rate shall mean the actual
occupancy rate for the Property for the underwriting
period and shall be calculated by the rooms occupied by
guests (including paid rooms occupied and complimentary
rooms occupied) divided by the rooms actually available
for rent during the underwriting period.
(ii) Expenses shall be adjusted as follows:
(1) Taxes shall be based on a fully completed,
occupied, functioning and assessed Property
(including, without limitation, all
build-out, personal property in place).
(2) if any ratio percentages used to calculate
fees or contributions (including, without
limitation, the base and incentive management
fees, base and incentive franchise fees, and
the replacement reserve contribution, if any)
under the Management Agreement, the License
Agreement or hereunder for the Property shall
be scheduled to increase during any portion
of the 24 month period following the
Underwriting Period (the increased amount
shall be the "INCREASED FEES AND
CONTRIBUTION"), then the higher Increased
Fees and Contribution on an annualized basis
shall be used to calculate the Expenses with
respect to the Property.
(iii) In addition to, but not in duplication of, the
adjustments set forth above, NOI for the Property
may be further adjusted to reflect (1) the growth
and/or decline in demand, (2) additions and/or
deletions to supply and (3) penetration of the
Property for the three year period commencing on
the date of determination of the trailing 12 month
period. The Property's stabilized NOI shall be
adjusted, on a constant dollar basis, for the
average daily rate and occupancy rate projected
over the three year period commencing on the date
of determination of the trailing 12 month period.
(iv) In the event that Mortgagor disputes Mortgagee's
calculation of
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adjustments set forth in subsection (iii) above,
it shall submit its calculation to Mortgagee with
supporting detail and Mortgagee shall have the
right to either accept Mortgagor's calculation or
to submit both Mortgagee's and Mortgagor's
adjustments as set forth in subsection (iii) above
to the arbitrator (as selected below) to resolve
the dispute. In the event Mortgagee shall elect to
submit a dispute to the arbitrator, Mortgagor and
Mortgagee shall have ten (10) days to designate
one and only one person to act as an arbitrator by
written notice given to the other within such ten
(10) day period. In the event that either side
shall fail to select an arbitrator within such ten
(10) day period, the arbitrator selected by the
other shall be deemed the arbitrator to resolve
the dispute. If both Mortgagor and Mortgagee
timely select an arbitrator as stated above, the
arbitrators so selected shall, within ten (10)
days of their appointment, select a third
arbitrator who shall resolve the dispute. Any
arbitrator selected above shall be an appraiser
with at least ten (10) years experience in
appraising hotel properties. The cost of the
arbitrator shall be shared equally between
Mortgagor and Mortgagee.
(nnn) "UNIFORM COMMERCIAL CODE" means the Uniform Commercial Code,
as adopted and enacted by the State or States where any of the Property is
located.
(ooo) "UNIFORM SYSTEM OF ACCOUNTS" has the meaning set forth in
Section 10(h) hereof.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Note. Unless the context clearly indicates a
contrary intent or unless otherwise specifically provided herein, words used in
this Mortgage may be used interchangeably in singular or plural form and the
word "Mortgagor" shall mean "each Mortgagor or any part thereof or any interest
therein", the word "Mortgagee" shall mean "Mortgagee, its successors and
assigns, and any subsequent holder of the Note", the word "Debt" shall mean "the
Note and any other evidence of indebtedness secured by this Mortgage", the word
"person" shall include an individual, corporation, partnership, trust,
unincorporated association, government, governmental authority and any other
entity, and the words "Property" shall include any portion of the Property and
any interest therein and the words "attorneys' fees" shall include any and all
attorneys' fees, paralegal and law clerk fees including, without limitation,
fees at the pretrial, trial and appellate levels incurred or paid by Mortgagee
in protecting its interest in the Property and Collateral and enforcing its
rights hereunder. Whenever the context may require, any pronouns used herein
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns and pronouns shall include the plural and vice versa.
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2. THE LOAN
(a) Upon and subject to the terms and conditions herein set forth,
Mortgagee agrees to lend to Mortgagor and Mortgagor agrees to borrow from
Mortgagee, a sum not to exceed Four Million Five Hundred Thousand and No/100
Dollars ($4,500,000.00) Mortgagor will pay the Debt at the time and in the
manner provided in the Note, this Mortgage and the other Loan Documents. All
payments made to Mortgagee in respect of the Debt after payment of principal and
interest due and payable under the Note shall be applied by Mortgagee in such
order of priority as Mortgagee shall determine in its sole discretion.
(b) All the covenants, conditions and agreements contained in the
Note, the Assignment of Contracts, Licenses, Permits, Agreements, Warranties and
Approvals dated as of the date hereof from Mortgagor to Mortgagee (the
"ASSIGNMENT"), the Assignment of Construction Agreements, Plans and Property
Agreements dated as of the date hereof from Mortgagor to Mortgagee (the
"DOCUMENT ASSIGNMENT"), the Environmental Indemnity Agreement dated as of the
date hereof among Mortgagee, Mortgagor and Guarantor (the "ENVIRONMENTAL
AGREEMENT"), the Guaranty Agreement dated as of the date hereof from Guarantor
to Mortgagee (the "GUARANTY AGREEMENT"), the Replacement Reserve Agreement dated
as of the date hereof from Mortgagor to Mortgagee (the "REPLACEMENT RESERVE
AGREEMENT"), the Uniform Commercial Code Financing Statement(s) dated as of the
date hereof from Mortgagor for the benefit of Mortgagee (the "UCC FINANCING
STATEMENTS"), and the other Loan Documents are hereby made a part of this
Mortgage to the same extent and with the same force as if fully set forth
herein.
2. WARRANTY OF TITLE
Mortgagor represents and warrants generally that Mortgagor: (a) has
good indefeasible fee simple title to the Property as specified in the title
insurance policy insuring the lien of this Mortgage, (b) has the full power,
authority and right to execute, deliver and perform its obligations under this
Mortgage and to encumber, mortgage, give, grant, bargain, sell, alienate,
enfeoff, convey, confirm, pledge, assign, hypothecate and grant a security
interest in the Property, (c) possesses an unencumbered fee estate in the Land
and the Improvements, and (d) owns the Property free and clear of all liens,
encumbrances and charges whatsoever except for those exceptions approved by
Mortgagee and shown in the title insurance policy insuring the lien of this
Mortgage. Mortgagor further represents and warrants that this Mortgage is and
will remain a valid and enforceable first lien on and security interest in the
Property, subject only to such exceptions. Mortgagor shall forever warrant,
defend and preserve such title and the validity and priority of the lien of this
Mortgage and shall forever warrant and defend such title, validity and priority
to Mortgagee against the claims of all persons whomsoever.
3. INSURANCE
(a) Mortgagor, at its sole cost and expense, will keep the Property
insured during the entire term of this Mortgage for the mutual benefit of
Mortgagor and Mortgagee in accordance
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with the terms and provisions of this Section against loss or damage by fire and
against loss or damage by other risks and hazards covered by a standard extended
coverage insurance policy including, without limitation, riot and civil
commotion, vandalism, malicious mischief, burglary and theft. The insurance
policy shall contain option perils and income loss endorsements and if any of
the Improvements or the use of the Property shall at any time constitute legal
nonconforming structures or uses, a law and ordinance endorsement. Such
insurance shall be in an amount equal to the greater of: (A) the original
principal amount of the Loan (in no event less than the minimum amount required
to compensate for damage or loss on a replacement cost basis), or (B) the then
full replacement cost of the Improvements and the Personal Property, without
deduction for physical depreciation; PROVIDED, HOWEVER, that such insurance
shall be in an amount such that the insurer would not deem Mortgagor a
co-insurer under such policies. The deductible in respect of such insurance
shall not exceed the lesser of: (1) Ten Thousand and No/100 Dollars
($10,000.00); or (2) one percent (1%) of the face value of such policy, unless a
higher deductible is required by law. Unless such premiums are deposited in the
Escrow Fund pursuant to Section 6 of this Mortgage, the premiums for the
insurance carried in accordance with this Section shall be paid annually in
advance and each policy shall contain the "Replacement Cost Endorsement" with a
waiver of depreciation.
(b) Mortgagor shall also obtain and maintain during the entire term of
this Mortgage, at its sole cost and expense, for the mutual benefit of Mortgagor
and Mortgagee, the following policies of insurance:
(i) If Mortgagee shall request at any time in writing, Flood
insurance if any part of the Property is currently or at any
time in the future located in an area identified by the
Federal Emergency Management Agency as an area having special
flood hazards and in which flood insurance has been made
available under the National Flood Insurance Act of 1968 (and
any amendment or successor act thereto) in an amount at least
equal to the lesser of: (A) the outstanding principal amount
of the Note; or (B) the maximum limit of coverage available
with respect to the Improvements and the Personal Property
under such act;
(ii) (A) Comprehensive public liability insurance, including broad
form property damage, blanket contractual and personal
injuries (including death resulting therefrom) coverages and
"Dram shop" or other liquor liability coverage if alcoholic
beverages are sold from or may be consumed at the Property,
and containing minimum limits per occurrence of One Million
and No/100 Dollars ($1,000,000.00) and Two Million and No/100
Dollars ($2,000,000.00) general aggregate for the Land and
the Improvements, or such greater amount as may be required
under the License Agreement; and (B) Umbrella liability
insurance containing minimum limits of Ten Million and No/100
Dollars ($10,000,000.00) for the Land and the Improvements,
or such greater amount as may be required under the License
Agreement;
(iii) Business interruption insurance: (A) with loss payable to
Mortgagee, its successors and/or assigns, as their respective
interests may appear; (B) covering all risks
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required to be covered by the insurance provided for in
Section 4(a); (C) containing an extended period of indemnity
endorsement which provides that after the physical loss to
the Improvements and all personal property has been repaired,
the continued loss of income will be insured until the
Property is restored (or if such income is not as of the date
of restoration at the same level it was at prior to the loss,
then until two (2) months following the restoration date), or
the expiration of twelve (12) months from the date of the
loss, whichever first occurs, and notwithstanding that the
policy may expire prior to the end of such period; and (D) in
an amount equal to One Million and No/100 Dollars
($1,000,000.00) (based on Expenses and NOI for the Property).
The amount of such business interruption insurance shall be
determined prior to the date hereof and at least once each
year thereafter based on clause 4(b)(iii)(D). All insurance
proceeds payable to Mortgagee pursuant to this Section shall
be held by Mortgagee and shall be applied to the obligations
secured hereunder from time to time due and payable hereunder
and under the Note; PROVIDED, HOWEVER, that nothing herein
contained shall be deemed to relieve Mortgagor of its
obligations to pay the obligations secured hereunder on the
respective dates of payment provided for in the Note except
to the extent such amounts are actually and timely paid out
of the proceeds of such business interruption insurance;
(iv) Insurance, in an amount equal to the lesser of the original
principal amount of the Loan or the insurable value of the
Improvements and the Personal Property, against loss or
damage from: (A) leakage of sprinkler systems; and (B)
explosion of steam boilers, air conditioning equipment, high
pressure piping, machinery and equipment, pressure vessels or
similar apparatus now or hereafter installed in the
Improvements;
(v) Worker's compensation insurance with respect to any employees
of Mortgagor, as required by any governmental authority or
legal requirement;
(vi) Motor vehicle liability coverage for all owned and non-owned
vehicles, including rented and leased vehicles, containing
minimum limits per occurrence of One Million and No/100
Dollars ($1,000,000.00) with minimum limits of Four Million
and No/100 Dollars ($4,000,000.00) liability umbrella
coverage or such greater amount as may be required under the
License Agreement;
(vii) Blanket crime and fidelity insurance coverage insuring
against losses resulting from dishonest or fraudulent acts
committed by Mortgagor's or Manager's personnel;
(viii) Earthquake insurance (including subsidence), if the Property
is located in an earthquake prone region, insuring to
replacement cost with a maximum deductible of no greater than
five percent (5%) of the Property value; and
(ix) Such other insurance as may from time to time be reasonably
required by Mortgagee or as may be required by the License
Agreement, including, without
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limitation, during the course of any construction of, or
repairs to, any Improvements, builder's completed value risk
insurance against "all risks of physical loss" including (A)
collapse and transit coverage, in a nonreporting form,
covering the total value of work performed and equipment,
supplies and materials furnished, and (B) a full installation
floater to insure all materials stored on the Land but not
yet part of the permanent installation.
(c) Mortgagor shall increase the amount of insurance required to be
provided hereunder at the time that each such policy is renewed (but, in any
event not less frequently than once during each twelve (12) month period) by
using the F.W. Dodge Building Index to determine whether there has been an
increase in the replacement cost of the improvement since the most recent
adjustment of any such policy and, if there has been any such increase, the
amount of insurance required to be provided hereunder shall be adjusted
accordingly.
(d) All policies of insurance required pursuant to this Section
(collectively, the "POLICIES") shall: (i) be issued by an insurer fully licensed
in the State of Ohio with an investment grade rating for claims paying ability
by Moody's Investors Service, Inc. and Standard & Poor's Rating Group, if rated
(or, if not rated investment grade by any of the foregoing, a CUT THROUGH
ENDORSEMENT will be required); (ii) contain a standard noncontributory mortgagee
clause naming Mortgagee, its successors and/or assigns, as their respective
interests may appear, as the person to which all payments made by such insurance
company shall be paid; (iii) be maintained throughout the term of this Mortgage
without cost to Mortgagee; (iv) be assigned and delivered to Mortgagee; (v)
contain such provisions as Mortgagee deems reasonably necessary or appropriate
to protect its interest including, without limitation, endorsements providing
that neither Mortgagor, Mortgagee nor any other party shall be a co-insurer
thereunder, and that Mortgagee shall receive at least thirty (30) days prior
written notice of any modification, reduction or cancellation; (vi) be
satisfactory in form and substance to Mortgagee, and be approved by Mortgagee as
to amounts, form, risk coverage, deductible, loss payees and insureds; (vii)
name Mortgagee as an additional insured or as a Loss Payee, as applicable; and
(viii) waive Mortgagor's right of subrogation against Mortgagee with respect to
all property, casualty and hazard insurance, but not with respect to any
liability insurance. To the extent that the funds in the Escrow Fund are
insufficient to pay such amounts, Mortgagor shall pay or cause Manager to pay
the premiums for the Policies (the "INSURANCE PREMIUMS") as they become due and
payable. Not later than thirty (30) days prior to the expiration date of each of
the Policies, Mortgagor will deliver to Mortgagee satisfactory evidence of the
renewal of each Policy. Notwithstanding anything herein to the contrary, in the
event that the License Agreement requires (1) greater amounts of coverage for
any insurance required hereunder, or (2) additional types of insurance coverage,
then the License Agreement insurance requirements shall prevail. In the event
Mortgagor fails to provide, maintain, keep in force, or deliver and furnish to
Mortgagee the Policies, Mortgagee may procure such insurance or single-interest
insurance for such risks covering Mortgagee's interest, and Mortgagor will
reimburse Mortgagee for all premiums paid by Mortgagee, together with interest
thereon from the date paid at the Default Rate, promptly upon demand by
Mortgagee. Until such payment is made by Mortgagor, the amount of all such
premiums, together with interest thereon, shall be secured by this Mortgage.
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(e) If the Property shall be damaged or destroyed, in whole or in
part, by fire or other casualty, Mortgagor shall give prompt written notice
thereof to Mortgagee.
(i) In the case of a loss covered by Policies, Mortgagee may: (A)
settle and adjust any claim without the consent of Mortgagor,
or (B) allow Mortgagor to agree with the insurance company or
companies on the amount to be paid upon the loss; PROVIDED,
HOWEVER, that, if no Event of Default shall have occurred and
be continuing, Mortgagor may adjust losses aggregating not in
excess of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) if such adjustment is carried out in a
competent and timely manner and provided in any case that
Mortgagee shall be, and is hereby, authorized to collect and
receipt for any such insurance proceeds. The expenses
incurred by Mortgagee in the adjustment and collection of
insurance proceeds shall become part of the Debt, shall be
secured by this Mortgage and shall be reimbursed by Mortgagor
to Mortgagee on demand.
(ii) In the event of any insured damage to or destruction of the
Property or any part thereof (an "INSURED CASUALTY") where:
(A) the proceeds of insurance are sufficient to enable
Mortgagor to fully restore the Property; (B) the term of, and
proceeds derived from, Mortgagor's business interruption
insurance (or other similar insurance) shall be sufficient to
fully cover the period that the Property is undergoing
restoration; (C) Mortgagee determines that the restoration is
reasonably capable of being completed, and is actually
completed, at least nine (9) months prior to the Maturity
Date; (D) the Loan-to-Value Ratio upon completion of
restoration is estimated, by an appraiser reasonably
acceptable to Mortgagee, to be no greater than 0.7:1.0; (E)
the License Agreement has not been terminated as a result of
the Insured Casualty; (F) the restoration can be completed
within nine (9) months from the date that the Insured
Casualty occurred, or within such shorter time period as may
be required by the License Agreement; (G) the restoration is
permitted or required under the License Agreement; and (H)
the Debt Service Coverage Ratio upon completion is reasonably
anticipated to be at least 1.25, then, if no Event of Default
shall have occurred and be continuing, the proceeds of
insurance shall be applied to the cost of restoring,
repairing, replacing or rebuilding the Property or the part
thereof subject to the Insured Casualty, as provided for
below; and Mortgagor hereby covenants and agrees forthwith to
commence and diligently to prosecute such restoring,
repairing, replacing or rebuilding. NOI for purposes of this
calculation shall be NOI for the twelve (12) calendar month
period immediately preceding the casualty, unless the
appraiser referenced in clause 4(e)(ii)(D) above estimates
that NOI after the restoration will be more than ten percent
(10%) less than NOI for such twelve (12) calendar month
period, in which case the Debt Service Coverage Ratio shall
be calculated using the appraiser's estimate of NOI.
(iii) Except as provided above, the proceeds of insurance collected
upon any Insured Casualty shall, at the option of Mortgagee
in its sole discretion, be applied to the payment of the Debt
or applied to reimburse Mortgagor for the cost of restoring,
repairing, replacing or rebuilding the Property or the part
thereof subject to the Insured Casualty, in the manner set
forth below. In no case shall any such application reduce or
postpone any
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payments otherwise required pursuant to the Note.
(iv) In the event that proceeds of insurance, if any, shall be
made available to Mortgagor for the restoring, repairing,
replacing or rebuilding of the Property, Mortgagor hereby
covenants to restore, repair, replace or rebuild the Property
to be of at least equal value and of substantially the same
character as prior to such damage or destruction, all to be
effected in accordance with applicable law and plans and
specifications approved in advance by Mortgagee and otherwise
in accordance with the requirements of the License Agreement,
if any; PROVIDED, HOWEVER, that Mortgagor shall pay all costs
(and if required by Mortgagee, shall deposit the total
thereof with Mortgagee in advance) of such restoring,
repairing, replacing or rebuilding in excess of the net
proceeds of insurance required to be made available pursuant
to the terms hereof.
(v) In the event Mortgagor is entitled to reimbursement out of
insurance proceeds held by Mortgagee, such proceeds shall be
disbursed from time to time upon Mortgagee being furnished
with: (A) evidence reasonably satisfactory to it of the
estimated cost of completion of the restoration, repair,
replacement and rebuilding; (B) funds, or, at Mortgagee's
option, assurances reasonably satisfactory to Mortgagee that
such funds are available, sufficient in addition to the
proceeds of insurance to complete the proposed restoration,
repair, replacement and rebuilding; and (C) such architect's
certificates, waivers of lien for work previously performed
or contemporaneously funded, contractor's sworn statements,
title insurance endorsements, bonds, plats of survey and such
other evidences of cost, payment and performance as Mortgagee
may reasonably require and approve. Mortgagee may, in any
event, require that all plans and specifications for such
restoration, repair, replacement and rebuilding be submitted
to and approved by Mortgagee prior to commencement of work
(which approval shall not be unreasonably withheld). No
payment made prior to the final completion of the
restoration, repair, replacement and rebuilding shall exceed
ninety percent (90%) of the value of the work performed from
time to time. Funds other than proceeds of insurance shall be
disbursed prior to disbursement of such proceeds, and at all
times the undisbursed balance of such proceeds remaining in
Mortgagee's possession, together with funds deposited for
that purpose or irrevocably committed to the reasonable
satisfaction of Mortgagee by or on behalf of Mortgagor for
that purpose, shall be at least sufficient in the reasonable
judgment of Mortgagee to pay for the cost of completion of
the restoration, repair, replacement or rebuilding, free and
clear of all liens and claims of lien. Any surplus which may
remain out of insurance proceeds held by Mortgagee after
payment of such costs of restoration, repair, replacement or
rebuilding shall be delivered to Mortgagor, provided such
restoration was performed in accordance with the provisions
of this Section and Mortgagor is not then in default of its
obligations under the Loan Documents.
(f) Mortgagor shall not carry separate insurance, concurrent in kind
or form or contributing in the event of loss, with any insurance required under
this Section. Notwithstanding the foregoing, Mortgagor may carry insurance not
required under this Mortgage, provided any such
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insurance affecting the Property shall be for the mutual benefit of Mortgagor
and Mortgagee, as their respective interests may appear, and shall be subject to
all other provisions of this Section.
(g) In the event this Mortgage is foreclosed, or title to the Property
is transferred in extinguishment, in whole or in part, of the Debt secured
hereby, all right, title and interest of Mortgagor in and to all Policies shall
inure to the benefit of and pass to the successor in interest of Mortgagor or
the purchaser or grantee of the Property.
5. PAYMENT OF TAXES
To the extent that the funds in the Escrow Fund are insufficient to pay
such amounts, Mortgagor shall pay, within thirty (30) days of receipt of
notification by Mortgagee, all taxes, assessments (including, without
limitation, all assessments imposed under any declaration of covenants, owner's
associations or special improvement districts affecting the Property), water
rates and sewer rents, now or hereafter levied, assessed or imposed against the
Property or any part thereof (collectively, the "TAXES") and all ground rents,
maintenance charges, other governmental impositions, and other charges
including, without limitation, vault charges and license fees for the use of
vaults, chutes and similar areas adjoining the Land, now or hereafter levied,
assessed or imposed against the Property or any part thereof (collectively, the
"OTHER CHARGES") as they become due and payable. Mortgagor will deliver to
Mortgagee evidence satisfactory to Mortgagee that the Taxes and Other Charges
have been so paid, or are not then delinquent, no later than thirty (30) days
following the date on which the Taxes and/or Other Charges would otherwise be
delinquent if not paid. Mortgagor shall not suffer, and shall promptly cause to
be paid and discharged, any lien or charge whatsoever which may be or become a
lien or charge against the Property, and shall promptly pay for all utility
services provided to the Property. Upon request, Mortgagor shall furnish to
Mortgagee or its designee receipts for the payment of the Taxes, Other Charges
and charges for utility services prior to the date that such obligations shall
become delinquent. Mortgagor shall be entitled to contest by appropriate legal
proceeding, promptly initiated and conducted in good faith and with due
diligence, the amount of any Taxes or Other Charges. Notwithstanding the
preceding sentence, during the pendency of any such contest Mortgagor shall pay
or cause to be paid all Taxes and Other Charges as and when due and payable, or
otherwise in accordance with Section 32 hereof.
6. ESCROW FUND
(a) Mortgagor shall pay to Mortgagee on the closing date and
thereafter monthly on the first (1st) day of each calendar month: (a)
one-twelfth (1/12th) of an amount which would be sufficient to pay the Taxes and
Other Charges payable, or reasonably estimated by Mortgagee to be payable,
during the next ensuing twelve (12) months; and (b) one-twelfth (1/12th) of an
amount which would be sufficient to pay the Insurance Premiums due for the
renewal of the coverage afforded by the Policies upon the expiration thereof
(the amounts described in clauses (a) and (b) above, collectively, the "ESCROW
FUND"). The Escrow Fund and the monthly installments of principal and interest
payable under the Note shall be added together and shall be paid as an aggregate
sum by Mortgagor to Mortgagee. Mortgagee will apply the Escrow Fund to payments
of Taxes and
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Insurance Premiums required to be made by Mortgagor pursuant to Sections 4 and 5
hereof. If the amount of the Escrow Fund shall exceed the amounts due for Taxes
and Insurance Premiums pursuant to Sections 4 and 5 hereof, Mortgagee shall, in
its discretion, return any excess to Mortgagor or credit such excess against
future payments to be made to the Escrow Fund. If the Escrow Fund is not
sufficient to pay the items set forth in clauses (a) and (b) above, Mortgagor
shall promptly pay to Mortgagee, within thirty (30) days following demand, an
amount which Mortgagee shall reasonably estimate as sufficient to make up the
deficiency. Upon the occurrence of an Event of Default, Mortgagee may apply any
sums then comprising the Escrow Fund to the payment of the Debt in any order in
its sole discretion. To the extent permitted by applicable law, the Escrow Fund
shall not constitute a trust fund and may be commingled with other monies held
by Mortgagee. No earnings or interest on the Escrow Fund shall be payable to
Mortgagor, unless required by applicable law.
(b) Mortgagee shall this day, or as soon hereafter as is practicable,
establish and shall thereafter maintain the following interest-bearing escrow
accounts at one or more federally insured institutions selected by Mortgagee
(collectively, the "ACCOUNTS"), each of which shall be in Mortgagee's name and
shall constitute additional security for Loan:
(i) Replacement Reserve Account, into which shall be deposited
monthly on the first (1st) day of each calendar month: (A)
from the thirteenth (13th) month of the Loan through the
twenty-fourth (24th) month of the Loan, an amount equal to
one-twelfth (1/12th) of two percent (2%) of the Gross
Revenues derived from the operation of the Property and (B)
thereafter, for the balance of the Loan term, an amount equal
to one-twelfth (1/12th) of four percent (4%) of the Gross
Revenues derived from the operation of the Property, from
which Mortgagor may request withdrawal from time to time on a
semi-monthly basis to refurbish, repair or replace specified
Personal Property at the Property, all as more particularly
set forth in the Replacement Reserve Agreement (the
"REPLACEMENT RESERVE ACCOUNT"); and
(ii) Intentionally omitted.
7. COMPLIANCE WITH LAWS
(a) Mortgagor shall promptly comply with all existing and
future federal, state and local laws, orders, ordinances, governmental rules and
regulations or court orders affecting the Property or the use thereof
("APPLICABLE LAWS").
(b) Mortgagor shall from time to time, upon Mortgagee's
request, provide Mortgagee with evidence reasonably satisfactory to Mortgagee
that the Property complies with all Applicable Laws or is exempt from compliance
with Applicable Laws.
(c) Notwithstanding any provisions set forth herein or in any document
regarding Mortgagee's approval of alterations of the Property, Mortgagor shall
not alter the Property in any manner which would materially increase Mortgagor's
responsibilities for compliance with
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Applicable Laws without the prior written approval of Mortgagee. Mortgagee's
approval of the plans, specifications, or working drawings for alterations of
the Property as required herein shall create no responsibility or liability on
behalf of Mortgagee for their completeness, design, sufficiency or their
compliance with Applicable Laws. The foregoing shall apply to tenant
improvements constructed by Mortgagor or by any of its tenants. Mortgagee may
condition any such approval upon receipt of a certificate of compliance with
Applicable Laws from an independent architect, engineer, or other person
acceptable to Mortgagee.
(d) Mortgagor shall give prompt notice to Mortgagee of the
receipt by Mortgagor of any notice related to a violation of any Applicable Laws
and of the commencement of any proceedings or investigations which relate to
compliance with Applicable Laws.
(e) After prior written notice to Mortgagee, Mortgagor, at its own
expense, may contest by appropriate legal proceeding, promptly initiated and
conducted in good faith and with due diligence, the Applicable Laws affecting
the Property, provided that (i) no Event of Default has occurred and is
continuing under the Note, this Mortgage or any of the other Loan Documents;
(ii) such proceeding shall be permitted under and be conducted in accordance
with the provisions of any other instrument to which Mortgagor is subject and
shall not constitute a default thereunder; (iii) neither the Property nor any
part thereof or interest therein nor any of the tenants or occupants thereof
shall be affected in any material adverse way as a result of such proceeding;
and (iv) Mortgagor shall have furnished to Mortgagee all other items reasonably
requested by Mortgagee.
8. CONDEMNATION
(a) Mortgagor shall promptly give Mortgagee written notice of the
actual or threatened commencement of any condemnation, governmental taking or
eminent domain proceeding of which Mortgagor has knowledge or receives notice
with respect thereto (a "CONDEMNATION") and shall deliver to Mortgagee copies of
any and all papers served in connection with such proceedings. Mortgagee is
hereby irrevocably appointed as Mortgagor's attorney-in-fact, coupled with an
interest, with exclusive power to collect, receive and retain any award or
payment for such Condemnation and to make any compromise or settlement in
connection with such proceeding, subject to the provisions of this Mortgage;
PROVIDED, HOWEVER, that so long as Mortgagor is not in default hereunder or
under the other Loan Documents, Mortgagee shall not be entitled to exercise said
appointment. Notwithstanding any taking by any public or quasi-public authority
through eminent domain or otherwise (including, without limitation, any transfer
made in lieu of or in anticipation of the exercise of such taking), Mortgagor
shall continue to pay the Debt at the time and in the manner provided for in the
Note, this Mortgage, and the other Loan Documents, and the Debt shall not be
reduced until any award or payment therefor shall have been actually received
after expenses of collection and applied by Mortgagee to the discharge of the
Debt. Mortgagee shall not be limited to the interest paid on the award by the
condemning authority but shall be entitled to receive out of the award interest
at the rate or rates provided in the Note.
(b) If the Property shall be the subject of a Condemnation, in whole
or in part,
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Mortgagor shall give prompt written notice thereof to Mortgagee.
(i) In the case of a Condemnation, provided that no Event of
Default has occurred and is continuing, Mortgagee may: (A)
settle and adjust any claim with the prior written consent of
Mortgagor, or (B) allow Mortgagor to agree with the
condemning authority on the amount to be paid upon the
Condemnation; PROVIDED, HOWEVER, that, if no Event of Default
shall have occurred and be continuing, Mortgagor may adjust
losses aggregating not in excess of Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) if such adjustment
is carried out in a competent and timely manner, and provided
in any case that Mortgagee shall be, and is hereby,
authorized to collect and receipt for any such Condemnation
award or proceeds. The reasonable expenses incurred by
Mortgagee in the adjustment and collection of a Condemnation
award or proceeds shall become part of the Debt, shall be
secured by this Mortgage and shall be reimbursed by Mortgagor
to Mortgagee on demand.
(ii) In the event of any Condemnation affecting all or any portion
of the Property where: (A) the Condemnation award or proceeds
are sufficient to enable Mortgagor to fully restore the
Property; (B) the term of, and proceeds derived from,
Mortgagor's business interruption insurance (or other similar
insurance) shall be sufficient to fully cover the period that
the Property is undergoing restoration; (C) Mortgagee
determines that the restoration is reasonably capable of
being completed, and is actually completed, at least nine (9)
months prior to the Maturity Date; (D) the Loan-to-Value
Ratio upon completion of restoration is estimated, by an
appraiser acceptable to Mortgagee, to be no greater than
0.7:1.0; (E) the License Agreement has not been terminated as
a result of the Condemnation; (F) the restoration can be
completed within nine (9) months from the date that the
Condemnation occurred, or within such shorter time period as
may be required by the License Agreement; (G) the restoration
is permitted or required under the License Agreement; and (H)
the Debt Service Coverage Ratio upon completion is reasonably
anticipated to be at least 1.25 to 1.0, then, if no Event of
Default shall have occurred and be continuing, the
Condemnation award or proceeds shall be applied to the cost
of restoring, repairing, replacing or rebuilding the Property
or the part thereof subject to the Condemnation, as provided
for below; and Mortgagor hereby covenants and agrees
forthwith to commence and diligently to prosecute such
restoring, repairing, replacing or rebuilding. NOI for
purposes of this calculation shall be NOI for the twelve (12)
calendar month period immediately preceding the Condemnation,
unless the appraiser referenced in clause (D) above estimates
that NOI after the restoration will be more than ten percent
(10%) less than NOI for such twelve (12) calendar month
period, in which case the Debt Service Coverage Ratio shall
be calculated using the appraiser's estimate of NOI.
(iii) Except as provided above, the award or proceeds collected
upon any Condemnation shall, at the option of Mortgagee in
its sole discretion, be applied to the payment of the Debt or
applied to the cost of restoring, repairing, replacing or
rebuilding the Property or the part thereof subject to the
Condemnation in the manner set forth below. In
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no case shall any such application reduce or postpone any
payments otherwise required pursuant to the Note.
(iv) In the event that a Condemnation award or proceeds, if any,
shall be made available to Mortgagor for the restoring,
repairing, replacing or rebuilding of the Property, Mortgagor
hereby covenants to restore, repair, replace or rebuild the
Property to be of at least equal value and of substantially
the same character as prior to such Condemnation, all to be
effected in accordance with applicable law and plans and
specifications approved in advance by Mortgagee; PROVIDED,
HOWEVER, that Mortgagor shall pay all costs (and if required
by Mortgagee, shall deposit the total thereof with Mortgagee
in advance) of such restoring, repairing, replacing or
rebuilding in excess of the net award or proceeds made
available pursuant to the terms hereof.
(v) In the event Mortgagor is entitled to reimbursement out of
proceeds held by Mortgagee, such proceeds shall be disbursed
from time to time upon Mortgagee being furnished with: (A)
evidence reasonably satisfactory to it of the estimated cost
of completion of the restoration, repair, replacement and
rebuilding; (B) funds, or, at Mortgagee's option, assurances
reasonably satisfactory to Mortgagee that such funds are
available, sufficient in addition to the Condemnation award
or proceeds to complete the proposed restoration, repair,
replacement and rebuilding; and (C) such architect's
certificates, waivers of lien for work previously performed
or contemporaneously funded, contractor's sworn statements,
title insurance endorsements, bonds, plats of survey and such
other evidences of cost, payment and performance as Mortgagee
may reasonably require and approve. Mortgagee may, in any
event, require that all plans and specifications for such
restoration, repair, replacement and rebuilding be submitted
to and approved by Mortgagee prior to commencement of work
(which approval shall not be unreasonably withheld). No
payment made prior to the final completion of the
restoration, repair, replacement and rebuilding shall exceed
ninety percent (90%) of the value of the work performed from
time to time. Funds other than the Condemnation award or
proceeds shall be disbursed prior to disbursement of such
proceeds, and at all times the undisbursed balance of such
proceeds remaining in Mortgagee's possession, together with
funds deposited for that purpose or irrevocably committed to
the reasonable satisfaction of Mortgagee by or on behalf of
Mortgagor for that purpose, shall be at least sufficient in
the reasonable judgment of Mortgagee to pay for the cost of
completion of the restoration, repair, replacement or
rebuilding, free and clear of all liens and claims of lien.
Any surplus which may remain out of a Condemnation award or
proceeds held by Mortgagee after payment of such costs of
restoration, repair, replacement or rebuilding shall be
delivered to Mortgagor, provided such restoration was
performed in accordance with the provisions of this Section,
and Mortgagor is not then in default of its obligations under
the Loan Documents.
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<PAGE>
9. LEASES AND PROFITS
(a) In connection with the Loan, Mortgagor hereby absolutely and
unconditionally assigns to Mortgagee all of Mortgagor's right, title and
interest in all current and future Leases and Profits, it being intended by
Mortgagor that such assignment constitutes a present, absolute assignment and
not an assignment for additional security only. Such assignment to Mortgagee
shall not be construed to bind Mortgagee to the performance of any of the
covenants, conditions or provisions contained in any such Lease or otherwise to
impose any obligation upon Mortgagee. Mortgagor shall execute and deliver to
Mortgagee such additional instruments, in form and substance reasonably
satisfactory to Mortgagee, as may hereafter be requested by Mortgagee to further
evidence and confirm such assignment. Nevertheless, subject to the terms of this
Section, Mortgagee has granted to Mortgagor a revocable license to operate and
manage the Property and to collect the Profits. Mortgagor shall hold the
Profits, or a portion thereof sufficient to discharge all current sums due on
the Debt, in trust for the benefit of Mortgagee for use in the payment of such
sums. Upon the occurrence of an Event of Default, the license granted to
Mortgagor shall automatically be revoked, and Mortgagee shall immediately be
entitled to possession of all Profits, whether or not Mortgagee enters upon or
takes control of the Property. Mortgagee is hereby granted and assigned by
Mortgagor the right, at its option, upon revocation of the license granted
herein, to enter upon the Property in person, by agent or by court-appointed
receiver to collect the Profits. Any Profits collected after revocation of the
license may be applied toward payment of the Debt in such priority and
proportions as Mortgagee in its discretion shall deem appropriate.
(b) Mortgagor shall furnish Mortgagee with executed copies of all
Leases and all amendments thereto. All renewals of Leases and all proposed
Leases shall provide for rental rates comparable to existing local market rates
and shall be arms-length transactions. All proposed Leases shall be subject to
the prior approval of Mortgagee except that proposed Leases which: (i) do not
individually or in the aggregate alter the ratio of office/retail space to hotel
space as presently utilized in the Property; (ii) are the result of an
arms-length transaction with a bona fide, independent third-party; (iii) provide
for rental rates comparable to existing market rates; (iv) do not contain any
terms which would affect Mortgagee's rights under the Note, this Mortgage or the
other Loan Documents; and (v) are for less than 500 square feet, shall not be
subject to the prior approval of Mortgagee (the "MAJOR LEASES"). All Leases
shall provide that they are subordinate to this Mortgage and that the lessee
agrees to attorn to Mortgagee. Mortgagor shall: (A) observe and perform all the
obligations imposed upon the lessor under the Leases and shall not do or permit
to be done anything to impair the value of the Leases as security for the Debt;
(B) promptly send to Mortgagee copies of all notices of default which Mortgagor
shall send or receive thereunder; (C) enforce all of the material terms,
covenants and conditions contained in the Leases on the part of the lessee
thereunder to be observed or performed, short of termination thereof; (D) not
collect any Profits more than one (1) month in advance; (E) not execute any
other assignment of the lessor's interest in the Leases or Profits; (F) other
than DE MINIMIS non-financial amendments, not alter, modify or change the terms
of the Major Leases without the prior written consent of Mortgagee (which
consent shall not be unreasonably withheld), or, except if a lessee is in
default, cancel or terminate a Major Lease or
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<PAGE>
accept a surrender thereof or convey or transfer or suffer or permit a
conveyance or transfer of the Property or of any interest therein so as to
effect a merger of the estates and rights of, or a termination or diminution of
the obligations of, lessees thereunder; PROVIDED, HOWEVER, that any Major Lease
may be canceled if at the time of the cancellation thereof a new Major Lease is
entered into with a bona fide, independent third-party on substantially the same
terms or more favorable terms as the canceled Major Lease; (G) not alter, modify
or change the terms of any guaranty of the Leases or cancel or terminate such
guaranty without the prior written consent of Mortgagee; (H) not consent to any
assignment of or subletting under a Major Lease not in accordance with their
terms, without the prior written consent of Mortgagee; and (I) execute and
deliver at the request of Mortgagee all such further assurances, confirmations
and assignments in connection with the Property as Mortgagee shall from time to
time request.
(c) All security deposits of lessees, whether held in cash or any
other form, shall not be commingled with any other funds of Mortgagor and, if
cash, shall be deposited by Mortgagor into a separate account. Any bond or other
instrument which Mortgagor is permitted to hold in lieu of cash security
deposits under any applicable legal requirements shall be maintained in full
force and effect unless replaced by cash deposits as hereinabove described,
shall be issued by an institution reasonably satisfactory to Mortgagee, shall,
if permitted pursuant to any legal requirements, name Mortgagee as payee or
mortgagee thereunder (or at Mortgagee's option, be fully assignable to
Mortgagee) and shall, in all respects, comply with any applicable legal
requirements and otherwise be reasonably satisfactory to Mortgagee. Mortgagor
shall, upon request, provide Mortgagee with evidence reasonably satisfactory to
Mortgagee of Mortgagor's compliance with the foregoing. Following the occurrence
and during the continuance of any Event of Default, Mortgagor shall, upon
Mortgagee's request, if permitted by any applicable legal requirements, turn
over to Mortgagee the security deposits (and any interest theretofore earned
thereon) with respect to all or any portion of the Property, to be held by
Mortgagee subject to the terms of the Leases.
10. REPRESENTATIONS CONCERNING LOAN
Mortgagor represents, warrants and covenants as follows:
(a) Mortgagor is duly organized and validly existing in good
standing under the applicable laws of the state of its creation as a limited
liability company and Mortgagor is qualified to do business in and is in good
standing in the state in which the Property is located, with full power, right,
authority and legal capacity to enter into this Mortgage, the Loan and the Loan
Documents and to operate the Property as contemplated hereunder.
(b) The execution, delivery and performance of the Loan Documents
executed or delivered by Mortgagor and the consummation of the transactions
contemplated thereby: (i) have been duly authorized by all requisite actions;
(ii) have been approved or consented to by all of their respective constituent
entities whose approval or consent is required to be obtained; (iii) do not
require the approval or consent of any governmental authority having
jurisdiction over any of Mortgagor or the Property; (iv) do not and will not
constitute a violation of,
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<PAGE>
or default under, the governing instruments of Mortgagor or any applicable
requirement of a governmental authority; and (v) will not be in contravention of
any court or administrative order or ruling applicable to Mortgagor or the
Property, or any mortgage, indenture, agreement, commitment or instrument to
which Mortgagor is a party or by which it or its assets are bound, nor create or
cause to be created any mortgage, lien, encumbrance, or charge against the
assets of Mortgagor other than those permitted by the Loan Documents.
(c) There are no actions, suits or proceedings pending, or, to the
knowledge of Mortgagor, threatened, nor any pending or, to the knowledge of
Mortgagor, threatened labor disputes, against or affecting Mortgagor or the
Property, or any other collateral covered by the Loan Documents, or involving
the validity or enforceability of the Loan Documents or the priority of the
liens created or to be created thereby, at law or in equity, or before or by any
governmental authority, which, if adversely determined, would, in the
determination of Mortgagee, either individually or in the aggregate, have a
material adverse affect on (i) the operation of the Property as contemplated
hereunder, (ii) the ability of Mortgagor to pay all of its liabilities or to
perform all of its obligations in the manner and within the time periods
required under the Loan Documents, (iii) the validity, enforceability or
consummation of the Loan Documents or the transactions contemplated thereby, or
(iv) the title to the Property, the permitted uses of the Property or the value
of the security provided by the Loan Documents.
(d) The Note, this Mortgage and the other Loan Documents are the
legal, valid and binding obligations of Mortgagor and are not subject to any
right of rescission, set-off, counterclaim or defense, including the defense of
usury, nor would the operation of any of the terms of the Note, this Mortgage,
and the other Loan Documents, or the exercise of any right thereunder, render
this Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury.
(e) To Mortgagor's best knowledge, and except as disclosed on the
survey of the Property delivered to Mortgagee in connection with this Mortgage,
all of the Improvements which were considered in determining the appraised value
of the Property lie wholly within the boundaries and building restriction lines
of the Property, no improvements on adjoining properties encroach upon the
Property, and no easements or other encumbrances upon the Land encroach upon any
of the Improvements, so as to affect the value or marketability of the Property.
(f) The Property is not subject to any leases, licenses or other
use or occupancy agreements. No person has any possessory interest in the
Property or right to occupy any portion thereof except under and pursuant to the
provisions of any Leases or transient hotel guests in the ordinary course of
Mortgagor's business.
(g) The survey of the Property delivered to Mortgagee in
connection with this Mortgage has been performed by a duly licensed surveyor
or registered
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<PAGE>
professional engineer in the jurisdiction in which the Property is situated, and
to Mortgagor's best knowledge, does not fail to reflect any material matter
affecting the Property or the title thereto.
(h) The financial statements of Mortgagor heretofore furnished to
Mortgagee are, as of the date specified therein, complete and correct in all
material respects and fairly present the financial condition of Mortgagor and to
Mortgagor's best knowledge are prepared in accordance with the Uniform System of
Accounts for hotel and motel properties as approved by the American Hotel and
Motel Association (as in effect from time to time, the "UNIFORM SYSTEM OF
ACCOUNTS") applied on a consistent basis. Mortgagor does not on the date hereof
have any contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any unfavorable
commitments which in each case are known to Mortgagor and which, in Mortgagor's
opinion, are reasonably likely to result in a material adverse effect on the
Property or the operation thereof as a hotel, except as referred to or reflected
or provided for in the financial statements heretofore furnished to Mortgagee or
as otherwise disclosed to Mortgagee herein. Since the last date of such
financial statements, there has been no material adverse change in the financial
condition, operations or business of Mortgagor from that set forth in such
financial statements as of the dates thereof.
(i) The License Commitment is in full force and effect and there
is no default, breach or violation existing thereunder by any party thereto and
no event (other than payments due but not yet delinquent) which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach or violation by any party thereunder.
(j) The Management Agreement is in full force and effect and there
is no default, breach or violation existing thereunder by any party thereto and
no event (other than payments due but not yet delinquent) which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach or violation by any party thereunder.
(k) Neither the execution and delivery of the Loan Documents,
Mortgagor's performance thereunder, nor the recordation of this Mortgage will
adversely affect (i) Mortgagor's rights under either the License Agreement or
the Management Agreement or (ii) the licenses, registrations, permits,
certificates, authorizations and approvals necessary for the operation of the
Property as a hotel.
(l) The Leases are in full force and effect and to Mortgagor's
best knowledge, there is no default, breach or violation existing thereunder by
any party thereto and no event (other than payments due but not yet delinquent)
which, with the passage of time or with notice and the expiration of any grace
or cure period, would constitute a default, breach or violation by any party
thereunder.
(m) Since the date of the last inspection of the Property by
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Mortgagee: (i) no portion of the Property has been damaged and not repaired to
Mortgagee's satisfaction or has been taken in condemnation or other similar
proceedings; and (ii) no change has occurred in the structure or physical
condition of the Property other than customary wear and tear.
(n) Since the date of the information and documentation relating
to the Property furnished to Mortgagee, no material change in the Property has
occurred.
(o) No default has occurred and is continuing in the performance
of any obligation of Mortgagor or any affiliate of Mortgagor which would be
deemed an Event of Default under the Loan Documents if they were in effect, or
any instruments evidencing, securing or guaranteeing any other loan.
(p) There exists no fact, event or disclosure in connection with
the Loan that reasonably could be expected to cause the Loan to become
delinquent or otherwise have a material adverse affect on the Loan or the
Property.
(q) Except as otherwise previously disclosed to Mortgagee in
writing, no notice of violation of any municipal ordinances have been filed
against the Property by any municipal department.
(r) Mortgagor has no knowledge of any latent or patent defects in
the roof, foundations, sprinkler mains, structural, mechanical and HVAC systems
and masonry wall in any of the Improvements.
(s) No portion of the Property or Improvements is located in an
area identified by the Secretary of Housing and Urban Development, the Federal
Emergency Management Act or any successor thereto as an area having special
flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood
Disaster Protection Act of 1973, or the National Flood Insurance Reform Act of
1994, as each may be amended, or any successor law, or, if any portion of the
Property or Improvements is now or at any time in the future located within any
such area, at the request of Mortgagee, Mortgagor will obtain and maintain the
insurance prescribed in Section 4 hereof. Mortgagor hereby acknowledges that
this provision is operative insofar as the triggering condition specified in the
first sentence hereof is satisfied.
(t) Mortgagor has obtained, or as promptly as reasonably possible
after completion of the construction of the Improvements will obtain and provide
to Mortgagee, true and correct copies of all necessary certificates, permits,
licenses and other approvals, governmental and otherwise, necessary for the
legal use, occupancy and operation of the Property as a hotel, including,
without limitation, any applicable food, beverage and liquor licenses,
certificate of completion and occupancy permit and the conduct of its business
and all required zoning, building code, land use, environmental and other
similar permits or approvals, all of which are either in full force and effect
as of the date hereof or will be promptly obtained when appropriate after the
date hereof and thereafter maintained in full force and effect, and are not or
will not be subject to
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<PAGE>
revocation, suspension, forfeiture or modification.
(u) The Property, the Improvements and the present and
contemplated use and occupancy thereof are in full compliance with all
applicable zoning ordinances, building codes, land use and Environmental Laws
and other similar laws.
(v) The Property is, or after completion of construction of the
Improvements will be, served by all utilities required for the current or
contemplated use thereof. All utility service is or will be provided by public
utilities and the Property has accepted such utility service or is or will be
equipped to accept such utility service.
(w) (i) The Property is contiguous to (or has access through a
perpetual easement which perpetual easement in each case is (or will be)
irrevocable, and is not (and will not be) subordinate to any mortgage other than
this Mortgage) and has access to a physically and legally open all-weather
public street; (ii) all public roads and streets necessary for service of and
access to the Property for the current or contemplated use thereof have been (or
will be) completed prior to the hotel on the Property opening for business, are
(or will be) serviceable and all-weather prior to the opening for business and
are (or will be) physically and legally open for use by the public prior to the
hotel on the Property opening for business; and (iii) Mortgagor has (or will
have) all necessary permits and approvals for ingress and egress prior to the
hotel on the property opening for business.
(x) The Property is free from damage caused by fire or other
casualty and is in good repair.
(y) All costs and expenses of any and all labor, materials,
supplies and equipment used in the construction of the Improvements have been
paid in full (or will be paid when due) and the title insurance company has
received such additional assurances, bond or other comfort it may require in
order to provide Mortgagee with an acceptable title insurance policy having no
title exception for mechanics' or materialmen's liens or potential liens.
(z) Mortgagor either has paid and is the owner of, or will have
paid and be the owner of, all furnishings, fixtures and equipment (other than
tenants' property) now or hereafter located on or used in connection with the
operation of the Property, free and clear of any and all security interests,
liens or encumbrances, except the lien and security interest created hereby and
any security interest expressly permitted by Mortgagee.
(aa) All liquid and solid waste disposal, septic and sewer systems
located on the Property are in a good and safe condition and repair and in
compliance with all Applicable Laws.
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<PAGE>
(bb) Mortgagor has received no notice of an actual or threatened
condemnation or eminent domain proceeding by any public or quasi-public
authority affecting the Property.
(cc) The Property is assessed for real estate tax purposes as one
or more wholly independent tax lot or lots, separate from any adjoining land or
improvements owned by Mortgagor or any other person not constituting a part of
such lot or lots, and no other land or improvements is assessed and taxed
together with the Property or any portion thereof.
(dd) Mortgagor has disclosed to Mortgagee all material facts and
has not failed to disclose any material fact that could cause any representation
or warranty made herein to be materially misleading. Each of the representations
and the warranties made by each Guarantor herein or in any other Loan
Document(s) is true and correct in all material respects.
(ee) No portion of the Property has been or will be purchased,
improved, fixtured, equipped or furnished with proceeds of any criminal or other
illegal activity and to the best of Mortgagor's knowledge, there are no illegal
activities or activities relating to controlled substances at the Property.
11. SINGLE PURPOSE ENTITY; AUTHORIZATION
Mortgagor represents and warrants, and covenants for so long as any
obligations secured by this Mortgage remain outstanding, as follows:
(a) Mortgagor does not and will not own any asset or property
other than: (i) the Property; and (ii) personal property necessary for the
ownership or operation of the Property.
(b) Mortgagor does not and will not engage in any business other
than the ownership, management and operation of the Property, and Mortgagor will
conduct and operate its business in all material respects as presently conducted
and operated and will not change the use of the Property.
(c) Mortgagor will not enter into any contract or agreement with
Guarantor or an Affiliate, except upon terms and conditions that are
substantially similar to those that would be available on an arms-length
third-party basis.
(d) Mortgagor has not incurred and will not incur any
indebtedness, secured or unsecured, direct or indirect, absolute or contingent
(including guaranteeing any obligation), other than: (i) the Debt, (ii) trade
and operational debt incurred in the ordinary course of business with trade
creditors and in amounts as are customary and reasonable under the circumstances
and (iii) interim advances to Mortgagor by Guarantor to fund construction and
property development expenses related to the Property in the amounts set forth
in the Guaranty Agreement, all of which
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shall be repaid with the proceeds of the Loan on or before August 15, 1997;
provided, however, that, after September 1, 1997, Mortgagor may incur Affiliate
indebtedness to Guarantor in an aggregate amount not to exceed Fifty Thousand
and No/100 Dollars ($50,000.00) in any calendar month and Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) in the aggregate, and provided further
that such Affiliate indebtedness shall bear interest at a rate not in excess of
the Prime Rate plus one percent (1%). Except with Mortgagee's prior written
approval in each instance, no indebtedness other than the Debt is or shall be
secured by the Property. Mortgagee's approval shall be granted or withheld at
Mortgagee's sole discretion. In connection with any such financing approved by
Mortgagee, Mortgagor shall be required to obtain and deliver to Mortgagee a
subordination and standstill agreement from such Mortgagee which shall be in
form and substance satisfactory to Mortgagee in its sole discretion.
(e) Mortgagor has not made and will not make any loans or advances
to any third party (including any constituent party, Guarantor or any affiliate
of Mortgagor, of any constituent party or of Guarantor), where the principal,
interest and all other sums exceed, in the aggregate, Ten Thousand Dollars
($10,000.00) in the ordinary course of business and of the character of trade or
operational expenses.
(f) Mortgagor has done or caused to be done, and will do or cause
to be done, all things necessary to preserve its existence, and Mortgagor will
not, nor will Mortgagor permit any constituent party or Guarantor, to amend,
modify or otherwise change the partnership certificate, partnership agreement,
articles of incorporation and bylaws, trust or other organizational documents,
as the case may be, of Mortgagor or such constituent party or Guarantor in a
manner which would adversely affect the Mortgagor's existence as a single
purpose entity.
(g) Mortgagor will maintain books and records and bank accounts
separate from those of its Affiliates and any constituent party, and Mortgagor
and Guarantor each will file or cause to be filed separate tax returns.
Mortgagor shall provide Mortgagee with sixty (60) days prior written notice of
any change in the principal place of its business or the jurisdiction of
formation.
(h) Mortgagor is and will be, and at all times will hold itself
out to the public as, a legal entity separate and distinct from any other entity
(including any Affiliate or constituent party of Mortgagor or any Affiliate or
constituent party of Guarantor), and will use and conduct its business in its
own name.
(i) Neither Mortgagor nor any constituent party will cause or seek
the dissolution or winding up, in whole or in part, of Mortgagor.
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(j) Mortgagor will not commingle its funds and other assets with
those of, or pledge its assets for the benefit of, any Affiliate or constituent
party of Mortgagor, any Affiliate or constituent party of Guarantor, or any
other person.
(k) Mortgagor does not or will not hold itself out to be
responsible for the debts or obligations of any other person and does not or
will not pay another person's liabilities out of its own funds.
(l) Mortgagor will not consent to the filing of any petition to
take advantage of any applicable insolvency, bankruptcy, liquidation or
reorganization statute, and Mortgagor will not make an assignment for the
benefit of its creditors.
12. MAINTENANCE OF PROPERTY
(a) Mortgagor shall cause the Property to be maintained in a good
and safe condition and repair. The Improvements and the Personal Property shall
not be removed, demolished or materially altered (except for normal replacement
of the Personal Property) without the prior written consent of Mortgagee.
Mortgagor shall promptly comply with all laws, orders and ordinances affecting
the Property, or the use thereof, subject to Mortgagor's right to contest the
same as provided in this Mortgage. Mortgagor shall promptly repair, replace or
rebuild any part of the Property which may be destroyed by any casualty (subject
to Section 4 hereof), or become damaged, worn or dilapidated, or which may be
affected by any proceeding of the character referred to in Section 8 hereof, and
shall complete and pay for any structure at any time in the process of
construction or repair on the Land. Except as expressly permitted in writing by
Mortgagee, Mortgagor shall not initiate, join in, acquiesce in, or consent to
any change in any private restrictive covenant, zoning law or other public or
private restriction limiting or defining the uses which may be made of the
Property or any part thereof. If under applicable zoning provisions the use of
all or any portion of the Property is or shall become a nonconforming use,
Mortgagor will not cause or permit such nonconforming use to be discontinued or
abandoned without the prior written consent of Mortgagee. Mortgagor shall not:
(i) change the use of the Land as currently configured and utilized; (ii) permit
or suffer to occur any waste on or to the Property or to any portion thereof; or
(iii) take any steps whatsoever to convert the Property, or any portion thereof,
to a condominium or cooperative form of ownership. Mortgagor shall not enter
into any license, easement, covenant or other agreement affecting the Property
without the prior written consent of Mortgagee.
(b) Mortgagor shall not commit or suffer any waste on or to the
Property or to any portion thereof or make any change in the use of the Property
which will in any way materially increase the risk of fire or other hazard
arising out of the operation of the Property, or take any steps to convert the
Property or any portion thereof to a condominium or cooperative form of
ownership, or take any action that might invalidate or give cause for
cancellation of any Policy, or do or permit to be done thereon anything that may
in any way impair the value of the Property or the security of this Mortgage.
Mortgagor will not, without the prior written consent of Mortgagee, permit any
drilling or exploration for or extraction, removal, or production of any
minerals from the surface or
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the subsurface of the Land, regardless of the depth thereof or the method of
mining or extraction thereof.
(c) Mortgagor will promptly pay when due all bills and costs for
labor, materials, and specifically fabricated materials incurred in connection
with the Property and never permit to exist beyond the due date thereof in
respect of the Property or any part thereof any lien or security interest, even
though inferior to the liens and the security interests hereof, and in any event
never permit to be created or exist in respect of the Property or any part
thereof any other or additional lien or security interest other than the liens
or security interests hereof, except as otherwise expressly permitted by
Mortgagee.
13. TRANSFER OR ENCUMBRANCE OF THE PROPERTY
(a) Mortgagor acknowledges that Mortgagee has examined and relied
on the creditworthiness and experience of Mortgagor, EHA IV and Guarantor in
owning and operating properties such as the Property in agreeing to make the
loan secured by this Mortgage, and that Mortgagee will continue to rely on
Mortgagor's ownership of the Property as a means of maintaining the value of the
Property as security for repayment of the Debt. Mortgagor acknowledges that
Mortgagee has a valid interest in maintaining the value of the Property so as to
ensure that, should Mortgagor default in the repayment of the Debt, Mortgagee
can recover the Debt by a sale of the Property. So long as any amounts remain
outstanding under the Note or Other Loan Documents, Mortgagor shall not, without
the prior written consent of Mortgagee, sell, convey, alienate, mortgage,
encumber, pledge or otherwise transfer the Property or any part thereof, or
permit the Property or any part thereof to be sold, conveyed, alienated,
mortgaged, encumbered, pledged or otherwise transferred.
(b) A sale, conveyance, alienation, mortgage, encumbrance, pledge
or transfer within the meaning of this Section shall be deemed to include: (i)
an installment sales agreement wherein Mortgagor agrees to sell the Property or
any part thereof for a price to be paid in installments; (ii) an agreement by
Mortgagor leasing all or a substantial part of the Property for other than
actual occupancy by a space tenant thereunder or a sale, assignment or other
transfer of, or the grant of a security interest in, Mortgagor's right, title
and interest in and to any Leases or any Profits; and (iii) the change, removal
or resignation of EHA IV or the transfer of the partnership interests of EHA IV;
PROVIDED, HOWEVER, that the foregoing provision shall not prohibit or restrict
the transfer of the lesser of: (A) up to forty-nine percent (49%) of the
ownership interests in EHA IV, or (B) such lesser amount of ownership interests
in EHA IV as shall be permitted by the License Agreement.
(c) No sale, conveyance, alienation, mortgage, encumbrance, pledge
or transfer of the Property, or of any interest therein, shall be permitted
during the term of the Loan without Mortgagee's prior written approval (except
for leases in the ordinary course of business entered into in accordance with
the terms of this Mortgage). Mortgagee shall not be required to demonstrate any
actual impairment of its security or any increased risk of default hereunder in
order to declare the Debt immediately due and payable upon Mortgagor's sale,
conveyance, alienation, mortgage,
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encumbrance, pledge or transfer of the Property without Mortgagee's consent.
This provision shall apply to every sale, conveyance, alienation, mortgage,
encumbrance, pledge or transfer of the Property regardless of whether voluntary
or not, or whether or not Mortgagee has consented to any previous sale,
conveyance, alienation, mortgage, encumbrance, pledge or transfer of the
Property.
(d) Mortgagee's consent to one sale, conveyance, alienation,
mortgage, encumbrance, pledge or transfer of the Property shall not be deemed to
be a waiver of Mortgagee's right to require such consent in the future. Any
sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the
Property made in contravention of this Section shall be null and void and of no
force or effect.
(e) Mortgagor agrees to bear and shall pay or reimburse Mortgagee
on demand for all reasonable expenses (including, without limitation,
Mortgagee's out-of-pocket attorney's fees and disbursements, title search costs
and title insurance endorsement premiums) incurred by Mortgagee in connection
with the review, approval or disapproval, and documentation of any such sale,
conveyance, alienation, mortgage, encumbrance, pledge or transfer.
14. ESTOPPEL CERTIFICATES: AFFIDAVITS
(a) Within ten (10) days after request by Mortgagee, Mortgagor
shall furnish Mortgagee or any proposed assignee of the Loan with a statement,
duly acknowledged and certified, setting forth: (i) the amount of the original
principal amount of the Note; (ii) the then outstanding principal balance of the
Note; (iii) the most recent rate of interest of the Note of which Mortgagor has
received notice; (iv) the terms of payment and maturity date of the Note; (v)
the date on which installments of interest and/or principal were last paid; (vi)
except as provided in such statement, there are no defaults or events with which
the passage of time or the giving of notice or both would constitute an event of
default under any of the Loan Documents; (vii) any offsets or defenses to the
payment of the Debt to Mortgagor's best knowledge; (viii) that the Note, this
Mortgage and the other Loan Documents are valid, legal and binding obligations
of Mortgagor, which have not been modified or if modified, giving particulars of
such modification; (ix) that after completion of the construction of the
Improvements, all Leases and other agreements necessary for the use and
operation of the Property, including without limitation, all food, liquor and
other beverage licenses and all other necessary permits and governmental
approvals, are (or will be prior to the hotel on the Property opening for
business) in full force and effect, have not been modified (or if modified,
setting forth all modifications), and are not, to the best knowledge of
Mortgagor, in default or if any of such agreements are in default, setting forth
the specific nature of all such defaults; (x) that the Management Agreement is
in full force and effect, has not been modified and is not, to the best
knowledge of Mortgagor, in default, or if in default, setting forth the specific
nature of such default; (xi) that the License Agreement is in full force and
effect, has not been modified and is not, to the best knowledge of Mortgagor, in
default, or if in default, setting forth the specific nature of such default,
and (xii) as to any other matters reasonably requested by Mortgagee and
reasonably related to the Management Agreement, the License Agreement, the
Leases, the obligations secured hereby, the Property or this Mortgage.
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(b) Within thirty (30) days after request by Mortgagee, Mortgagor
shall furnish Mortgagee or any proposed assignee of the Loan with a certificate
reaffirming all representations and warranties of Mortgagor set forth herein and
in the other Loan Documents as of the date requested by Mortgagee or, to the
extent of any changes to any such representations and warranties, so stating
such changes.
(c) Mortgagor shall deliver to Mortgagee upon request, an estoppel
certificate from the Manager attesting to such facts regarding the Management
Agreement as Mortgagee may require, including, but not limited to, attestations
that such agreement is in full force and effect with no defaults thereunder on
the part of Manager or, to Manager's best knowledge, any other party, stating
the amount of management fees and all other fees and sums payable by Mortgagor
under the Management Agreement, and that the Manager claims no defense or offset
against the full and timely performance of its obligations under the Management
Agreement in form and substance reasonably satisfactory to Mortgagee; PROVIDED,
HOWEVER, that Mortgagor shall not be required to deliver such certificates more
frequently than once in any consecutive twelve (12) month period except upon any
sale or transfer (or proposed sale or transfer) of the Loan by Mortgagee.
(d) Mortgagor shall use its best efforts to deliver to Mortgagee
upon request, an estoppel certificate from the Licensor attesting to such facts
regarding the License Agreement as Mortgagee may require, including, but not
limited to, attestations that such agreement is in full force and effect with no
defaults thereunder on the part of Licensor or, to Licensor's best knowledge,
any other party, stating the amount of license fees, incentive fees and all
other fees and sums payable by Mortgagor under the License Agreement, and to
Licensor's best knowledge that Licensor claims no defense or offset against the
full and timely performance of its obligations under the License Agreement in
form and substance reasonably satisfactory to Mortgagee; provided; however, that
Mortgagor shall not be required to deliver such certificates more frequently
than once in any consecutive twelve (12) month period except upon any sale or
transfer (or proposed sale or transfer) of the Loan by Mortgagee or except as
set forth in the Escrow Agreement.
15. CHANGES IN THE LAWS REGARDING TAXATION
If any law is enacted, adopted or amended after the date of this
Mortgage which imposes a tax (other than income taxes), either directly or
indirectly, on the Debt or Mortgagee's interest in the Property, Mortgagor will
pay such tax, with interest and penalties thereon, if any. In the event
Mortgagee or its counsel determines that the payment of such tax or interest and
penalties by Mortgagor would be unlawful or taxable to Mortgagee or
unenforceable or provide the basis for a defense of usury, then in any such
event, Mortgagee shall have the option, by written notice of not less than
ninety (90) days, to declare the Debt immediately due and payable.
16. NO CREDITS ON ACCOUNT OF THE DEBT
Mortgagor will not claim, demand or be entitled to any credit or
credits on account of the Debt for any part of the Taxes or Other Charges
assessed against the Property, or any part
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thereof, and no deduction shall otherwise be made or claimed from the assessed
value of the Property, or any part thereof, for real estate tax purposes by
reason of this Mortgage or the Debt. In the event such claim, credit or
deduction shall be required by law, Mortgagee shall have the option, by written
notice of not less than ninety (90) days, to declare the Debt immediately due
and payable.
17. DOCUMENTARY STAMPS
If at any time the United States of America, any State thereof or any
subdivision of any such State shall require revenue or other stamps to be
affixed to the Note, this Mortgage or any of the other Loan Documents, or shall
impose any other tax or charge on the same, Mortgagor will pay for the same,
with interest and penalties thereon, if any.
18. CONTROLLING AGREEMENT
It is expressly stipulated and agreed to be the intent of Mortgagor and
Mortgagee at all times to comply with applicable state law or applicable United
States federal law (to the extent that it permits Mortgagee to contract for,
charge, take, reserve, or receive a greater amount of interest than under state
law) and that this Section shall control every other covenant and agreement in
this Mortgage and the other Loan Documents. If the applicable law (state or
federal) is ever judicially interpreted so as to render usurious any amount
called for under the Note or under any of the other Loan Documents, or
contracted for, charged, taken, reserved, or received with respect to the Debt,
or if Mortgagee's exercise of the option to accelerate the maturity of the Note,
or if any prepayment by Mortgagor results in Mortgagor having paid any interest
in excess of that permitted by applicable law, then it is Mortgagor's and
Mortgagee's express intent that all excess amounts theretofore collected by
Mortgagee shall be credited on the principal balance of the Note and all other
Debt (or, if the Note and all other Debt have been or would thereby be paid in
full, refunded to Mortgagor), and the provisions of the Note and the other Loan
Documents immediately be deemed reformed and the amounts thereafter collectible
hereunder and thereunder reduced, without the necessity of the execution of any
new documents, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for hereunder or thereunder. All
sums paid or agreed to be paid to Mortgagee 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 stated term of
the Debt until payment in full so that the rate or amount of interest on account
of the Debt does not exceed the maximum lawful rate from time to time in effect
and applicable to the Debt for so long as the Debt is outstanding.
Notwithstanding anything to the contrary contained herein or in any of the other
Loan Documents, it is not the intention of Mortgagee to accelerate the maturity
of any interest that has not accrued at the time of such acceleration or to
collect unearned interest at the time of such acceleration.
19. BOOKS AND RECORDS. Mortgagor shall keep and maintain full and
adequate books and records of account in accordance with methods acceptable to
Mortgagee in its sole discretion, consistently applied. Mortgagor will furnish,
or cause to be furnished to Mortgagee, within 30 days of the end of each
calendar quarter or indicated period, the following items, each
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certified by a senior financial officer of Mortgagor as true, correct and
complete as of the end of and for such period (subject to normal year-end
adjustments), and as having been prepared in accordance with the Uniform System
of Accounts, consistently applied: (a) a written occupancy statement dated as of
the last day of the most recently ended calendar quarter identifying each of the
Leases by the term, space occupied, rental required to be paid, security deposit
paid, any rental concessions, and identifying any defaults or payment
delinquencies thereunder; (b) monthly and year to date operating statements
detailing the total revenues received and total expenses incurred in connection
with the ownership and operation of the Property, including a comparison of the
budgeted income and expenses and the actual income and expenses for such month
and the year to date (which operating information shall include the
Improvements); and (c) a written statement dated as of the last day of the most
recently ended month showing the percentage of hotel or motel rooms rented and
occupied during such month and the average daily room rate charged during such
month. Upon request by Mortgagee, Mortgagor will provide a detailed explanation
of any variances of ten (10%) percent or more between budgeted and actual
amounts for such periods. Mortgagor shall furnish or cause to be furnished,
within one hundred twenty (120) days following the end of each calendar year, a
statement of the financial affairs and condition of the Property, including a
statement of profit and loss and a balance sheet for the Property (and
Guarantor) for the immediately preceding fiscal year, prepared by an independent
certified public accountant acceptable to Mortgagee. Mortgagor shall deliver to
Mortgagee on or before January 31 of each calendar year an itemized operating
budget and capital expenditure budget for the Property and a management plan for
the Property for the current calendar year in such detail as Mortgagee may
reasonably request. Mortgagor shall promptly after receipt deliver to Mortgagee
copies of all quality inspection reports or similar reports or inspection
results that are delivered to it by the Franchisor. At any time and from time to
time Mortgagor and Guarantor shall deliver to Mortgagee or its agents such other
financial data as Mortgagee or its agents shall reasonably request with respect
to Mortgagor and/or Guarantor and the ownership, maintenance, use and operation
of the Property. All information required to be furnished to Mortgagee pursuant
to this Section shall be on the form provided by Mortgagee (which form shall
accompany Mortgagee's request). Mortgagee shall have the right to conduct an
independent audit of any of the above financial information at its own expense
at any time. In the event that an error in excess of three percent (3%) of
either total revenues or total expenses is discovered, the cost of the audit
shall be borne by Mortgagor.
20. PERFORMANCE OF OTHER AGREEMENTS
(a) Mortgagor shall observe and perform each and every term to be
observed or performed by Mortgagor pursuant to the terms of any agreement or
instrument affecting or pertaining to the Property (collectively, the "OPERATING
AGREEMENTS"). Upon reasonable request by Mortgagee, Mortgagor shall use best
efforts to deliver to Mortgagee estoppel certificates from each
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party to the Operating Agreements in form and substance reasonably satisfactory
to Mortgagee; PROVIDED, HOWEVER, that Mortgagor shall not be required to deliver
such certificates more frequently than once in any consecutive twelve (12) month
period except upon any sale or transfer (or proposed sale or transfer) of the
Loan by Mortgagee.
(b) Mortgagor shall observe and perform each and every term to be
observed or performed by Mortgagor pursuant to the terms of the Operating
Agreements and shall:
(i) diligently proceed to cure any default and satisfy any
demand made upon it pursuant to the Operating
Agreements;
(ii) promptly notify Mortgagee in writing of any default
under the Operating Agreements and provide Mortgagee
with copies of any notices delivered in connection
therewith;
(iii) promptly enforce the performance and observance of all
of the covenants and agreements required to be
performed and/or observed by the other party under the
Operating Agreements; and
(iv) grant Mortgagee the right, but Mortgagee shall be under
no obligation, to pay any sums and to perform any act
or take any action as may be appropriate to cause all
the terms, covenants and conditions of the Operating
Agreements on the part of Mortgagor to be performed or
observed to be promptly performed or observed on behalf
of Mortgagor, to the end that the rights of Mortgagor
in, to and under said Operating Agreements shall be
kept unimpaired and free from default.
21. FURTHER ASSURANCES
(a) Mortgagor will, at the cost of Mortgagor, and without expense to
Mortgagee, do, execute, acknowledge and deliver all and every such further acts,
deeds, conveyances, mortgages, assignments, notices of assignment, Uniform
Commercial Code financing statements or continuation statements, transfers and
assurances as Mortgagee shall, from time to time, require, for the better
assuring, conveying, assigning, transferring, and confirming unto Mortgagee the
property and rights hereby mortgaged, given, granted, bargained, sold,
alienated, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated or
intended now or hereafter so to be, or which Mortgagor may be or may hereafter
become bound to convey or assign to Mortgagee, or for carrying out the intention
or facilitating the performance of the terms of this Mortgage or for filing,
registering or recording this Mortgage. Mortgagor, on demand, will execute and
deliver and hereby authorizes Mortgagee to execute in the name of Mortgagor or
without the signature of Mortgagor to the extent Mortgagee may lawfully do so,
one or more financing statements, chattel mortgages or other instruments, to
evidence more effectively the security interest of Mortgagee in the Property.
Mortgagor grants to Mortgagee an irrevocable power of attorney coupled with an
interest for the purpose of exercising and perfecting any and all rights and
remedies available to Mortgagee at law
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and in equity, including, without limitation, such rights and remedies available
to Mortgagee pursuant to this Section; provided, however, that so long as no
Event of Default has occurred and continues beyond any applicable cure period,
Mortgagee shall not be entitled to exercise the foregoing power.
(b) Mortgagor acknowledges that Mortgagee may (i) sell or transfer
interests in the Loan and Loan Documents to one or more participants or special
purpose entities, (ii) pledge Mortgagee's interests in the Loan and the Loan
Documents as security for one or more loans obtained by Mortgagee, or (iii) sell
the Loan evidenced by the Note and the Loan Documents to a party who may pool
the Loan with a number of other loans and to have the holder of such loans grant
participations therein or issue one or more classes of Mortgage-Backed,
Pass-Through Certificates or other securities evidencing a beneficial interest
in a rated or unrated public offering or private placement (the "SECURITIES").
The Securities may be rated by one or more national rating agencies. Mortgagor
acknowledges and agrees that Mortgagee may, at any time, sell, transfer or
assign the Note, this Mortgage and the other Loan Documents, and any or all
servicing rights with respect thereto, or grant participations therein or issue
Securities evidencing a beneficial interest in a rated or unrated public
offering or private placement. In this regard, Mortgagor agrees to make
available to Mortgagee all information concerning its business and operations
which Mortgagee reasonably requests. Mortgagee may share such information with
the investment banking firms, rating agencies, accounting firms, law firms and
other third-party advisory firms involved with the Loan or the Securities.
Mortgagee may forward to each purchaser, transferee, assignee, servicer,
participant or investor in such securities or any credit rating agency rating
such Securities (collectively, the "INVESTOR") and each prospective Investor,
all documents and information which Mortgagee now has or may hereafter acquire
relating to Mortgagor and the Property, whether furnished by Mortgagor or
otherwise, as Mortgagee determines necessary or desirable consistent with full
disclosure for purposes of marketing and underwriting the Loan; PROVIDED,
HOWEVER, that Mortgagee shall obtain agreement from any such reviewing party to
keep such information strictly confidential to itself and its advisors.
Mortgagor shall furnish and hereby consents to Mortgagee furnishing to such
Investors or such prospective Investors any and all information concerning
Mortgagor and the Property as may be requested by Mortgagee, any Investor or any
prospective Investor in connection with any sale, transfer or participation
interest. It is understood that the information provided by Mortgagor to
Mortgagee may ultimately be incorporated into the offering documents for the
Securities and thus such information may be disclosed to Investors and
prospective Investors. Mortgagee and all of the aforesaid third-party advisors
and professional firms shall be entitled to rely on the information supplied by,
or on behalf of, Mortgagor. Upon any transfer or proposed transfer contemplated
above and by the Loan Documents, at Mortgagee's request, Mortgagor shall provide
an estoppel certificate to the Investor or any prospective Investor in such
form, substance and detail as Mortgagee may reasonably require.
22. RECORDING OF MORTGAGE
Mortgagor forthwith upon the execution and delivery of this Mortgage
and thereafter, from time to time, will cause this Mortgage, and any security
instrument creating a lien or security
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interest or evidencing the lien thereof upon the Property and each instrument of
further assurance to be filed, registered or recorded in such manner and in such
places as may be required by any present or future law in order to publish
notice of and fully to protect the lien or security interest thereof upon, and
the interest of Mortgagee in, the Property. Mortgagor will pay all filing,
registration or recording fees, and all expenses incident to the preparation,
execution and acknowledgment of this Mortgage, any mortgage supplemental
thereto, any security instrument with respect to the Property and any instrument
of further assurance, and all federal, state, county and municipal taxes,
duties, imposts, assessments and charges arising out of or in connection with
the execution and delivery of this Mortgage, any mortgage supplemental thereto,
any security instrument with respect to the Property or any instrument of
further assurance, except where prohibited by law so to do. Mortgagor shall hold
harmless and indemnify Mortgagee, its successors and assigns, against any
liability incurred by reason of the imposition of any tax on the making and
recording of this Mortgage.
23. REPORTING REQUIREMENTS
Mortgagor agrees to give prompt written notice to Mortgagee of the
insolvency or bankruptcy filing of Mortgagor or any constituent thereof, or the
insolvency or bankruptcy filing of Guarantor.
24. EVENTS OF DEFAULT
The term "EVENT OF DEFAULT" as used herein shall mean the occurrence or
happening, at any time and from time to time, of any one or more of the
following:
(a) if any portion of the Debt is not paid on or before the fifth
(5th) day after the date such payment is due (including, without limitation, any
required deposit into any of the Accounts or the Escrow Fund) or if the entire
Debt is not paid on or before the Maturity Date;
(b) subject to Mortgagor's right to contest as provided herein, if
any of the Taxes or Other Charges are not paid when due and payable;
(c) if the Policies are not kept in full force and effect, or if
the Policies are not delivered to Mortgagee upon request;
(d) if Mortgagor transfers or encumbers any portion of the
Property in a manner inconsistent with the terms of this Mortgage;
(e) if any representation or warranty of Mortgagor, or of
Guarantor, made herein, in any Loan Document, any guaranty, or in any
certificate, report, financial statement or other instrument or document
furnished to Mortgagee shall have been false or misleading in any material
respect when made or shall become so at any time prior to repayment in full of
the debt;
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(f) if Mortgagor or Guarantor shall make an assignment for the
benefit of creditors, or if Mortgagor or Guarantor shall generally not be paying
its debts as they become due;
(g) if a receiver, liquidator or trustee of Mortgagor or of
Guarantor shall be appointed, or if Mortgagor or Guarantor shall be adjudicated
a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or
arrangement pursuant to federal bankruptcy law, or any similar federal or state
law, shall be filed by or against, consented to, or acquiesced in by, Mortgagor
or Guarantor or if any proceeding for the dissolution or liquidation of
Mortgagor or of Guarantor shall be instituted; PROVIDED, HOWEVER, that such
appointment, adjudication, petition or proceeding, if involuntary and not
consented to by Mortgagor or Guarantor, shall constitute an Event of Default
only if not being discharged, stayed or dismissed within ninety (90) days;
(h) if Mortgagor shall be in default under any other mortgage or
security agreement covering any part of the Property, whether it be superior or
junior in lien to this Mortgage and such default continues beyond thirty (30)
days after written notice thereof;
(i) subject to Mortgagor's right to contest as provided herein, if
the Property becomes subject to any mechanic's, materialman's or other lien or
encumbrance except a lien or encumbrance for local real estate taxes and
assessments not then due and payable that is not bonded over, discharged or
terminated within thirty (30) days of filing;
(j) if Mortgagor fails to cure promptly any violations of laws,
ordinances or regulations affecting the Property or pertaining to its use or
operation;
(k) except as permitted in this Mortgage, the actual or threatened
alteration, improvement, demolition or removal of any of the Improvements
without the prior written consent of Mortgagee;
(l) if there shall occur any damage to the Property in any manner
which is not covered by insurance solely as a result of Mortgagor's failure to
maintain insurance required in accordance with this Mortgage;
(m) if without Mortgagee's prior written consent: (i) the Manager
resigns or is removed; (ii) there is any material change in or amendment to the
Management Agreement; or (iii) there is a cancellation, expiration, surrender or
termination, for any reason, of the Management Agreement;
(n) if a default by Borrower has occurred and continues beyond any
applicable cure period under the Management Agreement;
(o) if Mortgagor ceases to operate a hotel on the Property or
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terminates such business for any reason whatsoever (other than temporary
cessation in connection with any renovations to the Property or restoration of
the Property after casualty or condemnation or similar force majeure event);
(p) if Mortgagor operates the Property under the name of any hotel
chain or system other than "Hampton Inn" without the prior written consent of
Mortgagee;
(q) if without Mortgagee's prior written consent, (i) the Licensor
resigns or is removed, (ii) there is any material change in or amendment to the
License Agreement; or (iii) there is a cancellation, expiration, surrender or
termination, for any reason, of the License Agreement;
(r if a default has occurred and continues beyond any applicable
cure period under the License Agreement;
(s) if Mortgagor or Guarantor shall be in default beyond any
applicable cure period under any term, covenant, or condition of this Mortgage,
or any of the other Loan Documents;
(t) if for more than thirty (30) days after receipt of written
notice from Mortgagee, Mortgagor shall continue to be in default under any term,
covenant, or condition of this Mortgage, or any of the other Loan Documents
other than as specified in any of the subsections of this Section; PROVIDED,
HOWEVER, that if the cure of any such default cannot reasonably be effected
within such thirty (30) day period and Mortgagor shall have promptly and
diligently commenced to cure such default within such thirty (30) day period,
then the period to cure shall be deemed extended for up to an additional sixty
(60) days (for a total of ninety (90) days from Mortgagee's default notice) so
long as Mortgagor diligently and continuously proceeds to cure such default to
Mortgagee's satisfaction;
(u) if by December 31, 1997, EHA IV shall have failed to have
conveyed and transferred, for cash, the real property located in Warwick, Rhode
Island, which it currently owns or shall have failed to transfer such property
to another entity; and
(v) if a default shall have occurred and continues beyond any
applicable cure period under any term, covenant or condition of any mortgage or
other loan documents now existing or executed in the future by Erie Hotel, LLC,
a New York limited liability company to Mortgagee.
25. LATE PAYMENT CHARGE: SERVICING FEES
(a) If any portion of the Debt is not paid on or before the fifth
(5th) day after the date such payment is due or if the entire Debt is not paid
on or before the Maturity Date, Mortgagor shall pay to Mortgagee upon demand an
amount equal to the lesser of: (i) the maximum amount
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permitted by applicable law, and (ii) five percent (5%) of such overdue portion
of the Debt, to defray the expense incurred by Mortgagee in handling and
processing such delinquent payment and to compensate Mortgagee for the loss of
the use of such delinquent payment, and such amount shall be secured by this
Mortgage, and the other Loan Documents.
(b) Mortgagor will pay, from and after the date of the occurrence of
an Event of Default through the earlier of the date upon which the Event of
Default is cured or the date upon which the Debt is paid in full, interest on
the unpaid principal balance of the Note at a per annum rate equal to the lesser
of (a) the variable Adjustable Rate, as defined in the Note, then in effect on
the Debt calculated monthly as set forth in the Note plus five percent (5%) per
annum, or (b) the maximum interest rate which by law Mortgagor may pay or
Mortgagee may charge and collect (the "DEFAULT RATE")
26. RIGHT TO CURE DEFAULTS
Upon the occurrence of any Event of Default and the lapse of
any applicable cure period or if Mortgagor fails to make any payment or to do
any act as herein provided, Mortgagee may, but without any obligation to do so
and without notice to or demand on Mortgagor and without releasing Mortgagor
from any obligation hereunder, take such action as Mortgagee may deem necessary
to protect its security for the Loan. Upon the occurrence and continuation of an
Event of Default, Mortgagee is authorized to enter upon the Property for such
purposes or to appear in, defend, or bring any action or proceeding to protect
its interest in the Property or to foreclose this Mortgage or collect the Debt,
and the cost and expense thereof (including Mortgagee's attorneys' fees to the
extent permitted by law), with interest at the Default Rate for the period after
notice from Mortgagee that such cost or expense was incurred to the date of
payment to Mortgagee, shall constitute a portion of the Debt (following
Mortgagor's failure to cure), shall be secured by this Mortgage, and the other
Loan Documents and shall be due and payable to Mortgagee upon demand.
27. REMEDIES
(a) Upon the occurrence of any Event of Default or if Mortgagor fails
to make any payment or to do any action as herein provided, Mortgagee may take
such action, without any obligation to do so and notice or demand, except for
any notice which may not be waived pursuant to applicable law or which is
expressly provided for herein, and without releasing Mortgagor from any
obligation hereunder, as Mortgagee deems advisable to protect and enforce its
rights against Mortgagor and in and to the Property including, without
limitation, the following actions, each of which may be pursued concurrently or
otherwise, at such time and in such order as Mortgagee may determine, in its
sole discretion, without impairing or otherwise affecting the other rights and
remedies of Mortgagee:
(i) declare the entire Debt to be immediately due and payable;
(ii) institute judicial proceedings or nonjudicial proceedings,
by notice and
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advertisement to the extent required by law, for the
complete foreclosure of this Mortgage in which case the
Property or any interest therein may be sold for cash, upon
credit or otherwise in one or more parcels or in several
interests or portions and in any order or manner;
(iii) sell for cash, upon credit or otherwise the Property or any
part thereof and all estate, claim, demand, right, title and
interest of Mortgagor therein and rights of redemption
thereof, pursuant to the power of sale contained herein or
otherwise, at one or more sales, as an entity or in parcels,
at such time and place, upon such terms and after such
notice thereof as may be required or permitted by law;
(iv) institute an action, suit or proceeding in equity for the
specific performance of any covenant, condition or agreement
contained herein, in the Note or in the other Loan
Documents;
(v) recover judgment on the Note either before, during or after
any proceedings for the enforcement of this Mortgage or the
other Loan Documents;
(vi) apply for the appointment of a trustee, receiver, liquidator
or conservator of the Property, without notice and without
regard for the adequacy of the security for the Debt and
without regard for the solvency of Mortgagor, Guarantor or
of any person, firm or other entity liable for the payment
of the Debt;
(vii) revoke the license granted to Mortgagor to collect the
Profits and other sums due under the Leases and enforce
Mortgagee's interest in the Leases and Profits and enter
into or upon the Property, either personally or by its
agents, nominees or attorneys and dispossess Mortgagor and
its agents and servants therefrom, and thereupon Mortgagee
may to the maximum extent permitted, or not restricted,
under applicable law: (A) use, operate, manage, control,
insure, maintain, repair, restore and otherwise deal with
all and every part of the Property and conduct the business
thereat; (B) complete any construction on the Property in
such manner and form as Mortgagee deems advisable; (C) make
alterations, additions, renewals, replacements and
improvements to or on the Property; (D) exercise all rights
and powers of Mortgagor with respect to the Property,
whether in the name of Mortgagor or otherwise including,
without limitation, the right to make, cancel, enforce or
modify Leases, obtain and evict tenants, and demand, sue
for, collect and receive all Profits, earnings, revenues,
and other income of the Property and every part thereof; and
(E) apply the receipts from the Property to the payment of
the Debt, after deducting therefrom all expenses (including
Mortgagee's attorneys' fees) incurred in connection with the
aforesaid operations and all amounts necessary to pay the
taxes, assessments insurance and other charges in connection
with the Property, as well as just and reasonable
compensation for the services of Mortgagee, its counsel,
agents and employees;
(viii) require Mortgagor to pay monthly in advance to Mortgagee, or
any
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receiver appointed to collect the Profits, the fair and
reasonable rental value for the use and occupancy of any
portion of the Property occupied by Mortgagor and require
Mortgagor to vacate and surrender possession of the Property
to Mortgagee or to such receiver and, in default thereof,
evict Mortgagor by summary proceedings or otherwise; and
(ix) pursue such other rights and remedies as may be available at
law or in equity or under the Uniform Commercial Code,
including the right to establish a lock box for all Profits
and other receivables of Mortgagor relating to the Property.
In the event of a sale, by foreclosure or otherwise, of less than all of the
Property, this Mortgage shall continue as a lien on the remaining portion of the
Property.
(b) The proceeds of any sale made under or by virtue of this Section,
together with any other sums which then may be held by Mortgagee under this
Mortgage or the other Loan Documents, whether under the provisions of this
Section or otherwise, shall be applied by Mortgagee to the payment of the Debt
in such priority and proportion as Mortgagee in its sole discretion shall deem
proper.
(c) Mortgagee may adjourn from time to time any sale by it to be made
under or by virtue of this Mortgage by announcement at the time and place
appointed for such sale or for such adjourned sale or sales; and, except as
otherwise provided by any applicable provision of law, Mortgagee, without
further notice or publication, may make such sale at the time and place to which
such sale shall be so adjourned.
(d) Upon the completion of any sale or sales pursuant hereto,
Mortgagee or an officer of any court empowered to do so, shall execute and
deliver to the accepted purchaser or purchasers a good and sufficient
instrument, or good and sufficient instruments, conveying, assigning and
transferring all estate, right, title and interest in and to the property and
rights sold. Mortgagee is hereby irrevocably appointed the true and lawful
attorney-in-fact of Mortgagor, to act in its name and stead (such power of
attorney being coupled with an interest, and irrevocable), to make all necessary
conveyances, assignments, transfers and deliveries of the Property and rights so
sold and for that purpose Mortgagee may execute all necessary instruments of
conveyance, assignment and transfer, and may substitute one or more persons with
like power, Mortgagor hereby ratifying and confirming all that its attorney or
such substitute or substitutes shall lawfully do by virtue hereof. Any sale or
sales made under or by virtue of this Section, whether made under the power of
sale herein granted or under or by virtue of judicial proceedings or of a
judgment or decree of foreclosure and sale, shall operate to divest all the
estate, right, title, interest, claim and demand whatsoever, whether at law or
in equity, of Mortgagor in and to the properties and rights so sold, and shall
be a perpetual bar both at law and in equity against Mortgagor and against any
and all persons claiming or who may claim the same, or any part thereof from,
through or under Mortgagor.
(e) Upon any sale made under or by virtue of this Section, whether
made under the power of sale herein granted or under or by virtue of judicial
proceedings or of a judgment or
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decree of foreclosure and sale, Mortgagee may bid for and acquire the Property
or any part thereof and in lieu of paying cash therefor may make settlement for
the purchase price by crediting upon the Debt the net sales price after
deducting therefrom the expenses of the sale and costs of the action and any
other sums which Mortgagee is authorized to deduct under this Mortgage.
(f) No recovery of any judgment by Mortgagee and no levy of an
execution under any judgment upon the Property or upon any other property of
Mortgagor shall affect in any manner or to any extent the lien of this Mortgage
upon the Property or any part thereof, or any liens, rights, powers or remedies
of Mortgagee hereunder, but such liens, rights, powers and remedies of Mortgagee
shall continue unimpaired as before.
(g) Mortgagee may terminate or rescind any proceeding or other action
brought in connection with its exercise of the remedies provided in this Section
at any time before the conclusion thereof, as determined in Mortgagee's sole
discretion and without prejudice to Mortgagee.
(h) Mortgagee may resort for the payment of the Debt to any remedies
and the security given by the Note, this Mortgage or the other Loan Documents in
whole or in part, and in such portions and in such order as determined by
Mortgagee's sole discretion. No such action shall in any way be considered a
waiver of any rights, benefits or remedies evidenced or provided by the Note,
this Mortgage or the other Loan Documents. The failure of Mortgagee to exercise
any right, remedy or option provided in the Note, this Mortgage or the other
Loan Documents shall not be deemed a waiver of such right, remedy or option or
of any covenant or obligation secured by the Note, this Mortgage or the other
Loan Documents. No acceptance by Mortgagee of any payment after the occurrence
of any Event of Default and no payment by Mortgagee of any obligation for which
Mortgagor is liable hereunder shall be deemed to waive or cure any Event of
Default with respect to Mortgagor, or Mortgagor's liability to pay such
obligation. No sale of all or any portion of the Property, no forbearance on the
part of Mortgagee, and no extension of time for the payment of the whole or any
portion of the Debt or any other indulgence given by Mortgagee to Mortgagor,
shall operate to release or in any manner affect the interest of Mortgagee in
the remaining Property or the liability of Mortgagor to pay the Debt. No waiver
by Mortgagee shall be effective unless it is in writing and then only to the
extent specifically stated.
(i) The interests and rights of Mortgagee under the Note, this
Mortgage or the other Loan Documents shall not be impaired by any indulgence,
including: (i) any renewal, extension or modification which Mortgagee may grant
with respect to any of the Debt; (ii) any surrender, compromise, release,
renewal, extension, exchange or substitution which Mortgagee may grant with
respect to the Property or any portion thereof; or (iii) any release or
indulgence granted to any maker, endorser, guarantor or surety of any of the
Debt.
(j) Mortgagor hereby expressly waives and releases to the fullest
extent permitted by law, the pleading of any statute of limitations as a defense
to payment of the Debt or performance of its obligations under any of the Loan
Documents.
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28. RIGHT OF ENTRY
Mortgagee and its agents shall have the right to enter and inspect the
Property during normal business hours upon reasonable notice.
29. SECURITY AGREEMENT
This Mortgage is a "security agreement" within the meaning of the
Uniform Commercial Code. The Property includes both real and personal property
and all other rights and interests, whether tangible or intangible in nature, of
Mortgagor in the Property. By executing and delivering this Mortgage, Mortgagor
has granted and thereby grants to Mortgagee, as security for the Debt, a
security interest in the Property to the full extent that the Property may be
subject to the Uniform Commercial Code (such portion of the Property so subject
to the Uniform Commercial Code being called in this Section the "COLLATERAL").
Mortgagor hereby agrees with Mortgagee to execute and deliver to Mortgagee, in
form and substance satisfactory to Mortgagee, such financing statements and such
further assurances as Mortgagee may from time to time reasonably consider
necessary to create, perfect or preserve Mortgagee's security interest therein
granted. This Mortgage shall also constitute a "fixture filing" for the purposes
of the Uniform Commercial Code. All or part of the Property are or are to become
fixtures. If an Event of Default shall occur, Mortgagee, in addition to any
other rights and remedies which it may have, shall have and may exercise
immediately and without demand, any and all rights and remedies granted to a
secured party upon default under the Uniform Commercial Code including, without
limitation, the right to take possession of the Collateral or any part thereof,
and to take such other measures as Mortgagee may deem necessary for the care,
protection and preservation of the Collateral. Upon request or demand of
Mortgagee, following the occurrence and continuation beyond any applicable cure
period of an Event of Default, Mortgagor shall at its expense assemble the
Collateral and make it available to Mortgagee at a convenient place acceptable
to Mortgagee. Mortgagor shall pay to Mortgagee on demand any and all expenses,
including Mortgagee's attorneys' fees, incurred or paid by Mortgagee in
protecting the interest in the Collateral and in enforcing the rights hereunder
with respect to the Collateral. Any notice of sale, disposition or other
intended action by Mortgagee with respect to the Collateral sent to Mortgagor in
accordance with the provisions hereof at least ten (10) days prior to such
action, shall constitute commercially reasonable notice to Mortgagor. The
proceeds of any disposition of the Collateral, or any part thereof, may be
applied by Mortgagee to the payment of the Debt in such priority and proportions
as Mortgagee in its discretion shall deem proper. In the event of any change in
name, identity or structure of any Mortgagor, such Mortgagor shall notify
Mortgagee thereof and promptly after request shall execute, file and record such
Uniform Commercial Code forms as are necessary to maintain the priority of
Mortgagee's lien upon and security interest in the Collateral, and shall pay all
expenses and fees in connection with the filing and recording thereof. If
Mortgagee shall require the filing or recording of additional Uniform Commercial
Code forms or continuation statements, Mortgagor shall, promptly after request,
execute, file and record such Uniform Commercial Code forms or continuation
statements as Mortgagee shall deem necessary, and shall pay all expenses and
fees in connection with the filing and recording thereof, it being understood
and agreed, however, that no such additional documents
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shall increase Mortgagor's obligations under the Note, this Mortgage, the
Assignment, the Environmental Agreement, the Guaranty Agreement and the other
Loan Documents. Mortgagor hereby irrevocably appoints Mortgagee as its
attorney-in-fact, coupled with an interest, to file with the appropriate public
office on its behalf any financing or other statements signed only by Mortgagee,
as secured party, in connection with the Collateral covered by this Mortgage.
30. ACTIONS AND PROCEEDINGS
After the occurrence and during the continuance of an Event of Default,
Mortgagee has the right to appear in and defend any action or proceeding brought
with respect to the Property and to bring any action or proceeding, in the name
and on behalf of Mortgagor, which Mortgagee, in its discretion, decides should
be brought to protect its interest in the Property. Mortgagee shall, at its
option, be subrogated to the lien of any mortgage or other security instrument
discharged in whole or in part by the Debt, and any such subrogation rights
shall constitute additional security for the payment of the Debt.
31. WAIVER OF SETOFF AND COUNTERCLAIM
All amounts due under this Mortgage, the Note and the other Loan
Documents shall be payable without setoff, counterclaim or any deduction
whatsoever. Mortgagor hereby waives the right to assert a counterclaim (other
than a mandatory or compulsory counterclaims) in any action or proceeding
brought against it by Mortgagee, or arising out of or in any way connected with
this Mortgage, the Note, any of the other Loan Documents, or the Debt.
32. CONTEST OF CERTAIN CLAIMS
Notwithstanding the provisions of Sections 5 and 24(i) hereof,
Mortgagor shall not be in default for failure to pay or discharge Taxes, Other
Charges or a mechanic's or materialman's lien asserted against the Property if,
and so long as: (a) Mortgagor shall have notified Mortgagee of such nonpayment
and the reasons therefor within ten (10) days of obtaining knowledge thereof;
(b) Mortgagor shall diligently and in good faith contest such Taxes, Other
Charges or lien by appropriate legal proceedings which shall operate to prevent
the enforcement or collection thereof and the sale of the Property or any part
thereof, in satisfaction thereof; (c) Mortgagor shall have furnished to
Mortgagee a cash deposit, or an indemnity bond satisfactory to Mortgagee with a
surety reasonably satisfactory to Mortgagee or such other entity as is required
by applicable law, in the amount of the Taxes, other Charges or mechanic's or
materialman's lien claim, plus a reasonable additional sum to pay all costs,
interest and penalties that may be imposed or incurred in connection therewith,
to assure payment of the matters under contest and to prevent any sale or
forfeiture of the Property or any part thereof; (d) Mortgagor shall promptly
upon final determination thereof pay the amount of any such Taxes, Other Charges
or claim so determined, together with all costs, interest and penalties which
may be payable in connection therewith; and (e) the failure to pay the Taxes,
Other Charges or mechanic's or materialman's lien claim does not constitute a
default under any other Mortgage, mortgage or security interest covering or
affecting any part of the Property. Notwithstanding the
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foregoing, Mortgagor shall immediately upon request of Mortgagee pay (and if
Mortgagor shall fail so to do, Mortgagee may, but shall not be required to, pay
or cause to be discharged or bonded against) any such Taxes, Other Charges or
claim notwithstanding such contest, if in the opinion of Mortgagee, the Property
or any part thereof or interest therein may be in danger of being sold,
forfeited, foreclosed, terminated, canceled or lost. Mortgagee may pay over any
such cash deposit or part thereof to the claimant entitled thereto at any time
when, in the judgment of Mortgagee, the entitlement of such claimant is
established.
33. RECOVERY OF SUMS REQUIRED TO BE PAID
Mortgagee shall have the right from time to time to take action to
recover any sum or sums which constitute a part of the Debt as they become due,
without regard to whether or not the balance of the Debt shall be due, and
without prejudice to the right of Mortgagee thereafter to bring an action of
foreclosure, or any other action, for a default or defaults by Mortgagor
existing at the time such earlier action was commenced.
34. MARSHALING AND OTHER MATTERS
Mortgagor hereby waives, to the extent permitted by law, the benefit of
all appraisement, valuation, stay, extension, reinstatement and redemption laws
now or hereafter in force, and all rights of marshaling in the event of any sale
hereunder of the Property or any part thereof or any interest therein. Further,
Mortgagor hereby expressly waives and renounces any and all rights of redemption
from sale under any order or decree of foreclosure of this Mortgage on behalf of
Mortgagor, and on behalf of each and every person acquiring any interest in or
title to the Property subsequent to the date of this Mortgage and on behalf of
all persons to the extent permitted by applicable law.
35. HAZARDOUS SUBSTANCES
Mortgagor hereby represents and warrants to Mortgagee that,
except as set forth in the Phase I Environmental I Site Assessment dated June
26, 1997, prepared by SCS Engineering, Inc.: (a) the Property is not in direct
or indirect violation of any local, state, federal or other applicable
governmental authority, statute, ordinance, code, order, decree, law, rule or
regulation or common law pertaining to or imposing liability or standards of
conduct concerning the protection of human health, environmental regulation,
contamination or clean-up including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the Resource
Conservation and Recovery Act, as amended, and any state super-lien and
environmental clean-up statutes (collectively, "ENVIRONMENTAL LAWS"); (b) the
Property is not subject to any private or governmental lien or judicial or
administrative notice or action relating to hazardous and/or toxic, dangerous
and/or regulated substances, solvents, wastes, materials, pollutants or
contaminants, petroleum, tremolite, anthlophylie or actinolite or
polychlorinated biphenyls (including, without limitation, any raw materials
which include hazardous constituents) and any other substances, materials or
solvents which are included under or regulated by Environmental Laws, including,
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without limitation, Asbestos (collectively, "HAZARDOUS SUBSTANCES"); (c) no
Hazardous Substances are or have been, prior to Mortgagor's acquisition of the
Property, discharged, generated, treated, disposed of or stored on, incorporated
in or removed or transported from the Property other than in compliance with all
Environmental Laws; and (d) no underground storage tanks exist on any of the
Property. So long as Mortgagor owns or is in possession of the Property,
Mortgagor shall keep or cause the Property to be kept free from Hazardous
Substances (other than DE MINIMIS quantities of Hazardous Substances that are
necessary and lawfully used in the operation of the Property as a hotel or
motel, and which are stored and disposed of in compliance with all Environmental
Laws, including, without limitation, chlorinators, pesticides, fertilizers,
de-icers, cleaning supplies and other Hazardous Substances used by Mortgagor or
its agents in the operation of the Property) and in compliance with all
Environmental Laws, shall promptly notify Mortgagee if Mortgagor shall become
aware of any Hazardous Substances on the Property and/or if Mortgagor shall
become aware that the Property is in direct or indirect violation of any
Environmental Laws and Mortgagor shall remove such Hazardous Substances and/or
cure such violations, as applicable, as required by law, promptly after
Mortgagor becomes aware of such Hazardous Substances or such violations, at
Mortgagor's sole expense. Nothing herein shall prevent Mortgagor from recovering
such expenses from any other party that may be liable for such removal or cure.
Upon Mortgagee's request, at any time and from time to time while this Mortgage
is in effect (but in no event more frequently than once in any three-year period
or more frequently if specific facts and circumstances reasonably dictate, or
otherwise at Mortgagee's election but at Mortgagee's expense), Mortgagor shall
provide at Mortgagor's sole expense, an inspection or audit of the Property
prepared by a licensed hydrogeologist or licensed environmental engineer
approved by Mortgagee indicating the presence or absence of Hazardous Substances
on the Property. If Mortgagor fails to provide such inspection or audit within
thirty (30) days after such request, Mortgagee may order such inspection or
audit, and Mortgagor hereby grants to Mortgagee and its employees and agents
access to the Property and a license to undertake such inspection or audit. The
cost of such inspection or audit shall be paid by Mortgagor and added to the
principal balance of the sums due under the Note and this Mortgage and shall
bear interest thereafter until paid at the Default Rate. The obligations and
liabilities of Mortgagor under this Section shall survive any termination,
satisfaction, or assignment of this Mortgage and the exercise by Mortgagee of
any of its rights or remedies thereunder including, without limitation, the
acquisition of the Property by foreclosure or a conveyance in lieu of
foreclosure.
36. ASBESTOS
Mortgagor represents and warrants that no asbestos or any substance
containing asbestos (collectively, "ASBESTOS") is located on the Property.
Mortgagor shall not install in the Property, nor permit to be installed in the
Property, Asbestos and shall remove any Asbestos promptly upon discovery to the
satisfaction of Mortgagee, at Mortgagor's sole expense. Upon Mortgagee's
request, at any time and from time to time (but in no event more frequently than
once in any three-year period or more frequently if specific facts and
circumstances reasonably dictate, or otherwise at Mortgagee's election but at
Mortgagee's expense), Mortgagor shall provide, at Mortgagor's sole expense, an
inspection or audit of the Property prepared by an engineering or
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consulting firm approved by Mortgagee, indicating the presence or absence of
Asbestos on the Property. If Mortgagor fails to provide such inspection or audit
within thirty (30) days after such request, Mortgagee may order such inspection
or audit. The cost of such inspection or audit shall be paid by Mortgagor and
added to the principal balance of the sums due under the Note and this Mortgage,
and shall bear interest thereafter until paid at the Default Rate. The
obligations and liabilities of Mortgagor under this Section shall survive any
termination, satisfaction, or assignment of this Mortgage and the exercise by
Mortgagee of any of its rights or remedies thereunder, including, but not
limited to, the acquisition of the Property by foreclosure or a conveyance in
lieu of foreclosure.
37. ENVIRONMENTAL MONITORING
Mortgagor shall give prompt written notice to Mortgagee of: (a) any
proceeding or inquiry by any party with respect to the presence of any Hazardous
Substance on, under, from or about the Property; (b) all claims made or
threatened by any third party against Mortgagor or the Property relating to any
loss or injury resulting from any Hazardous Substance; and (c) Mortgagor's
discovery of any occurrence or condition on any real property adjoining or in
the vicinity of the Property that could cause the Property to be subject to any
investigation or cleanup pursuant to any Environmental Law. Mortgagor shall
permit Mortgagee to join and participate, as a party if it so elects, in any
legal proceedings or actions initiated with respect to the Property in
connection with any Environmental Law or Hazardous Substance, and Mortgagor
shall pay all reasonable attorneys' fees incurred by Mortgagee in connection
therewith. In the event that any environmental site assessment report prepared
for the Property recommends that an operations and maintenance plan be
implemented for Asbestos or any Hazardous Substance, Mortgagor shall cause such
operations and maintenance plan to be prepared and implemented at Mortgagor's
expense upon request of Mortgagee and in accordance with the recommendation. In
the event that any inspection, assessment, investigation, site monitoring,
containment, cleanup, removal, restoration, corrective action or other work of
any kind to prevent, cure or mitigate any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment, including, without limitation,
the movement of Hazardous Substances through ambient air, soil, surface water,
ground water, wetlands, land or subsurface strata, or which is reasonably
necessary or desirable under an applicable Environmental Law ("REMEDIAL WORK")
is recommended, Mortgagor shall, at its sole cost and expense, commence and
thereafter diligently prosecute to completion all such Remedial Work within
thirty (30) days after written demand by Mortgagee for performance thereof (or
such shorter period of time as may be required under applicable law).
38. MANAGEMENT OF THE PROPERTY
Mortgagor further covenants and agrees with Mortgagee as follows:
(a) Mortgagor shall cause the hotel located on the Property to be
operated pursuant to the License Agreement and the Management Agreement.
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(b) Mortgagor shall:
(i) pay all sums required to be paid by Mortgagor under the
License Agreement and the Management Agreement and promptly
perform and/or observe all of the covenants and agreements
required to be performed and observed by it under the
License Agreement and the Management Agreement and do all
things necessary to preserve and to keep unimpaired its
material rights thereunder;
(ii) promptly notify Mortgagee in writing of any default under
the License Agreement or the Management Agreement of which
it is aware and provide Mortgagee with copies of any notices
delivered in connection therewith;
(iii) promptly deliver to Mortgagee a copy of each financial
statement, business plan, capital expenditures plan, notice,
report and estimate received by it under the License
Agreement or the Management Agreement other than day-to-day
general correspondence;
(iv) promptly enforce the performance and observance of all of
the covenants and agreements required to be performed and/or
observed by Licensor and Manager;
(v) assign, and does hereby assign and transfer, to Mortgagee
any right it may have to modify, amend or supplement the
License Agreement or the Management Agreement, such that any
attempted modification, amendment or supplement of the
License Agreement or the Management Agreement without the
prior written consent of Mortgagee shall be null and void
and have no legal force or effect;
(vi) grant Mortgagee the right, but Mortgagee shall be under no
obligation, to pay any sums and to perform any act or take
any action as may be appropriate to cause all the terms,
covenants and conditions of the License Agreement and the
Management Agreement on the part of Mortgagor to be
performed or observed to be promptly performed or observed
on behalf of Mortgagor, to the end that the rights of
Mortgagor in, to and under the License Agreement and the
Management Agreement shall be kept unimpaired and free from
default;
(vii) use its reasonable efforts to obtain, from time to time,
from Licensor and Manager such certificates of estoppel with
respect to compliance by Mortgagor with the terms of the
License Agreement and the Management Agreement,
respectively, as may be requested by Mortgagee;
(viii) exercise each individual option, if any, to extend or renew
the term of the License Agreement and the Management
Agreement upon demand by Mortgagee made at any time within
one year of the last day upon which any such option may be
exercised,
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and Mortgagor hereby expressly authorizes and appoints
Mortgagee its attorney-in-fact to exercise any such option
in the name of and upon behalf of Mortgagor, which power of
attorney shall be irrevocable and shall be deemed to be
coupled with an interest; PROVIDED, HOWEVER, that so long as
Mortgagor is not in default hereunder or under any of the
Loan Documents, Mortgagee shall not be entitled to exercise
the foregoing appointment; and
(ix) promptly notify Mortgagee in writing and provide Mortgagee
with copies of any notices delivered to Mortgagor,
including, without limitation, any notice of violation of
any laws, regulations, or ordinances or other notice from
any governmental or quasi-governmental authority, or any
notice of default under the Leases, the Management Agreement
or any other document or agreement relating to the Property,
which contain information that, if true, might materially
adversely affect the value, use or operation of the
Property.
(c) Mortgagor shall not, without Mortgagee's prior written consent:
(i) surrender, terminate or cancel the License Agreement or the Management
Agreement; (ii) reduce or consent to the reduction of the term of the License
Agreement or the Management Agreement; (iii) increase or consent to the increase
of the amount of any charges under the License Agreement (except as otherwise
expressly provided therein) or the Management Agreement; (iv) otherwise modify,
change, supplement, alter or amend, or waive or release any of its rights and
remedies under the License Agreement or the Management Agreement in any material
respect; or (v) operate the Property under the name of any hotel chain or system
other than Hampton Inn.
(d) Mortgagor shall not, without Mortgagee's prior written consent,
enter into transactions with any Affiliate including, without limitation, any
arrangement providing for the management of the hotel on the Property, the
rendering or receipt of services or the purchase or sale of inventory, except
any such transaction in the ordinary course of business of Mortgagor if the
monetary or business consideration arising therefrom would be substantially as
advantageous to Mortgagor as the monetary or business consideration which would
obtain in a comparable transaction with a person not an Affiliate of Mortgagor.
Notwithstanding the foregoing, Mortgagee acknowledges that Manager is an
Affiliate of Mortgagor, and hereby consents to the Management Agreement.
(e) Mortgagor irrevocably authorizes and directs Licensor and
Manager to deliver to Mortgagee: (i) all operating information concerning the
Property submitted by Mortgagor to Licensor or Manager; (ii) the written results
of all quality assurance inspections of the Property performed by Licensor or
Manager; and (iii) such other information that Mortgagee or Mortgagee's agents
may reasonably request, from time to time, including any information in the
possession of Licensor or Manager relating to Mortgagor not included in the
reports referred to above.
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39. HANDICAPPED ACCESS
(a) Mortgagor agrees that the Property shall at all times strictly
comply to the extent applicable with the requirements of the Americans with
Disabilities Act of 1990, all state and local laws and ordinances related to
handicapped access and all rules, regulations, and orders issued pursuant
thereto including, without limitation, the Americans with Disabilities Act
Accessibility Guidelines for Buildings and Facilities (collectively, "ACCESS
LAWS").
(b) Notwithstanding any provisions set forth herein or in any other
document regarding Mortgagee's approval of alterations of the Property,
Mortgagor shall not alter the Property in any manner which would increase
Mortgagor's responsibilities for compliance with the applicable Access Laws
without the prior written approval of Mortgagee. The foregoing shall apply to
tenant improvements constructed by Mortgagor or by any of its tenants. Mortgagee
may condition any such approval upon receipt of a certificate of Access Law
compliance from an architect, engineer or other person acceptable to Mortgagee.
(c) Mortgagor agrees to give prompt written notice to Mortgagee of the
receipt by Mortgagor of any complaints related to violation of any Access Laws
and of the commencement of any proceedings or investigations which relate to
compliance with applicable Access Laws.
40. ERISA
Mortgagor covenants and agrees that it shall not engage in any
transaction which would cause any obligation, or action taken or to be taken,
hereunder (or the exercise by Mortgagee of any of its rights under the Note,
this Mortgage and the other Loan Documents) to be a non-exempt (under a
statutory or administrative class exemption) prohibited transaction under the
Employee Retirement Income Security Act of 1974 (or any successor legislation
thereto), as amended ("ERISA").
41. INDEMNIFICATION
(a) In addition to any other indemnifications provided herein, in the
Environmental Agreement or in the other Loan Documents, Mortgagor shall protect,
defend, indemnify and save harmless the Indemnified Parties (defined herein)
from and against all liabilities, obligations, claims, demands, damages,
penalties, causes of action, losses, fines, costs and expenses (including,
without limitation, attorneys' fees and expenses), imposed upon or incurred by
or asserted against Mortgagee by reason of: (i) ownership of this Mortgage
(except income, franchise and similar taxes and costs related thereto), the
Property or any interest therein or receipt of any Profits; (ii) any accident,
injury to or death of persons or loss of or damage to property occurring in, on
or about the Property or any part thereof or on the adjoining sidewalks, curbs,
adjacent property or adjacent parking areas, streets or ways; (iii) any use,
nonuse or condition in, on or about the Property or any part thereof or on
adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets
or ways; (iv) any failure on the part of Mortgagor or Guarantor to perform or
comply with
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any of the terms of this Mortgage; (v) performance of any labor or services or
the furnishing of any materials or other property in respect of the Property or
any part thereof; (vi) the presence, disposal, escape, seepage, leakage,
spillage, discharge, emission, release, or threatened release of any Hazardous
Substance or Asbestos on, from, or affecting the Property or any other property;
(vii) any personal injury (including wrongful death) or property damage (real or
personal) arising out of or related to such Hazardous Substance or Asbestos;
(viii) any lawsuit brought or threatened, settlement reached, or government
order relating to such Hazardous Substance or Asbestos; (ix) any violation of
the Environmental Laws, which are based upon or in any way related to such
Hazardous Substance or Asbestos including, without limitation, the costs and
expenses of any remedial action, reasonable out-of-pocket attorney's and
consultant's fees, investigation and laboratory fees, court costs, and
litigation expenses; (x) any failure of the Property to comply with any Access
Laws; (xi) any representation or warranty made in the Note, this Mortgage or the
other Loan Documents being false or misleading in any material respect as of the
date such representation or warranty was made; (xii) any claim by brokers,
finders or similar persons claiming to be entitled to a commission in connection
with any Lease or other transaction involving the Property or any part thereof
under any legal requirement or any liability asserted against Mortgagee with
respect thereto; (xiii) the claims of any lessee of all or any portion of the
Property or any person acting through or under any lessee or otherwise arising
under or as a consequence of any Lease; and (xiv) claims of any persons arising
under or as a consequence of any of the Operating Agreements. Any amounts
payable to Mortgagee by reason of the application of this Section shall be
immediately due and payable, shall be secured by this Mortgage and shall bear
interest at the Default Rate from the date loss or damage is sustained by
Mortgagee until paid. Notwithstanding the foregoing, Mortgagor shall not be
liable for any losses incurred by Mortgagee arising solely as a direct result of
Mortgagee's gross negligence or willful misconduct. The obligations and
liabilities of Mortgagor under this Section shall survive any termination,
satisfaction or assignment of this Mortgage or the entry of a judgment of
foreclosure, sale of the Property by nonjudicial foreclosure sale, or delivery
of a conveyance in lieu of foreclosure (but shall be limited to liabilities
accruing or arising prior thereto), but shall continue to be subject to the
limitations on recourse set forth in Section 42 below, to the extent applicable,
which shall also survive.
(b) "INDEMNIFIED PARTIES" means Mortgagee and any person or entity who
is or will have been involved in the origination of this loan, any person or
entity who is or will have been involved in the servicing of this loan, any
person or entity in whose name the encumbrance created by this Mortgage is or
will have been recorded, persons and entities who may hold or acquire or will
have held a full or partial interest in this loan (including, but not limited to
Investors or prospective Investors in the Securities, as well as custodians,
trustees and other fiduciaries who hold or have held a full or partial interest
in this loan for the benefit of third parties) as well as the respective
directors, officers, shareholders, members, partners, employees, agents,
servants, representatives, contractors, subcontractors, affiliates,
subsidiaries, participants, successors and assigns of any and all of the
foregoing (including, but not limited to any other person or entity who holds or
acquires or will have held a participation or other full or partial interest in
this loan or the Property, whether during the term of this loan or as a part of
or following a foreclosure of this loan and including, but not limited to any
successors by merger, consolidation or acquisition of all or a substantial
portion of
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Mortgagee's assets and business).
42. LIMITATIONS ON RECOURSE
(a) Subject to the qualifications set forth in this Section,
neither Mortgagor nor Guarantor nor any partner, shareholder, officer, or
director, manager, member or Affiliate of either of them or any successors or
assigns of the foregoing (collectively, the "EXCULPATED PARTIES") shall be
personally liable either at law or in equity for the repayment of the Debt or
the failure of performance of any other obligation evidenced by the Note or
contained in the Mortgage or the other Loan Documents and Mortgagee will satisfy
any judgments, orders or decrees on account of the failure to repay such Debt
and/or the failure to perform any such obligation, from the Property and any
other real or personal property, tangible or intangible, as Mortgagor, Guarantor
or any other entity shall have pledged or assigned to secure the Note by any of
the Loan Documents, except that Mortgagee may bring a foreclosure action, an
action for specific performance or any other appropriate action or proceeding to
enable Mortgagee to enforce and realize upon the Note, the Mortgage, the other
Loan Documents, and the interests in the Property and any other collateral given
to Mortgagee pursuant to the Mortgage and the other Loan Documents; PROVIDED,
HOWEVER, that, except as specifically provided in this Section, any judgment in
any such action or proceeding shall be enforceable against Mortgagor only to the
extent of Mortgagor's interest in the Property and in any other collateral given
to Mortgagee. Mortgagee, by accepting the Note, the Mortgage and the other Loan
Documents, agrees that it shall not sue for, seek or demand any deficiency
judgment against Mortgagor in any such action or proceeding, under, by reason of
or in connection with the Mortgage, the Assignment, the other Loan Documents or
the Note. The provisions of this Section shall not, however: (i) constitute a
waiver, release or impairment of any obligation evidenced or secured by the Note
this Mortgage or the other Loan Documents; (ii) impair the right of Mortgagee to
name Mortgagor as a party defendant in any action or suit for foreclosure and
sale under this Mortgage; (iii) affect the validity or enforceability of the
Guaranty Agreement, the Environmental Agreement or any other guaranty or
indemnity made in connection with the Note, this Mortgage or the other Loan
Documents; (iv) impair the right of Mortgagee to obtain the appointment of a
receiver; (v) impair the right of Mortgagee to bring suit with respect to fraud
or misrepresentation by Mortgagor in connection with the Note, this Mortgage or
Loan Documents; (vi) affect the validity or impair the enforcement of the Loan
Documents.
(b) Nothing herein shall be deemed to be a waiver of any right which
Mortgagee may have under Sections 506(a), 506(b), 1111(b) or any other
provisions of the U.S. Bankruptcy Code to file a claim for the full amount of
the Debt secured by this Mortgage or to require that all collateral shall
continue to secure all of the debt owing to Mortgagee in accordance with the
Note, this Mortgage and the other Loan Documents.
(c) Notwithstanding the foregoing provisions of this Section or any
other provision in the Loan Documents, Mortgagor and Guarantor, jointly and
severally, shall be fully and personally liable to and shall indemnify Mortgagee
for any or all loss, cost, liability, judgment, claim, damage or expense
sustained, suffered or incurred by Mortgagee (including, without
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limitation, Mortgagee's attorneys' fees and costs) arising out of or
attributable or relating to:
(i) fraud or misrepresentation by Mortgagor or Guarantor in
connection with the Loan;
(ii) the gross negligence or willful misconduct of Mortgagor or
Guarantor, their agents, managers, officers or employees
with respect to their obligations to Mortgagee or with
respect to the operation of the Property, or physical waste
of the Property;
(iii) the breach of provisions in this Mortgage concerning
Environmental Laws, Hazardous Substances and Asbestos, and
any indemnification of Mortgagee herein or in the
Environmental Agreement or any other Loan Document with
respect to such Environmental Laws, Hazardous Substances and
Asbestos;
(iv) other than in the ordinary course of business, the removal
or disposal of any portion of the Property after an Event of
Default under the Note, this Mortgage, or any other Loan
Document;
(v) the misapplication or conversion by Mortgagor of: (A) any
insurance proceeds paid by reason of any loss, damage or
destruction to the Property; (B) any awards or other amounts
received in connection with the condemnation of all or a
portion of the Property; or (C) rents, issues, profits,
proceeds, accounts, or other amounts received by Mortgagor
or Guarantor (in the case of clause (C) following an Event
of Default under the Note, this Mortgage or the other Loan
Documents);
(vi) Mortgagor's failure to pay Taxes, assessments, charges for
labor or materials or Other Charges that can result in liens
on any portion of the Property, provided, however, that
Mortgagor's and Guarantor's liability hereunder shall cease
with respect to such amounts incurred from and after such
time, if any, that Mortgagee obtains legal and beneficial
title to the Property;
(vii) the deductible amount in respect of any insurance maintained
in respect of the Property, provided, however, that
Mortgagor's and Guarantor's liability hereunder shall cease
with respect to such amounts incurred from and after such
time, if any, that Mortgagee obtains legal and beneficial
title to the Property;
(viii) the costs incurred by Mortgagee (including reasonable
attorneys' fees) in connection with the collection or
enforcement of the Debt;
(ix) any security deposits, advance deposits or retained rents
and profits collected with respect to the Property which are
not delivered to Mortgagee upon a foreclosure of the
Property or action in lieu thereof;
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(x) the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release of any
Hazardous Substance or Asbestos on, from, or affecting the
Property or any other property, regardless of when
discovered, which occurs prior to foreclosure, transfer by
deed in lieu of foreclosure or the appointment of a receiver
by Mortgagee;
(xi) any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to such
Hazardous Substance or Asbestos;
(xii) any lawsuit brought or threatened, settlement reached, or
government order relating to such Hazardous Substance or
Asbestos;
(xiii) any violation of the Environmental Laws, regardless of when
discovered, which occurs prior to foreclosure, transfer by
deed in lieu of foreclosure or the appointment of a receiver
by Mortgagee, and which is based upon or in any way related
to such Hazardous Substance or Asbestos including, without
limitation, the costs and expenses of any remedial action,
reasonable out-of-pocket attorney's and consultant's fees,
investigation and laboratory fees, court costs, and
litigation expenses; and
(xiv) Mortgagor fails to comply with the provisions of Sections 11
and/or 13 of this Mortgage.
(d) Notwithstanding the foregoing, the agreement of Mortgagee not to
pursue recourse liability as set forth in subsection (a) above SHALL BE AND
BECOME NULL AND VOID and shall be of no further force or effect if: (1)
Mortgagor fails to permit reasonable on-site inspections of the Property upon
reasonable advance oral notice or to provide financial reports and information
pertaining to the Property as required by any Loan Document, unless such failure
is the result of a good faith error and such failure is cured within ten (10)
days after notice; (2) any financial information concerning Mortgagor or
Guarantor provided by Mortgagor or Guarantor (or their respective agents,
employees, or authorized representatives) is fraudulent in any respect, contains
any fraudulent information or misrepresents in any material respect the
financial condition of Mortgagor or Guarantor; (3) Mortgagor fails to obtain
Payee's prior written consent, if consent is required under any Loan Document,
to any subordinate financing; (4) Mortgagor fails to obtain Payee's prior
written consent, if consent is required under any Loan Document, to any transfer
of the Property or of any ownership interest in Mortgagor; and (5) Mortgagor or
its Managing Member files for relief or protection under any federal, state or
other bankruptcy, insolvency, reorganization or other creditor-relief laws, or
an involuntary filing or petition is made under any of such laws, against
Mortgagor by any of its creditors (other than Payee) and such involuntary filing
is not unconditionally dismissed or vacated within ninety (90) days. Upon the
occurrence of any of the foregoing events, Mortgagor and Guarantor shall have
full joint and several recourse liability for all sums due under the Loan
Documents.
(e) Nothing in this Section shall be interpreted or construed to
impair, limit the
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liability of or otherwise affect the terms, conditions, requirements and
obligations of Guarantor under that certain Guaranty Agreement dated as of the
date hereof or the Mortgagor or Guarantor under the Environmental Agreement.
43. NOTICE
Any notice, demand, statement, request, consent or other
communication made hereunder shall be in writing and shall be deemed given (a)
on the next Business Day if sent by Federal Express or other reputable overnight
courier and designated for next Business Day delivery, (b) upon delivery, if
delivered in person or by facsimile transmission with receipt acknowledged by
the recipient thereof, or (c) on the third (3rd) Business Day following the day
such notice is deposited with the United States postal service first class
certified mail, return receipt requested, addressed to the address, as set forth
above, of the party to whom such notice is to be given, or to such other address
or additional party as Mortgagor, Guarantor or Mortgagee, as the case may be,
shall in like manner designate in writing. Any notice to Mortgagor or Guarantor
shall be likewise given to Harris Beach & Wilcox, LLP, 130 East Main Street,
Rochester, New York, 14604-1687, to the attention of Mark R. Foerster, Esq. Any
notice to Mortgagee shall be likewise given to Katten Muchin & Zavis, 1025
Thomas Jefferson Street, N.W., Suite 700 East Tower, Washington, D.C.
20007, to the attention of Christopher J. Hart, Esq.
44. AUTHORITY
Mortgagor represents and warrants that: (a) it has full power,
authority and right to execute, deliver and perform its obligations pursuant to
this Mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm,
warrant, pledge, hypothecate and assign the Property pursuant to the terms
hereof and to keep and observe all of the terms of this Mortgage on Mortgagor's
part to be performed; and (b) Mortgagor is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended,
and the related Treasury Department regulations, including temporary
regulations. Mortgagee represents and warrants that it has full power, authority
and right to execute, deliver and perform its obligations pursuant to this
Mortgage.
45. WAIVER OF NOTICE
To the extent permitted by applicable law, neither Mortgagor nor
Guarantor shall be entitled to any notices of any nature whatsoever from
Mortgagee except with respect to matters for which this Mortgage specifically
and expressly provides for the giving of notice by Mortgagee to Mortgagor or
Guarantor and except with respect to matters for which Mortgagee is required by
applicable law to give notice, and Mortgagor and Guarantor each hereby expressly
waives the right to receive any notice from Mortgagee with respect to any matter
for which this Mortgage does not specifically and expressly provide for the
giving of notice by Mortgagee to Mortgagor or Guarantor, including, without
limitation, notice of default, notice of intention to accelerate sums under the
Loan Documents and notice of acceleration of sums under the Loan Documents. All
notices required hereunder must be in writing, delivered by certified mail
(return receipt requested), personal delivery
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or overnight delivery.
46. REMEDIES OF MORTGAGOR
In the event that a claim or adjudication is made that Mortgagee has
acted unreasonably or has unreasonably delayed acting in any case where by law
or under the Note, this Mortgage, the Assignment, the Environmental Agreement,
the Guaranty Agreement or the other Loan Documents, it has an obligation to act
reasonably or promptly, Mortgagee shall not be liable for any monetary damages,
and Mortgagor's and Guarantor's remedies shall be limited to injunctive relief
or declaratory judgment.
47. SOLE DISCRETION OF MORTGAGEE
Wherever pursuant to this Mortgage Mortgagee exercises any right given
to it to approve or disapprove, or any arrangement or term is to be satisfactory
to Mortgagee, the decision of Mortgagee to approve or disapprove or to decide
that arrangements or terms are satisfactory or not satisfactory shall be in the
sole discretion of Mortgagee and shall be final and conclusive, except as may be
otherwise expressly and specifically provided herein.
48. NON-WAIVER
The failure of Mortgagee to insist upon strict performance of any term
hereof shall not be deemed to be a waiver of any term of this Mortgage.
Mortgagor shall not be relieved of Mortgagor's obligations hereunder by reason
of: (a) the failure of Mortgagee to comply with any request of Mortgagor or
Guarantor to take any action to foreclose this Mortgage or otherwise to enforce
any of the provisions hereof or of the Note, the Assignment, the Environmental
Agreement, the Guaranty Agreement or the other Loan Documents; (b) the release,
regardless of consideration, of the whole or any part of the Property, or of any
person liable for the Debt or any portion thereof; or (c) any agreement or
stipulation by Mortgagee extending the time of payment or otherwise modifying or
supplementing the terms of the Note, this Mortgage, the Assignment, the
Environmental Agreement, the Guaranty Agreement or the other Loan Documents.
Mortgagee may resort for the payment of the Debt to any other security held by
Mortgagee in such order and manner as Mortgagee, in its discretion, may elect.
Mortgagee may take action to recover the Debt, or any portion thereof, or to
enforce any covenant hereof without prejudice to the right of Mortgagee
thereafter to foreclosure this Mortgage. The rights and remedies of Mortgagee
under this Mortgage shall be separate, distinct and cumulative and none shall be
given effect to the exclusion of the others. No act of Mortgagee shall be
construed as an election to proceed under any one provision herein to the
exclusion of any other provision. Mortgagee shall not be limited exclusively to
the rights and remedies herein stated but shall be entitled to every right and
remedy now or hereafter afforded at law or in equity.
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49. NO ORAL CHANGE
This Mortgage, and any provisions hereof, may not be modified,
amended, waived, extended, changed, discharged or terminated orally or by any
act or failure to act on the part of Mortgagor or Mortgagee, but only by an
agreement in writing signed by the party against whom enforcement of any
modification, amendment, waiver, extension, change, discharge or termination is
sought.
50. LIABILITY
If Mortgagor or Guarantor consists of more than one person,
the obligations and liabilities of each such person hereunder and of each of
Mortgagor and Guarantor shall be joint and several. Subject to the provisions
hereof requiring Mortgagee's consent to any transfer of the Property, this
Mortgage shall be binding upon and inure to the benefit of Mortgagor, Guarantor
and Mortgagee and their respective successors and assigns forever.
51. INAPPLICABLE PROVISIONS
If any term, covenant or condition of this Mortgage is held to be
invalid, illegal or unenforceable in any respect, this Mortgage shall be
construed without such provision.
52. SECTION HEADINGS
The headings and captions of the various Sections of this
Mortgage are for convenience of reference only and are not to be construed as
defining or limiting, in any way, the scope or intent of the provisions hereof.
53. COUNTERPARTS
This Mortgage may be executed in any number of duplicate originals and
each such duplicate original shall be deemed to be an original. This Mortgage
may be executed in several counterparts, each of which counterparts shall be
deemed an original instrument and all of which together shall constitute a
single Mortgage. The failure of any party hereto to execute this Mortgage, or
any counterpart hereof, shall not relieve the other signatories from their
obligations hereunder.
54. HOMESTEAD
Mortgagor hereby waives and renounces all homestead and exemption
rights provided by the constitution and the laws of the United States and of any
state, in and to the Property as against the collection of the Debt, or any part
thereof.
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55. ASSIGNMENTS
Mortgagee shall have the right to assign or transfer its rights under
this Mortgage without limitation. Any assignee or transferee shall be entitled
to all the benefits afforded Mortgagee under this Mortgage. Neither Mortgagor
nor Guarantor shall, without the prior written consent of Mortgagee, which
consent may be withheld in Mortgagee's sole discretion, assign or transfer its
rights under this Mortgage or any of the Loan Documents.
56. SUBMISSION TO JURISDICTION
MORTGAGOR, GUARANTOR AND MORTGAGEE EACH HEREBY IRREVOCABLY SUBMIT TO
THE JURISDICTION OF ANY OHIO STATE OR FEDERAL COURT SITTING IN CUYAHOGA COUNTY
OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS MORTGAGE.
MORTGAGOR, GUARANTOR AND MORTGAGEE EACH MAY, AT ITS SOLE DISCRETION, ELECT THE
STATE OF OHIO, CUYAHOGA COUNTY, OR THE UNITED STATES OF AMERICA FEDERAL DISTRICT
COURT HAVING JURISDICTION OVER CUYAHOGA COUNTY AS THE VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING. MORTGAGOR, GUARANTOR AND MORTGAGEE EACH HEREBY IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE TO SUCH VENUE AS BEING AN INCONVENIENT FORUM.
57. SERVICE OF PROCESS
To the extent permitted by applicable law, process in any suit, action
or proceeding of the nature referred to in Section 56 hereof may be served by
registered or certified mail, postage prepaid, to Mortgagor or Guarantor, as
applicable, at the address set forth above or to such other address of which
Mortgagor or Guarantor, as applicable, shall have given Mortgagee written
notice. Nothing in this Section shall affect the Mortgagee's right to serve
process in any manner permitted by law, or limit Mortgagee's right to bring
proceedings against Mortgagor or Guarantor in the courts of any other
jurisdiction.
58. WAIVER OF JURY TRIAL
MORTGAGOR, HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE NOTE,
THIS MORTGAGE OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER
ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
GIVEN KNOWINGLY AND VOLUNTARILY BY MORTGAGOR, AND IS
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INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE
RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. MORTGAGEE IS HEREBY AUTHORIZED
TO FILE A COPY OF THIS SECTION IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS
WAIVER BY MORTGAGOR.
59. CHOICE OF LAW
THIS MORTGAGE SHALL BE DEEMED TO BE A CONTRACT ENTERED INTO PURSUANT TO
THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED AND SHALL IN ALL RESPECTS
BE GOVERNED, CONSTRUED, APPLIED, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
SUCH JURISDICTION.
60. TIME OF ESSENCE
Time is of the essence of this Mortgage and of each and every term,
covenant and condition herein.
61. SURVIVAL
All covenants, representations and warranties made herein shall survive
the making of the Loan and the delivery of the Note and other Loan Documents.
Except as hereinafter specifically set forth below, the representations and
warranties, covenants, and other obligations arising under Sections 35, 36, 37
and 41 of this Mortgage shall in no way be impaired by: any satisfaction or
other termination of this Mortgage, any assignment or other transfer of all or
any portion of this Mortgage or Mortgagee's interest in the Property (but, in
such case, shall benefit both Mortgagee and any assignee or transferee), any
exercise of Mortgagee's rights and remedies pursuant hereto including, but not
limited to foreclosure or acceptance of a deed in lieu of foreclosure, any
exercise of any rights and remedies pursuant to the Note or any of the other
Loan Documents, any transfer of all or any portion of the Property (whether by
Mortgagor or by Mortgagee following foreclosure or acceptance of a deed in lieu
of foreclosure or at any other time), any amendment to this Mortgage, the Note
or the other Loan Documents, and any act or omission that might otherwise be
construed as a release or discharge of Mortgagor from the obligations pursuant
hereto. All obligations and liabilities of Mortgagor under Sections 35, 36, 37
and 41 of this Mortgage shall cease and terminate on the earlier to occur of (a)
the first (1st) anniversary of the date of payment to Mortgagee in cash of the
entire Debt, and (b) the first date, after payment to Mortgagee in cash of the
entire Debt, on which Mortgagor, at its sole cost and expense, delivers to
Mortgagee an environmental audit of the Property in form and substance, and
prepared by a qualified environmental consultant, reasonably satisfactory in all
respects to Mortgagee and indicating the Property is in full compliance with all
applicable Environmental Laws.
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62. NO THIRD-PARTY BENEFICIARY RIGHTS CREATED
The parties hereto expressly declare that it is their joint
and mutual intention that this Mortgage and the transactions contemplated hereby
shall not be construed as creating a third party beneficiary contract, and
neither this Mortgage nor any of the other Loan Documents shall be construed as
giving or conferring any rights or benefits whatsoever to or upon any other
persons or entities other than Mortgagor, Guarantor and Mortgagee.
63. DISCHARGE
If all indebtedness secured hereby is promptly paid when due and all
other provisions hereof are faithfully performed, the conveyance of the Property
shall be null and void, otherwise to remain in full force and effect.
64. MAINTAINING PRIORITY OF MORTGAGE
Mortgagor shall, at its expense, cause the recordation of this Mortgage
and of any other instrument evidencing or securing the Note wherever such
recording would or might be required in order to protect the first lien and
priority of this Mortgage or such instrument against the claims of third
parties. Mortgagor hereby covenants and agrees at all times, at its sole
expense, take such other action and execute and record such other instruments as
may be necessary or desirable to preserve and protect the first lien and
priority of this Mortgage and all other instruments evidencing or securing the
Note.
65. USURY SAVINGS
This Mortgage and the Note are subject to the express condition that at
no time shall Mortgagor be obligated or required to pay interest on the Debt or
loan charges at a rate which could subject the holder of the Note to either
civil or criminal liability as a result of being in excess of the maximum
interest rate which Mortgagor is permitted by applicable law to contract or
agree to pay. If by the terms of this Mortgage or the Note, Mortgagor is at any
time required or obligated to pay interest on the Debt or loan charges at a rate
in excess of such maximum rate, the rate of interest or loan charges under the
Mortgage and the Note shall be deemed to be immediately reduced to such maximum
rate and the interest payable shall be computed at such maximum rate and all
prior interest payments or loan charges in excess of such maximum rate shall be
applied and shall be deemed to have been payments in reduction of the principal
balance of the Note. All sums paid or agreed to be paid to Mortgagee for the
use, forbearance, or detention of the Debt or for loan charges shall, to the
extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full stated term of the Note until payment in full so that
the rate or amount of interest on account of the Debt does not exceed the
maximum lawful rate of interest from time to time in effect and applicable to
the Debt for so long as the Debt is outstanding.
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66. COSTS
(a) Mortgagor acknowledges and confirms that Mortgagee shall impose
certain administrative processing and/or commitment fees in connection with (a)
the extension, renewal, modification, amendment and termination of its loans,
(b) the release or substitution of collateral therefor, (c) obtaining certain
consents, waivers and approvals with respect to the Property, or (d) the review
of any Lease or proposed Lease or the preparation or review of any
subordination, non-disturbance agreement. Mortgagor further acknowledges and
confirms that it shall be responsible for the payment of all costs of
reappraisal of the Property or any part thereof, whether required by law,
regulation, Mortgagee or any governmental or quasi-governmental authority.
Mortgagor hereby acknowledges and agrees to pay, immediately, with or without
demand, all such fees (as the same may be increased or decreased from time to
time), and any additional fees of a similar type or nature which may be imposed
by Mortgagee from time to time, upon the occurrence of any such event or
otherwise. Wherever it is provided for herein that Mortgagor pay any costs and
expenses, such costs and expenses shall include, but not be limited to, all
legal fees and disbursements of Mortgagee, whether of retained firms, the
reimbursement for the expenses of in-house staff or otherwise.
(b) (i) Mortgagor shall pay all legal fees incurred by Mortgagee in
connection with (A) the preparation of the Note, this Mortgage and the other
Loan Documents; and (B) the items set forth in subsection (a) above, and (ii)
Mortgagor shall pay to Mortgagee on demand any and all expenses, including legal
expenses and attorneys' fees, incurred or paid by Mortgagee in protecting its
interest in the Property or Personal Property or in collecting any amount
payable hereunder or in enforcing its rights hereunder with respect to the
Property or Personal Property, whether or not any legal proceeding is commenced
hereunder or thereunder and whether or not any default or Event of Default shall
have occurred and is continuing, together with interest thereon at the Default
Rate from the date paid or incurred by Mortgagee until such expenses are paid by
Mortgagor.
67. LOCAL LAW PROVISIONS
(a) Notice is hereby given that no holder of any mortgage, deed of
trust, deed to secure debt, lien security interest or other encumbrance
affecting all or any portion of the Property, which is inferior to the lien,
security interest and security title of this Mortgage shall have the right or
privilege to require the Mortgagee to marshall assets.
(b) The Mortgagee is hereby authorized to do all things provided to be
done by a mortgagee under Section 1311.14 of the Ohio Revised Code. The correct
name and address of the Mortgagor and the Mortgagee are as set forth in the
preamble to this Mortgage.
[SIGNATURE APPEARS ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, Mortgagor has executed and delivered this
Open-End Mortgage, Assignment of Leases and Profits, Security Agreement and
Fixture Filing under seal as of the day and year first above written.
Witnesses: MORTGAGOR:
SOLON HOTEL LLC, a New York limited liability company
By: Essex Hotels LLC, a New York limited liability
company, its managing member
By: Essex Hospitality Associates IV L.P., a New York
limited partnership, its managing member
By: Essex Partners Inc., a New York corporation,
its general partner
By: /S/BARBARA J. PURVIS (SEAL)
Name: Barbara J. Purvis
Title: Senior Vice President
_______________________
Witness
_______________________
Printed Name
_______________________
Witness
_______________________
Printed Name
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<PAGE>
STATE OF NEW YORK )
)
COUNTY OF MONROE )
Before me, ________________________________, on this day personally
appeared Barbara J. Purvis, known to me to be the person whose name is
subscribed to the foregoing instrument, and known to me to be the Senior Vice
President of Essex Partners Inc., a New York corporation, general partner of
Essex Hospitality Associates IV L.P., a New York limited partnership, managing
member of Essex Hotels LLC, a New York limited liability company, managing
member of SOLON HOTEL LLC, a New York limited liability company, and
acknowledged to me that she executed said instrument for the purposes and
consideration therein expressed, and as the act of said corporation as general
partner of said limited partnership, as managing member of Essex Hotels LLC, as
managing member of SOLON HOTEL LLC, on behalf of said corporation, said limited
partnership and said limited liability companies. Given under my hand and seal
of office this 7TH day of July, 1997.
-----------------------------
Notary Public
[NOTARIAL SEAL]
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF LAND
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EXHIBIT 10.3
GUARANTY AGREEMENT
This GUARANTY AGREEMENT dated as of July 7, 1997 is made by ESSEX
PARTNERS INC., a New York corporation, having an address at 100 Corporate Woods,
Rochester, New York 14623 ("GUARANTOR"), to and for the benefit of GMAC
COMMERCIAL MORTGAGE CORPORATION, a California corporation, having an address at
8614 Westwood Center Drive, Suite 630, Vienna, Virginia 22182-2233 ("LENDER").
W I T N E S S E T H:
WHEREAS, Lender has this day made a loan to Solon Hotel LLC, a New York
limited liability company ("BORROWER") in the original principal amount of Four
Million Five Hundred Thousand And No/100 Dollars ($4,500,000.00) (the "LOAN");
WHEREAS, the Loan is evidenced by a Mortgage Note made by
Borrower (the "NOTE") and is secured by, among other things, a first mortgage
lien on the fee simple land and improvements, construction of which is nearing
completion, known as "Hampton Inn", located at 6305 Enterprise Parkway in the
City of Solon, County of Cuyahoga and State of Ohio (the "PROPERTY"; the Note
and all other documents and instruments executed or delivered in connection with
the Loan, collectively, the "LOAN DOCUMENTS");
WHEREAS, following the Completion of the construction of the
Improvements, as such capitalized terms are defined in and in accordance with
the requirements of the Mortgage (defined below) and the License Agreement, and
except as specifically set forth in the Note, the Note evidences the nonrecourse
liability of Borrower and, except as expressly provided to the contrary,
Lender's recourse under the Loan Documents is limited to Borrower's interest in
and to the Property;
WHEREAS, Guarantor is an Affiliate of Borrower, and Guarantor expects
to derive substantial economic benefit from the Loan; and
WHEREAS, as a material condition to making the Loan and accepting the
Loan Documents, Lender has required Guarantor, and Guarantor has agreed, to be
personally liable with full recourse for the Guaranteed Obligations (as defined
below).
NOW, THEREFORE, in consideration of Ten Dollars ($10.00), the Loan, and
for other good and valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereby represent, warrant, covenant
and agree as follows:
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1. CERTAIN DEFINITIONS.
(a) Capitalized terms not defined herein shall have the meanings
ascribed thereto in the Open-End Mortgage, Assignment of Leases and Profits,
Security Agreement and Fixture Filing dated as of the date hereof from Borrower,
as mortgagor to Lender, as mortgagee (the "MORTGAGE"). An "EVENT OF DEFAULT" is
any default beyond any applicable cure period under this Guaranty Agreement or
any of the Loan Documents.
(b) "GUARANTEED OBLIGATIONS" shall be the collective reference to the
obligations of Guarantor set forth below to guarantee to Lender the prompt and
full payment and performance of the indebtedness and obligations described in
this Guaranty Agreement, including without limitation, the guaranty of payment
(the "PAYMENT GUARANTY") described in Section 2 below, the guaranty of
performance and completion (the "PERFORMANCE GUARANTY") described in Section 3
below, and the guaranty of Recourse Liability described in Section 4 below.
(c) "RECOURSE LIABILITY" shall mean the full personal and
recourse liability of Guarantor pursuant to the final paragraph of this clause
(c) and further described in Section 4, together with the full personal and
recourse liability of Guarantor to indemnify Lender for any or all loss, cost,
liability, judgment, claim, damage or expense sustained, suffered or incurred by
Lender (including, without limitation, Lender's attorneys' fees) arising out of
or attributable or relating to (collectively and inclusive of (i) through (xiv)
hereof):
(i) fraud or misrepresentation by Guarantor in connection with the
Loan;
(ii) the gross negligence or willful misconduct of Guarantor, or
its agents, managers or officers, with respect to its obligations to Lender or
with respect to the operation of the Property, or the physical waste of the
Property;
(iii) the breach of provisions in the Mortgage concerning
Environmental Laws or Hazardous Substances, and any indemnification of Lender
therein, in the Environmental Agreement or any other Loan Document with respect
to such Environmental Laws or Hazardous Substances;
(iv) the removal or disposal of any portion of the Property after
an Event of Default under this Guaranty Agreement, the Note, the Mortgage, the
Environmental Agreement or any other Loan Document;
(v) the misapplication or conversion by Borrower of: (A) any
insurance proceeds paid by reason of any loss, damage or destruction to the
Property; (B) any awards or other amounts received in connection with the
condemnation of all or a portion of the Property; or (C) rents, issues, profits,
proceeds, accounts, or other amounts received by Borrower (in the case of clause
(C) following an Event of Default under this Guaranty Agreement, the Note, the
Mortgage, the Environmental Agreement or the other Loan Documents);
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<PAGE>
(vi) Borrower's failure to pay taxes, assessments, charges for
labor or materials or other charges that can result in liens on any portion of
the Property; provided, however, that Borrower's and Guarantor's liability
hereunder shall cease with respect to such amounts incurred from and after such
time, if any, that Lender obtains legal and beneficial title to the Property;
(vii) the deductible amount in respect of any insurance maintained
in respect of the Property; provided, however, that Borrower's and Guarantor's
liability hereunder shall cease with respect to such amounts incurred from and
after such time, if any, that Lender obtains legal and beneficial title to the
Property;
(viii) the costs incurred by Lender (including reasonable
attorneys' fees) in connection with the collection or enforcement of the Debt;
(ix) any security deposits, advance deposits or retained rents and
profits collected with respect to the Property which are not delivered to Lender
upon a foreclosure of the Property or action in lieu thereof;
(x) the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release of any hazardous substance
or asbestos on, from, or affecting the Project or any other property if
emanating from the Project, regardless of when discovered, which occurs prior to
foreclosure, transfer by deed in lieu of foreclosure or the appointment of a
receiver by Lender;
(xi) any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to such hazardous substance
or asbestos;
(xii) any lawsuit brought or threatened, settlement reached, or
government order relating to such hazardous substance or asbestos;
(xiii) any violation of the environmental laws, regardless of when
discovered, which occurs prior to foreclosure, transfer by deed in lieu of
foreclosure or the appointment of a receiver by Lender, and which is based upon
or in any way related to such hazardous substance or asbestos including, without
limitation, the costs and expenses of any remedial action, out-of-pocket
attorneys' and consultants' fees, investigation and laboratory fees, court
costs, and litigation expenses; and
(xiv) Borrower fails to comply with the provisions of Sections 11
or 13 of the Mortgage.
In addition to the foregoing, the agreement of Lender not to pursue recourse
liability pursuant to Section 11 of the Note and Article 42 of the Mortgage
SHALL BE AND BECOME NULL AND VOID and shall be of no further force or effect if:
(1) Borrower fails to permit reasonable on-site inspections of the Property upon
reasonable advance oral notice or to provide financial reports and information
pertaining to the Property as required by any Loan Document, unless such
failure is the result of a good faith error and such failure is cured within ten
(10) days after notice; (2) any
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<PAGE>
financial information concerning Borrower or Guarantor provided by Borrower or
Guarantor (or their respective agents, employees, or authorized representatives)
is fraudulent in any respect, contains any fraudulent information or
misrepresents in any material respect the financial condition of Borrower or
Guarantor; (3) Borrower fails to obtain Payee's prior written consent, if
consent is required under any Loan Document, to any subordinate financing; (4)
Borrower fails to obtain Payee's prior written consent, if consent is required
under any Loan Document, to any transfer of the Property or of any ownership
interest in Borrower; and (5) Borrower or its Managing Member files for relief
or protection under any federal, state or other bankruptcy, insolvency,
reorganization or other creditor-relief laws, or an involuntary filing or
petition is made under any of such laws, against Borrower by any of its
creditors (other than Payee) and such involuntary filing is not unconditionally
dismissed or vacated within ninety (90) days. Upon the occurrence of any of the
foregoing events, Borrower and Guarantor shall have full joint and several
recourse liability for all sums due under the Loan Documents.
2. GUARANTY OF PAYMENT.
Guarantor hereby unconditionally and irrevocably guarantees to Lender
the punctual payment when due, and not merely the collectability, whether by
lapse of time, by acceleration of maturity, or otherwise, and at all times
thereafter, of all principal, interest including interest accruing after the
commencement of any bankruptcy or insolvency proceeding by or against Borrower
(whether or not allowed in such proceeding), commitment fees, extension fees,
deferred financing fees, other fees, late charges, costs, expenses,
indemnification indebtedness, and other sums of money now or hereafter due and
owing pursuant to (a) the terms of the Note, the Mortgage, the Environmental
Agreement and the other Loan Documents, including the making of any deposits or
reserves required of Borrower thereunder, and any indemnifications contained in
such Loan Documents, now or hereafter existing, and (b) all renewals,
extensions, refinancings, modifications, supplements or amendments of any such
indebtedness described in the preceding clause, or any of the Loan Documents, or
any part thereof (the indebtedness described in clauses (a) and (b) above in
this Section is herein collectively called the "DEBT"). This Payment Guaranty
covers the Debt, whether presently outstanding or arising subsequent to the date
hereof, including all amounts advanced by Lender in stages or installments. The
Payment Guaranty as set forth in this Section is a continuing guaranty of
payment and not a guaranty of collection.
3. GUARANTY OF PERFORMANCE.
(a) Guarantor additionally hereby unconditionally and irrevocably
guarantees to Lender the timely performance of all other obligations of Borrower
under all of the Loan Documents, including, without limiting the generality of
the foregoing, that the Improvements will be constructed in accordance with the
License Agreement and with the Plans, as the same may have been modified from
time to time in accordance with the License Agreement, free and clear from all
defects and liens and in compliance with applicable law.
(b) If any of such obligations of Borrower are not complied with, in
any respect whatsoever, and without the necessity of any notice from Lender to
Guarantor, Guarantor agrees to (i) assume all responsibility for the completion
of the Improvements and, at Guarantor's own cost
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<PAGE>
and expense, cause the Improvements to be fully completed in accordance with the
Plans, the Loan Documents and applicable law; (ii) pay all bills in connection
with the construction of the Improvements, including without limitation, all
permitting fees, licensing fees, amounts payable under the general construction
contract and all subcontracts, and amounts payable to all architects, engineers
and other consultants engaged in connection with the construction of the
Improvements; (iii) cure any Default (as hereinafter defined) or Event of
Default under any term, covenant or condition of the Mortgage or other Loan
Documents, including if applicable, causing any liens and claims to be removed
and thereafter keeping the Improvements free and clear from all liens and claims
that may be filed or made for performing work or labor thereon or furnishing
materials therefor or both; and (iv) indemnify and hold Lender harmless from any
and all loss, cost, liability or expense that Lender may suffer by any reason of
any such non-compliance. So long as all of such obligations are being performed
by Borrower or Guarantor and no Event of Default exists, Lender will make the
Loan proceeds available under and subject to the terms of the Mortgage. If after
the occurrence of a Default, and without limiting Lender's rights and remedies,
Lender, in its sole discretion, is dissatisfied with the progress of
construction by Borrower and/or Guarantor, Lender, at its option, upon at least
ten (10) days prior notice to Guarantor, may complete the Improvements either
before or after commencement of foreclosure proceedings or before or after
exercise of any other right or remedy of Lender against Borrower or Guarantor,
with such changes or modifications in the Plans that Lender deems necessary and
expend such sums as Lender, in its reasonable discretion, deems necessary or
advisable to complete the Improvements, and Guarantor hereby waives any right to
contest any such necessary expenditures. The amount of any and all expenditures
made by Lender for the foregoing purposes shall bear interest from the date made
until repaid to Lender, at a rate per annum equal to the interest rate provided
for in the Note and, together with such interest, shall be due and payable by
Guarantor to Lender within ten (10) days of written demand. Lender does not have
and shall never have any obligation to complete the Improvements or take any
such action. The obligations and liability of Guarantor under this Section shall
not be limited or restricted by the existence of (or any terms of) the Payment
Guaranty described above.
4. GUARANTY OF RECOURSE LIABILITY.
In addition to the above described Payment Guaranty and the above
described Performance Guaranty, Guarantor hereby absolutely and unconditionally
guarantees the prompt satisfaction and discharge of any and all Recourse
Liability, without defense, offset, counterclaim or right of subrogation, each
of which is hereby waived. This guaranty of Recourse Liability is and shall be
construed as a continuing, absolute and unconditional guaranty of payment, and
not as a guaranty of collection.
5. RELEASE OF PERFORMANCE GUARANTY AND PAYMENT GUARANTY.
The guarantee of Recourse Liability set forth in Section 4 of this
Guaranty Agreement is unlimited; Guarantor shall satisfy any and all such
Recourse Liability regardless of when incurred and regardless of the amount of
such liability. However, notwithstanding any provision contained in this
Guaranty Agreement to the contrary, the Payment Guaranty and the Performance
Guaranty are subject to the limitations described below:
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(a) At such time as the conditions set forth below have been
satisfied, in Lender's sole determination, Lender shall notify, in writing,
Guarantor of such fact, and upon such notice, (x) the Performance Guaranty
described in Section 3 above shall be automatically released and extinguished in
its entirety, and (y) the Payment Guaranty described in Section 2 above shall be
automatically reduced to a repayment guarantee for thirty percent (30%) of the
Loan, plus interest and costs (the "LIMITED PAYMENT GUARANTY"). The conditions
which must be satisfied, in Lender's sole judgement, for Lender to release the
Performance Guaranty and reduce the Payment Guaranty to the Limited Payment
Guaranty are the following:
(i) No Event of Default or the occurrence and continuance of an
event which, with the passage of time or the giving of notice, or both, would
constitute and Event of Default (collectively, a "DEFAULT") shall exist with
respect to the Loan;
(ii) Lender shall have received an acceptable current date
endorsement to Lender's Title Policy, increasing the limits of liability of the
title insurance company to the amount of the Loan proceeds then disbursed, and
insuring that, except for taxes not yet due and payable and the lien of the
Mortgage and the other security documents under the Loan, no additional
exceptions to title have been added to the title policy;
(iii) Lender shall have received an acceptable copy of "as
completed" Plans showing the constructed Improvements;
(iv) Lender shall have received an acceptable "as-built" survey
showing the completed Improvements;
(v) Lender shall have received acceptable evidence that the
Management Agreement between Borrower and Guarantor is in full force and effect
and, to the best knowledge of the parties thereto, is not in default;
(vi) Lender shall have received acceptable evidence that the
License Agreement between Borrower and Promus Hotels, Inc. ("PROMUS") is in full
force and effect and, to the best knowledge of the parties thereto, is not in
default;
(vii) Lender shall have received acceptable evidence that all real
estate taxes and assessments applicable to the Property are current;
(viii) Lender shall have received acceptable evidence that the
Property is in compliance with all applicable laws, ordinances and regulations;
(ix) Lender shall have received acceptable copies of all
applicable permits and licenses required for the use and operation of the
constructed Improvements, including, without limitation, any certificates of
occupancy or similar evidence of completion;
(x) Lender shall have received acceptable evidence that the
construction
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<PAGE>
of the Improvements has been completed free and clear of all mechanic's and
materialmen's liens;
(xi) Lender shall have received a final inspection and approval by
Promus that the Property, as constructed, conforms to the requirements set forth
in the License Agreement and is open and operating;
(xii) Lender shall have received acceptable evidence that there
are no pending or threatened lawsuits, legal proceeding, governmental
investigations or similar matters against Borrower, the Property, Guarantor, or
any member of Borrower which, if adversely determined, could, in Lender's
judgment, materially and adversely affect Borrower, the Property or Guarantor;
(xiii) Lender shall have received evidence that there has been no
change in the financial or other condition of Borrower, Guarantor or the
Property which, in Lender's judgment, is materially adverse; and
(xiv) Lender shall have received a fully executed collateral
assignment of all licenses (including, without limitation, all food and beverage
licenses), permits, contracts and warranties issued with respect to the Project,
which assignment shall be acknowledged and agreed to by all third parties deemed
necessary by Lender, including, without limitation, the Manager and the
Licensor.
(b) At such time as Lender has notified Guarantor in writing that the
Project has achieved a 1.40 to 1.0 DSCR (as defined in the Mortgage) over a
continuous twelve (12) month period, as determined by Lender, and provided that
(i) no Event of Default shall exist with respect to the Loan and (ii) at least
eighteen (18) months have passed since the date hereof, the Payment Guaranty
described in Section 2 above shall be automatically released and extinguished in
its entirety.
(c) Lender's agreement to the limitations set forth in this Section
shall in no way be deemed to limit or restrict the Lender's right to apply any
sums paid by Guarantor to any portion of the Loan.
6. WAIVERS AND ACKNOWLEDGEMENTS.
(a) Guarantor hereby waives: (i) notice of acceptance of this Guaranty
Agreement by Lender and of presentment, demand, protest, notice of protest and
of dishonor, notice of default and all other notices of every kind or nature now
or hereafter provided by agreement or available at law, including, without
limitation, notice of default, notice of intention to accelerate all sums under
the Loan Documents, and notice of acceleration of all sums under the Loan
Documents; (ii) any right to require or compel Lender, prior to exercising its
rights hereunder to first proceed against Borrower or any security for the Loan,
or to pursue any other remedy available to Lender. Lender's failure to exercise,
or delay in exercising, any right or power hereunder shall not operate as a
waiver thereof, nor shall any single or partial exercise by Lender of any right,
remedy or power hereunder preclude any other or future exercise of any other
right, remedy or power. Guarantor acknowledges that
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Lender may seek recovery for any Guaranteed Obligations and may exercise any
remedies it may have against Guarantor with respect to such Guaranteed
Obligations with the same force and effect as if Guarantor were a primary
obligor under the Note and the other Loan Documents.
(b) Guarantor further agrees that the validity of this Guaranty
Agreement and the obligations of Guarantor hereunder shall in no way be
terminated, affected or impaired by reason of: (i) the assertion by Lender of
any rights or remedies which it may have under or with respect to the Note or
the other Loan Documents, against any person obligated thereunder or against the
owner of the Property; (ii) any failure to file or record any of the Loan
Documents or to take or perfect any security intended to be provided thereby;
(iii) the release or exchange of the Property or any other collateral for the
Loan; (iv) the commencement of a case under the Bankruptcy Code, 11 U.S.C.
ss.101 et seq., as amended from time to time (the "BANKRUPTCY CODE"), by or
against any person obligated under the Note or the other Loan Documents; or (v)
any payment made on the Debt or any other indebtedness arising under the Note or
the other Loan Documents, whether made by [such] Guarantor or any other person,
which is required to be refunded pursuant to any bankruptcy or insolvency law;
it being understood that no payment so refunded shall be considered as a payment
of any portion of the Debt, nor shall it have the effect of reducing the
liability of Guarantor hereunder. It is further understood that if Borrower
shall have taken advantage of, or be subject to the protection of, any provision
of the Bankruptcy Code, the effect of which is to prevent or delay Lender from
taking any remedial action against Borrower, including the exercise of any
option Lender has to declare the Debt due and payable on the happening of any
default or event by which, under the terms of the Loan Documents, the Debt shall
become due and payable, Lender may, as against Guarantor[s], nevertheless,
declare the Guaranteed Obligations due and payable and enforce any and all of
its rights and remedies provided for herein.
(c) Guarantor further covenants: (i) that this Guaranty Agreement
shall remain and continue in full force and effect as to any modification,
extension or renewal of the Note or any of the other Loan Documents; (ii) that
Lender shall not be under a duty to protect, secure or insure any security or
lien provided by the Loan Documents or other collateral for the Loan; and (iii)
that other indulgence or forbearance may be granted under any or all of the Loan
Documents, without notice to or further consent of Guarantor.
7. FAIR CONSIDERATION FOR TRANSFERS.
Guarantor will not convey, transfer or assign, directly or indirectly,
any material portion of its property of any nature, whether real, personal or
mixed, tangible or intangible, or any interest therein, for less than full and
fair consideration.
8. SUBORDINATION OF CERTAIN DEBT/WAIVERS.
Any indebtedness of Borrower to Guarantor or any affiliate of
Guarantor now or hereafter existing, including, without limitation, that
indebtedness described on SCHEDULE A attached hereto and made a part hereof,
together with any rights of subrogation Guarantor may have as a result of any
payment by Guarantor under this Guaranty Agreement, together with any interest
thereon, shall be, and such indebtedness is hereby subordinated to the prior
payment in full of the
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Debt. Notwithstanding the foregoing, so long as such indebtedness is permitted
under Section 11(d) of the Mortgage, and no Event of Default has occurred and is
continuing, Borrower may make, and Guarantor may receive, payments of principal
and interest under such indebtedness. In furtherance of the foregoing, in the
event Borrower shall become the subject of a bankruptcy proceeding, Guarantor
agrees that the Debt shall be prior and superior to any claim of Guarantor or
its affiliates and will not object or oppose a sale or other disposition of the
Property free and clear of security interests, liens or other claims of
creditors pursuant to a plan of reorganization or under Section 363 or any other
provision of the Bankruptcy Code. In addition, Guarantor or its affiliates will
not assert any position in connection with any application, motion, proceeding
or matter arising at any time in any proceeding filed in connection with such a
bankruptcy proceeding to the extent such application, motion, proceeding or
matter directly affects the Debt, which position would be contrary to or
inconsistent with the position of Lender.
9. REPRESENTATIONS AND WARRANTIES.
Guarantor hereby represents, warrants and covenants that it
has full power, authority and right to execute, deliver and perform its
obligations pursuant to this Guaranty Agreement and to keep and observe all of
the terms of this Guaranty Agreement on Guarantor's part to be performed.
Guarantor hereby further represents, warrants and covenants as follows:
(a) Guarantor is an Affiliate of Borrower.
(b) The execution, delivery and performance of this Guaranty
Agreement and the Environmental Agreement by each Guarantor and the consummation
of the transactions contemplated thereby: (i) do not require the approval or
consent of any governmental authority having jurisdiction over Guarantor or its
property; (ii) do not and will not constitute a violation of, or default under,
any applicable requirement of a governmental authority; and (iii) will not be in
contravention of any court or administrative order or ruling applicable to
Guarantor or the Property, or any mortgage, indenture, operating agreement,
charter document, agreement, commitment or instrument to which Guarantor is a
party or by which it or its assets are bound, nor create or cause to be created
any mortgage, lien, encumbrance, or charge against the assets of Guarantor other
than those permitted by the Loan Documents.
(c) There are no actions, suits or proceedings pending, or, to the
best knowledge of Guarantor, threatened, nor any pending or, to the best
knowledge of Guarantor, threatened labor disputes, against or affecting
Guarantor or the Property, or any other collateral covered by the Loan
Documents, or involving the validity or enforceability of the Loan
Documents or the priority of the liens created or to be created thereby, at law
or in equity, or before or by any governmental authority, which, if adversely
determined, could, in the reasonable determination of Lender, either
individually or in the aggregate, have a material adverse affect on the
financial condition of Guarantor. Guarantor has complied with all requirements
of ERISA.
(d) This Guaranty Agreement and the Environmental Agreement are the
legal, valid and binding obligations of Guarantor, and are not subject to any
right of rescission, set-off, counterclaim or defense, including the defense of
usury, nor would the operation of any of the terms
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of this Guaranty Agreement, the Environmental Agreement and the other Loan
Documents, or the exercise of any right thereunder, render this Guaranty
Agreement unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury.
(e) With respect to the financial statements of Guarantor;
(i) The financial statements of Guarantor heretofore furnished to
Lender are, as of the date specified therein, complete and correct in all
material respects, fairly present the financial condition of Guarantor, and are
prepared by an accountant in a consistent manner. Guarantor does not have on the
date hereof any contingent liabilities, liabilities for taxes, unusual forward
or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments or pending or threatened litigation which in each case
are known to Guarantor and which, in Guarantor's reasonable opinion, are
reasonably likely to result in a material adverse effect on the financial
condition, operations or property of Guarantor except as referred to or
reflected or provided for in the financial statements heretofore furnished to
Lender or as otherwise disclosed to Lender herein or in the Mortgage. Since the
last date of such financial statements, there has been no material adverse
change in the financial condition, operations or business of Guarantor from that
set forth in such financial statements as of the dates thereof.
(ii) Guarantor covenants and agrees to provide to Lender, within
ninety (90) days after the end of each fiscal year of Guarantor, with financial
statements, including a balance sheet, an income statement, a statement of
changes in financial position, and such other statements as may be required by
Lender, all prepared by an accountant in a manner consistent with those
financial statements supplied to Lender prior to the date hereof, and all and
certified as true and complete without qualification by Guarantor or, if
required by Lender, a certified public accountant. Guarantor further covenants
and agrees to immediately notify Lender of any material adverse change in
Guarantor's financial status.
(f) Since the first date that any information and documentation
relating to the Property has been furnished to Lender, no material change in the
Property has occurred.
(g) No default has occurred that is continuing in the performance of
any obligation of Guarantor or any affiliate of Guarantor which would be deemed
a Default under the Loan Documents if they were currently in effect.
(h) There exists no fact, event or disclosure in connection with the
Loan that reasonably could be expected to cause the Loan to become delinquent or
otherwise have a material adverse affect on the Loan or the Property.
(i) Guarantor acknowledges that it has received, reviewed and
understands its potential obligations under the Note, the Mortgage and the other
Loan Documents, including, without limitation, its liability under the
Performance Guaranty described above for the completion of the Improvements in
accordance with the requirements set forth in such Loan Documents. Guarantor
acknowledges that its liability under this Guaranty Agreement may be greater in
amount and more burdensome than that of Borrower.
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<PAGE>
Within ten (10) days after request by Lender, Guarantor shall furnish
Lender with a certificate reaffirming all representations and warranties of
Guarantor set forth herein and in the other Loan Documents as of the date
requested by Lender or, to the extent of any changes to any such representations
and warranties, so stating such changes.
10. SUBMISSION TO JURISDICTION.
GUARANTOR AND LENDER HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF
ANY OHIO STATE OR FEDERAL COURT SITTING IN CUYAHOGA COUNTY OVER ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY AGREEMENT. EITHER
GUARANTOR OR LENDER MAY, AT ITS SOLE DISCRETION, ELECT THE STATE OF OHIO,
CUYAHOGA COUNTY, OR THE UNITED STATES OF AMERICA FEDERAL DISTRICT COURT HAVING
CUYAHOGA COUNTY AS THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. GUARANTOR
AND LENDER EACH HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY
LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SUCH VENUE AS BEING AN
INCONVENIENT FORUM.
11. ENTIRE AGREEMENT.
This Guaranty Agreement constitutes the entire agreement between
Guarantor and Lender with respect to the matters referred to herein, and no
modification or waiver of any of the terms hereof shall be effective unless in
writing, signed by the party to be charged with such modification or waiver.
12. SUCCESSORS AND ASSIGNS.
This Guaranty Agreement shall inure to the benefit of Guarantor, Lender
and their permitted successors and assigns and any subsequent holder of the Loan
Documents and shall be binding upon Guarantor, Lender and their permitted
successors and assigns. Guarantor shall not be permitted to assign this Guaranty
Agreement without the prior written consent of Lender. Lender may assign this
Guaranty Agreement without the prior written consent of Guarantor.
13. GOVERNING LAW.
This Guaranty Agreement shall be governed by the laws of the State of
Ohio, without regard to conflicts of laws principles.
14. Intentionally omitted.
15. TRANSFER OF LOAN.
(a) Guarantor acknowledges that Lender may (i) fund the Loan through
an affiliate, (ii) sell or transfer interests in the Loan and the Loan Documents
to one or more participants or special purpose entities, (iii) pledge Lender's
interests in the Loan and the Loan Documents as
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security for one or more loans obtained by Lender or (iv) sell or transfer
Lender's interests in the Loan and the Loan Documents in connection with a
securitization transaction at no cost to Guarantor. All documentation, financial
statements, appraisals, reports and other data, or copies thereof, related to
any loan application or commitment for the Loan, Borrower, Guarantor, the
Property or the Loan may be exhibited to and reviewed by any party that is
reviewing the Loan for the purposes of purchasing, valuing or rating the Loan,
provided that such reviewing party shall agree to keep such information strictly
confidential to itself and its advisors.
(b) Upon any transfer or proposed transfer contemplated above and by
the Loan Documents, at Lender's request, Guarantor shall provide an estoppel
certificate to the investor or any prospective investor in such form, substance
and detail as Lender, such investor or prospective investor may reasonably
require.
16. WAIVER OF JURY TRIAL.
TO THE FULLEST EXTENT PERMITTED BY LAW, GUARANTOR AND LENDER HEREBY
IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, COUNTERCLAIM OR JUDICIAL
PROCEEDING BROUGHT BY GUARANTOR OR LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR IN CONNECTION WITH THIS
INSTRUMENT, THE LOAN, THE LOAN DOCUMENTS, AND ANY ACTS OR OMISSIONS OF GUARANTOR
OR LENDER IN CONNECTION THEREWITH.
17. SURVIVAL.
This Guaranty Agreement shall survive any termination, satisfaction,
assignment, entry of a judgment of foreclosure, exercise of power of sale,
acceptance by Lender of a deed in lieu of foreclosure or repayment of the Loan.
18. REMEDIES AVAILABLE. The remedies of Lender, as provided herein or
in any other Loan Document, shall be cumulative and concurrent, and may be
pursued singularly, successively or together, at the sole discretion of Lender,
and may be exercised as often as occasion therefor shall arise. No act of
omission or commission of Lender, including specifically any failure to exercise
any right, remedy or recourse, shall be deemed to be a waiver or release of the
same, and any waiver or release with reference to any one event shall not be
construed as continuing or as a bar to, or as a waiver or release of, any
subsequent right, remedy or recourse as to a subsequent event.
19. EFFECT OF WAIVER. No failure to exercise, and no delay in
exercising any right, power or remedy hereunder or under any other Loan Document
shall impair any right, power or remedy which Lender may have, nor shall any
such delay be construed to be a waiver of any of such rights, powers or
remedies, or an acquiescence in any breach or default under this Guaranty
Agreement or any other Loan Document, nor shall any waiver of any breach or
default of Guarantor hereunder or under any other Loan Document be deemed a
waiver of any default or breach subsequently occurring. The rights and remedies
herein specified are cumulative and not exclusive of any rights or remedies
which Lender would otherwise have.
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<PAGE>
20. NOTICES.
All notices, requests and other communications provided for herein
shall be given or made in writing in the manner specified in the Mortgage, with
notices to the address of "Mortgagor" thereunder sufficing for notices to
Guarantor hereunder.
21. SEVERABILITY.
Wherever possible, each provision of this Guaranty Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Guaranty Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty Agreement.
22. TIME OF ESSENCE.
Time is of the essence of this Guaranty Agreement and of each and every
term, covenant and condition herein.
[SIGNATURE APPEARS ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
Agreement under seal as of the day and year first above written.
GUARANTOR:
ESSEX PARTNERS INC., a New York corporation
By: /S/BARBARA J. PURVIS
(Seal)
Name: Barbara J. Purvis
Title: Senior Vice President
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<PAGE>
SCHEDULE A
Affiliated Indebtedness
1. Any indebtedness incurred by Borrower to Guarantor after September 1,
1997, in an amount not to exceed Fifty Thousand Dollars ($50,000.00) in
any calendar month and Two Hundred Fifty Thousand Dollars ($250,000.00)
in the aggregate, which indebtedness shall bear interest at a rate not
to exceed the Prime Rate plus one percent (1%).
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EXHIBIT 10.4
PLEDGE AND ASSIGNMENT OF MEMBERSHIP INTERESTS
(SOLON HOTEL LLC)
This PLEDGE AND ASSIGNMENT OF MEMBERSHIP INTERESTS (this "PLEDGE"),
dated as of July 7, 1997, is executed by and between ESSEX HOSPITALITY
ASSOCIATES IV L.P., a New York limited partnership (sometimes hereinafter
referred to as "ESSEX HOSPITALITY"), and ESSEX HOTELS LLC, a New York limited
liability company (sometimes hereinafter referred to as "ESSEX HOTELS"), both
entities having an address at c/o Essex Partners, Inc., 100 Corporate Woods,
Rochester, New York, 14623 (Essex Hospitality and Essex Hotels shall hereinafter
be collectively referred to as "PLEDGOR") and GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation, having an address at 8614 Westwood Center
Drive, Suite 630, Vienna, Virginia 22182-2233 ("PLEDGEE").
WITNESSETH:
WHEREAS, Pledgee is this day making a loan to Solon Hotel LLC, a New
York limited liability company ("BORROWER") in the original principal amount of
Four Million Five Hundred Thousand and No/100 Dollars ($4,500,000.00) (the
"LOAN"); and
WHEREAS, the Loan is evidenced by a certain Mortgage Note dated as of
the date hereof made by Borrower in favor of Pledgee (the "NOTE"), and is
secured by, among other things, a certain Open-End Mortgage, Assignment of
Leases and Profits, Security Agreement and Fixture Filing dated as of the date
hereof (the "MORTGAGE"; the Note, the Mortgage, this Pledge and all other
documents executed or delivered in connection with the Loan, collectively, the
"LOAN DOCUMENTS"); and
WHEREAS, Essex Hospitality and Essex Hotels, collectively, own one
hundred percent (100%) of the equity interests in Borrower and expect to derive
a substantial economic benefit from the Loan; and
WHEREAS, as a material condition to making the Loan, Pledgee has
required Pledgor, and Pledgor has agreed, to secure unto Pledgee the full and
punctual payment and performance of all obligations which may become owing in
accordance with the Note.
NOW, THEREFORE, for and in consideration of the foregoing, One Dollar
($1.00), and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. PLEDGE AND ASSIGNMENT. Pledgor hereby pledges, grants and assigns
to Pledgee a security interest in the following (collectively, the "PLEDGED
COLLATERAL"):
(a) all of the right, title and interest of Pledgor as a member in
Borrower,
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including but not limited to:
(i) Pledgor's right to his share of the profits and losses of
Borrower and the right as a member to receive distributions of Borrower's
assets, whether now existing or hereafter arising, whether arising under the
terms of the operating agreement of Borrower (as such operating agreement
heretofore has been or hereinafter may be amended, restated, supplemented or
otherwise modified from time to time, the "OPERATING AGREEMENT") or otherwise,
or at law or in equity, and any and all proceeds therefrom;
(ii) all options and warrants for the purchase of membership
interests of Borrower now or hereafter held in the name of Pledgor;
(iii) all dividends, distributions, cash, income, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of, or in exchange for, any or all of the Pledged
Collateral;
(iv) all voting rights of Pledgor with respect to Borrower
now or hereafter acquired; and
(vi) any other interest, right or privilege that Pledgor
presently has, is entitled to, may be entitled to, or shall acquire pursuant to
the Operating Agreement, or conferred by statute, law, rule, regulation, or
decision (all of the items set forth in THIS SECTION 1(A) are hereinafter
collectively referred to as the "ASSIGNED INTERESTS").
(b) all additional membership interests of Borrower from time to
time acquired by Pledgor in any manner (any such additional membership interests
shall constitute part of the Assigned Interests), including, without limitation,
those covered in SECTION 5 below.
(c) the property and interests in property described in SECTION 3
below.
(d) all proceeds of the foregoing.
Notwithstanding the foregoing, so long as no Event of Default (defined below)
has occurred and continues beyond any applicable cure period, Pledgee shall not
be entitled to exercise its rights to the Pledged Collateral.
2. SECURITY FOR OBLIGATIONS. The Pledged Collateral secures the prompt
payment, performance and observance of Borrower's obligations under the Loan
Documents and Pledgor's obligations under this Pledge, in each case as hereafter
amended, supplemented or otherwise modified.
3. DELIVERY OF PLEDGED COLLATERAL. All certificates or instruments
representing or evidencing the Pledged Collateral, if any, shall be delivered to
and held by Pledgee pursuant hereto and either shall be in suitable form for
transfer by delivery or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance
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<PAGE>
satisfactory to Pledgee. Any such executed instruments of transfer or assignment
in blank shall be updated, revised or replaced from time to time if
circumstances change so that they shall be in usable, current, form.
4. REGISTRATION AND ACKNOWLEDGMENTS. Pledgor hereby agrees to register
in the books and records of Borrower the pledges of the Assigned Interests to
Pledgee. Pledgor, as a partner of Borrower, does hereby acknowledge and agree
that Pledgee or its designee shall be treated as an "assignee" for all purposes
under the Operating Agreement of Borrower.
5. PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this Pledge:
(a) any reclassification, readjustment or other change is declared
or made in the membership or other organizational structure of Borrower, or any
option included within the Pledged Collateral is exercised, or both, or
(b) any subscription warrants or any other rights or options shall
be issued in connection with the Pledged Collateral,
then all new, substituted and additional membership interests, warrants, rights,
options or other securities issued by reason of any of the foregoing shall be
immediately delivered to and held by Pledgee under the terms of this Pledge and
shall constitute Pledged Collateral hereunder.
6. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL.
(a) Pledgor shall not amend, supplement, terminate or otherwise
modify the Operating Agreement, as amended to the date hereof, of Borrower or
permit the same to be amended, supplemented, terminated or otherwise modified,
and
(b) Pledgor shall not amend, supplement, terminate or otherwise
modify the agreement of limited partnership, certificate of limited partnership,
articles of incorporation, certificate of incorporation, bylaws, declaration of
trust, articles of organization, operating agreement or other organizational
documents of Pledgor, or permit the same to be amended, supplemented, terminated
or otherwise modified, except to the extent that such amendment, supplement,
termination or other modification does not adversely affect Pledgee's security
interest in the Pledged Collateral.
7. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants, as
of the date hereof, to Pledgee as follows:
(a) Essex Hospitality is a member of Borrower and holds a
ninety-nine percent (99%) interest as such member in Borrower. Essex Hospitality
is the sole legal and beneficial owner of such membership interests, free and
clear of any lien, security interest, claim, tax assessment, encumbrance or
other restriction except for the security interest created by this Pledge.
(b) Essex Hotels is a member of Borrower and holds a one percent
(1%)
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<PAGE>
interest as such member in Borrower. Essex Hotels is the sole legal and
beneficial owner of such membership interests, free and clear of any lien,
security interest, claim, tax assessment, encumbrance or other restriction
except for the security interest created by this Pledge.
(c) Each Pledgor has full power and authority to enter into this
Pledge.
(d) There are no restrictions upon the voting rights associated
with, or upon the transfer of, any of the Pledged Collateral.
(e) Each Pledgor has the right to vote, pledge, assign and
grant a security interest in or otherwise transfer the Pledged Collateral free
of any liens, security interests, claims, tax assessments, encumbrances or other
restrictions, without the necessity of obtaining any consents or authorizations
from any third parties.
(f) No authorization, approval, or other action by, and no notice
to or filing with, any governmental authority is required either (i) for the
pledge and assignment of the Pledged Collateral pursuant to this Pledge or for
the execution, delivery or performance of this Pledge by Pledgor, or (ii) for
the exercise by Pledgee of the voting or other rights provided for in this
Pledge or the remedies in respect of the Pledged Collateral pursuant to this
Pledge (except as may be required in connection with such disposition by laws
affecting the offering and sale of securities generally).
(g) The pledge and assignment of the Pledged Collateral pursuant
to this Pledge creates a valid and perfected first priority security interest in
the Pledged Collateral in favor of Pledgee securing the payment and performance
of the obligations under the Note.
(h) This Pledge has been duly executed and delivered by and on
behalf of Pledgor and constitutes the legal, valid and binding obligation of
Pledgor, enforceable against Pledgor in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally and except
as to limitations under general equitable principles on the availability of
specific relief.
(i) Pledgor has delivered to Pledgee a true, accurate and complete
copy of the Operating Agreement.
8. VOTING RIGHTS. During the term of this Pledge, and except as
otherwise provided in this Section, Pledgor shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Pledged Collateral
on all corporate, limited liability company, membership or other entity
questions in a manner not inconsistent with the terms of this Pledge. After the
occurrence of a default (after the expiration of any applicable notice and cure
period) under the Note (an "EVENT OF DEFAULT"), Pledgee may, at Pledgee's option
and without further notice, exercise all voting and other consensual rights
pertaining to the Pledged Collateral, including the right to take action by
consent of partners.
9. DIVIDENDS AND OTHER DISTRIBUTIONS. Upon the occurrence of an Event
of
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<PAGE>
Default and its continuation beyond any applicable cure period, any and all
dividends, interest and distributions paid in respect of the Pledged Collateral,
including, but not limited to, any and all:
(a) dividends, interest and distributions paid or payable other
than in cash with respect to, and instruments and other property received,
receivable or otherwise distributed with respect to, or in exchange for, any of
the Pledged Collateral;
(b) dividends and other distributions paid or payable in cash with
respect to any of the Pledged Collateral on account of a partial or total
liquidation or dissolution or in connection with a reduction of capital, capital
surplus or paid-in surplus; and
(c) cash paid, payable or otherwise distributed with respect to
principal of, or in redemption of, or in exchange for, any of the Pledged
Collateral;
shall be delivered to Pledgee and shall, if received by Pledgor, be received in
trust for Pledgee, be segregated from the other property or funds of Pledgor,
and be delivered immediately to Pledgee in the same form as so received (with
any necessary endorsement). Pledgor shall execute and deliver (or cause to be
executed and delivered) to Pledgee all such proxies and other instruments as
Pledgee may reasonably request for the purpose of enabling Pledgee to receive
the dividends or interest payments which it is authorized to receive and retain
pursuant to the preceding sentence. Pledgor will reimburse Pledgee for all
expenses incurred by Pledgee, including, without limitation, reasonable
attorneys' and accountants' fees and expenses, in connection with the foregoing.
10. TRANSFERS AND OTHER LIENS. Pledgor agrees that he will not (a)
sell, transfer or otherwise dispose of, or grant any option with respect to, any
of the Pledged Collateral, (b) create or permit to exist any lien upon or with
respect to any of the Pledged Collateral, except for the security interest under
this Pledge or (c) consent or approve the creation of any other membership
interest in Borrower. Pledgor further covenants to maintain its existence and
the existence of Borrower.
11. REMEDIES.
(a) If an Event of Default occurs, Pledgee shall have, in addition
to any other rights given under this Pledge, the Note or by law, all of the
rights and remedies with respect to the Pledged Collateral of a secured party
under the Uniform Commercial Code as in effect in the State of Ohio. In
addition, after the occurrence of such an Event of Default, Pledgee shall have
such powers of sale and other powers as may be conferred by applicable law. With
respect to the Pledged Collateral or any part thereof which shall then be in or
shall thereafter come into the possession or custody of Pledgee or which Pledgee
shall otherwise have the ability to transfer under applicable law, Pledgee may,
in his sole discretion, without notice except as specified below, after the
occurrence of an Event of Default, sell or cause the same to be sold at any
exchange, broker's board or at public or private sale, in one or more sales or
lots, at such price as Pledgee may deem best, for cash or on credit or for
future delivery, without assumption of any credit risk, and the purchaser of any
or all of the Pledged Collateral so sold shall thereafter own
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<PAGE>
the same, absolutely free from any claim, encumbrance or right of any kind
whatsoever. Pledgee may, in his own name, or in the name of a designee or
nominee, buy the Pledged Collateral at any public sale and, if permitted by
applicable law, buy the Pledged Collateral at any private sale. Pledgor will pay
to Pledgee all expenses (including, without limitation, court costs and
reasonable attorneys' and paralegals' fees and expenses) of, or incident to, the
enforcement of any of the provisions hereof. To the extent permitted by
applicable law, Pledgee agrees to distribute any proceeds of the sale of the
Pledged Collateral in accordance with SECTION 11(D) hereof and Pledgor shall
remain liable for any deficiency following the sale of the Pledged Collateral.
(b) Unless any of the Pledged Collateral threatens to decline
speedily in value or is or becomes of a type sold on a recognized market,
Pledgee will give Pledgor reasonable notice of the time and place of any public
sale thereof, or of the time after which any private sale or other intended
disposition is to be made. Any sale of the Pledged Collateral conducted in
conformity with reasonable commercial practices of banks, commercial finance
companies, insurance companies or other financial institutions disposing of
property similar to the Pledged Collateral shall be deemed to be commercially
reasonable. Notwithstanding any provision to the contrary contained herein,
Pledgor agrees that any requirements of reasonable notice shall be met if such
notice is received by Pledgor at least ten (10) days before the time of the sale
or disposition; provided, however, that Pledgee may give any shorter notice that
is commercially reasonable under the circumstances. Any other requirement of
notice, demand or advertisement for sale is waived, to the extent permitted by
law.
(c) In view of the fact that federal and state securities laws may
impose certain restrictions on the method by which a sale of the Pledged
Collateral may be effected after an Event of Default, Pledgor agrees that after
the occurrence of an Event of Default Pledgee may, from time to time, attempt to
sell all or any part of the Pledged Collateral by means of a private placement
restricting the bidders and prospective purchasers to those who are qualified
and will represent and agree that they are purchasing for investment only and
not for distribution. In so doing, Pledgee may solicit offers to buy the Pledged
Collateral, or any part of it, from a limited number of investors deemed by
Pledgee, in his reasonable judgment, to be financially responsible parties who
might be interested in purchasing the Pledged Collateral. If Pledgee solicits
such offers from not less than three (3) such investors, then the acceptance by
Pledgee of the highest offer obtained therefrom shall be deemed to be a
commercially reasonable method of disposing of the Pledged Collateral; provided,
however, that this Section does not impose a requirement that Pledgee solicit
offers from three or more investors in order for the sale to be commercially
reasonable.
(d) Upon the occurrence of an Event of Default and the sale of any
or all of the Pledged Collateral, the proceeds from such sale shall be applied
by Pledgee as follows:
FIRST: to payment of the costs and expenses of such sale,
including the expenses of Pledgee and the fees and expenses of counsel employed
in connection therewith;
SECOND: to the payment of the remainder of Pledgor's
obligations under the and the Loan Documents;
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THIRD: to the payment of any other amounts required by
applicable law;
FOURTH: the balance, if any, of such proceeds shall be paid
to Pledgor, its successors and assigns, or as a court of competent jurisdiction
may direct.
12. SECURITY INTEREST ABSOLUTE. All rights of Pledgee and security
interests hereunder, and all obligations of Pledgor hereunder, shall be absolute
and unconditional irrespective of:
(a) any lack of validity or enforceability of the Loan Documents
or any other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of the cash
flow and other economic benefits encumbered by this Pledge;
(c) any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any part of the obligations set forth in the Loan
Documents or any other agreement or instrument relating thereto; or
(d) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, Pledgor in respect of the obligations
under the Loan Documents or of this Pledge or any other agreement or instrument
relating thereto.
13. CONTINUING SECURITY INTEREST. This Pledge shall create a
continuing security interest in the Pledged Collateral and shall (a) remain in
full force and effect until the payment in full of all amounts payable under
this Pledge, (b) be binding upon Pledgor, his successors and assigns, and (c)
inure, together with the rights and remedies of Pledgee hereunder, to the
benefit of, and be enforceable by, Pledgee and his successors, transferees and
assigns. Upon the payment in full of all amounts payable under this Pledge, the
security interest granted hereby shall terminate and all rights to the Pledged
Collateral shall revert to Pledgor. Upon any such termination, Pledgee will, at
Pledgor's expense, return to Pledgor such of the Pledged Collateral as shall not
have been sold or otherwise applied pursuant to the terms hereof and execute and
deliver to Pledgor such documents as Pledgor shall reasonably request to
evidence such termination.
14. REINSTATEMENT; LIENS. This Pledge and the obligations and security
interests hereunder shall continue to be effective or be reinstated, as the case
may be, if at any time payment and performance of the obligations under this
Pledge, the Loan Documents and/or under any agreement or instrument related
hereto (collectively, the "OBLIGATIONS") by Pledgor or any other obligor, or any
part thereof (including the receipt of any collateral or proceeds thereof), is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall be
reinstated and deemed reduced only by such amount paid and not so
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rescinded, reduced, restored or returned. Pledgor shall not contest or support
any other person or entity in contesting, in any actions or proceedings, the
priority or validity of any security interest or other claim in any collateral
or other interest granted under any agreement or document by Pledgor or any
other obligor to Pledgee.
15. PLEDGEE APPOINTED ATTORNEY-IN-FACT. Pledgor hereby appoints
Pledgee his attorney-in-fact, with full authority in the name of Pledgor or
otherwise, from time to time in Pledgee's sole discretion, to take any action
and to execute any instrument which Pledgee may deem necessary or advisable to
accomplish the purposes of this Pledge, including, without limitation, to
receive, endorse and collect all instruments made payable to Pledgor
representing any dividend, interest payment or other distribution in respect of
the Pledged Collateral or any part thereof and to give full discharge for the
same and to arrange for the transfer of all or any part of the Pledged
Collateral on the books of Borrower to the name of Pledgee or Pledgee's nominee;
provided, however, that so long as no Event of Default has occurred and
continues beyond any applicable cure period, Pledgee shall not be entitled to
exercise the foregoing power.
16. PLEDGEE'S DUTY OF CARE. Pledgee shall not be liable for any acts,
omissions, errors of judgment or mistakes of fact or law including, without
limitation, acts, omissions, errors or mistakes with respect to the Pledged
Collateral, except for those arising out of or in connection with Pledgee's (a)
gross negligence or willful misconduct, or (b) failure to use reasonable care
with respect to the safe custody of the Pledged Collateral in Pledgee's
possession. Without limiting the generality of the foregoing, Pledgee shall be
under no obligation to take any steps necessary to preserve rights in the
Pledged Collateral against any other parties but may do so at his option. All
expenses incurred in connection therewith shall be for the sole account of
Pledgee, and shall constitute part of the obligations secured hereby.
17. NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be given in the manner set forth in the
Mortgage.
18. INDEMNITY AND EXPENSES.
(a) Pledgor agrees to indemnify Pledgee from and against any and
all claims, losses and liabilities (including reasonable attorneys' fees)
growing out of or resulting from this Pledge (including, without limitation,
enforcement of this Pledge), except claims, losses or liabilities resulting from
Pledgee's gross negligence or willful misconduct.
(b) Pledgor will upon demand pay to Pledgee the amount of any and
all expenses, including the reasonable fees and expenses of his counsel and of
any experts and agents, which Pledgee may incur in connection with (i) the
administration of this Pledge, (ii) the custody, preservation, use or operation
of, or the sale of, collection from or other realization upon, any of the
Pledged Collateral, (iii) the exercise or enforcement of any of the rights of
Pledgee hereunder or (iv) the failure by Pledgor to perform or observe any of
the provisions hereof.
19. TERM. This Pledge shall remain in full force and effect until all
obligations under the Loan Documents have been fully and indefeasibly performed.
Upon the termination of this
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Pledge as provided above (other than as a result of the sale of the Pledged
Collateral), Pledgee will promptly, and without condition or delay, release the
security interest created hereunder, and, upon the request of Pledgor, will
promptly, and without condition or delay, execute and deliver in recordable form
all necessary UCC-3 termination statements to accomplish such release.
20. JOINT AND SEVERAL OBLIGATIONS. The obligations of Pledgor
hereunder and of other pledgors under certain other pledge agreements similar
hereto and of even or approximate date herewith (as they may be amended from
time to time) are joint and several. If any other pledgor is added to this
Pledge at any time, the obligations of Pledgor and such other pledgor under this
Pledge shall be joint and several.
21. FURTHER ASSURANCES. Pledgor agrees that at any time and from time
to time, at the expense of Pledgor, Pledgor will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or desirable, or that Pledgee may request, in order to perfect and
protect any security interest granted or purported to be granted hereby or to
enable Pledgee to exercise and enforce his rights and remedies hereunder with
respect to any Pledged Collateral.
22. SUCCESSORS AND ASSIGNS. This Pledge shall be binding upon and
inure to the benefit of Pledgor, Pledgee and their respective heirs, personal
administrators, successors and assigns. Pledgor's successors and assigns shall
include, without limitation, a receiver, trustee or debtor-in-possession of or
for Pledgor or any representative, executor or administrator of Pledgor's
estates. Pledgee may designate other beneficiaries of his rights and remedies
hereunder from time to time without assigning his position as Pledgee, and, if
and when so notified to do so by Pledgee, Pledgor shall make payments hereunder
directly to such designees.
23. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any
provision of this Pledge nor consent to any departure by Pledgor herefrom shall
in any event be effective unless the same shall be in writing and signed by
Pledgee, and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
24. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The covenants,
agreements, representations and warranties of the parties hereto made in this
Pledge shall survive the closing of the transactions contemplated hereby for a
period of one (1) year from the date hereof.
25. SECTION HEADINGS. The section headings herein are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Pledge. Unless otherwise specified, references in this
Pledge to Sections are references to Sections of this Pledge.
26. DEFINITIONS. The singular shall include the plural and vice versa
as the context may require. All genders shall include all other genders
(including the neuter gender for any entity).
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27. ENTIRE AGREEMENT. This Pledge, the Loan Documents and all other
documents or instruments related thereto set forth the entire understanding of
the parties hereto and supersede all prior agreements between them with respect
to the subject matter hereof and all prior negotiations between the parties are
merged in this Pledge and such other documents and there are no promises,
agreements, conditions, undertakings, warranties or representations, oral or
written, express or implied, between them other than as herein set forth.
28. SEVERABILITY. If this Pledge or any one or more of the provisions
contained in this Pledge should be held to be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of all remaining
provisions shall not in any way be affected or impaired.
29. GOVERNING LAW. This Pledge shall be construed in accordance with
the laws of the State of New York, without regard to its conflict of laws
principles.
30. WAIVER OF TRIAL BY JURY. PLEDGOR HEREBY WAIVES TRIAL BY JURY IN
ANY ACTION OR PROCEEDING TO WHICH IT AND PLEDGEE MAY BE PARTIES ARISING OUT OF
OR IN ANY WAY PERTAINING TO (A) THIS PLEDGE, (B) THE NOTE OR THE LOAN DOCUMENTS
OR (C) ANY DOCUMENT RELATED TO ANY OF THE FOREGOING. IT IS AGREED AND UNDERSTOOD
THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL
PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE
NOT PARTIES TO THIS PLEDGE.
31. SUBMISSION TO JURISDICTION. PLEDGOR AND PLEDGEE EACH HEREBY
IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY OHIO STATE OR FEDERAL COURT
SITTING IN CUYAHOGA COUNTY OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS NOTE AND HEREBY AGREE NOT TO ASSERT THAT IT IS NOT SUBJECT TO
THE JURISDICTION OF THE FOREGOING COURTS. EITHER PLEDGOR OR PLEDGEE MAY, AT ITS
SOLE DISCRETION, ELECT THE STATE OF OHIO, CUYAHOGA COUNTY, OR THE UNITED STATES
OF AMERICA FEDERAL DISTRICT COURT HAVING CUYAHOGA COUNTY AS THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. PLEDGOR AND PLEDGEE EACH HEREBY IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE TO SUCH VENUE AS BEING AN INCONVENIENT FORUM OR IMPROPER VENUE.
32. REPRESENTATIONS OF PLEDGOR. PLEDGOR REPRESENTS AND WARRANTS THAT
THE WAIVER OF TRIAL BY JURY CONTAINED HEREIN IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY PLEDGOR, AND PLEDGOR HEREBY REPRESENTS THAT NO
REPRESENTATIONS OF FACT OR AGREEMENTS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE
THE WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.
PLEDGOR FURTHER REPRESENTS THAT HE HAS BEEN REPRESENTED IN THE SIGNING OF THIS
PLEDGE AND IN THE MAKING OF THE WAIVER OF TRIAL BY JURY AND BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF HIS OWN FREE WILL, AND THAT HE HAS HAD THE OPPORTUNITY TO
DISCUSS THE WAIVER OF TRIAL BY JURY WITH SUCH COUNSEL.
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33. EXECUTION IN COUNTERPARTS. This Pledge may be executed in any
number of counterparts, each of which shall be an original, but all of which
shall together constitute one and the same agreement.
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IN WITNESS WHEREOF, Pledgor and Pledgee have executed this Pledge as of
the date first set forth above.
PLEDGOR:
ESSEX HOSPITALITY ASSOCIATES IV L.P.,
a New York limited partnership
By: Essex Partners Inc., a New York
corporation, its general partner
By:/S/BARBARA J. PURVIS (SEAL)
Name: Barbara J. Purvis
Title: Senior Vice President
ESSEX HOTELS LLC, a New York limited
liability company
By: Essex Hospitality Associates IV
L.P., a New York limited
partnership, its managing partner
By: Essex Partners Inc., a New
York corporation, its general
partner
By: /S/BARBARA J. PURVIS (SEAL)
Name: Barbara J. Purvis
Title: Senior Vice President
PLEDGEE:
GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation
By: /S/MORGAN G. EARNEST, II (SEAL)
Morgan G. Earnest, II
Senior Vice President
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EXHIBIT 10.5
PLEDGE AND ASSIGNMENT OF MEMBERSHIP INTERESTS
(ESSEX HOTELS LLC)
This PLEDGE AND ASSIGNMENT OF MEMBERSHIP INTERESTS (this "PLEDGE"),
dated as of July 7, 1997, is executed by and between ESSEX HOSPITALITY
ASSOCIATES IV L.P., a New York limited partnership, having an address at c/o
Essex Partners, Inc., 100 Corporate Woods, Rochester, New York, 14623 (
"PLEDGOR") and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation,
having an address at 8614 Westwood Center Drive, Suite 630, Vienna, Virginia
22182-2233 ("PLEDGEE").
WITNESSETH:
WHEREAS, Pledgee is this day making a loan to Solon Hotel LLC, a New
York limited liability company ("BORROWER") in the original principal amount of
Four Million Five Hundred Thousand and No/100 Dollars ($4,500,000.00) (the
"LOAN"); and
WHEREAS, the Loan is evidenced by a certain Mortgage Note dated as of
the date hereof made by Borrower in favor of Pledgee (the "NOTE"), and is
secured by, among other things, a certain Open-End Mortgage, Assignment of
Leases and Profits, Security Agreement and Fixture Filing dated as of the date
hereof (the "MORTGAGE"; the Note, the Mortgage, this Pledge and all other
documents executed or delivered in connection with the Loan, collectively, the
"LOAN DOCUMENTS"); and
WHEREAS, Pledgor owns one hundred percent (100%) of the equity
interests in Borrower and expects to derive a substantial economic benefit from
the Loan; and
WHEREAS, as a material condition to making the Loan, Pledgee has
required Pledgor, and Pledgor has agreed, to secure unto Pledgee the full and
punctual payment and performance of all obligations which may become owing in
accordance with the Note.
NOW, THEREFORE, for and in consideration of the foregoing, One Dollar
($1.00), and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. PLEDGE AND ASSIGNMENT. Pledgor hereby pledges, grants and assigns to
Pledgee a security interest in the following (collectively, the "PLEDGED
COLLATERAL"):
(a) all of the right, title and interest of Pledgor as a member in
Essex Hotels LLC (the "COMPANY"), including but not limited to:
(i) Pledgor's right to his share of the profits and losses
of the Company and the right as a member to receive distributions of the
Company's assets,
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whether now existing or hereafter arising, whether arising under the terms of
the operating agreement of the Company (as such operating agreement heretofore
has been or hereinafter may be amended, restated, supplemented or otherwise
modified from time to time, the "OPERATING AGREEMENT") or otherwise, or at law
or in equity, and any and all proceeds therefrom;
(ii) all options and warrants for the purchase of membership
interests of the Company now or hereafter held in the name of Pledgor;
(iii) all dividends, distributions, cash, income,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of, or in exchange for, any or all of the
Pledged Collateral;
(iv) all voting rights of Pledgor with respect to the
Company now or hereafter acquired; and
(vi) any other interest, right or privilege that Pledgor
presently has, is entitled to, may be entitled to, or shall acquire pursuant to
the Operating Agreement, or conferred by statute, law, rule, regulation, or
decision (all of the items set forth in THIS SECTION 1(A) are hereinafter
collectively referred to as the "ASSIGNED INTERESTS").
(b) all additional membership interests of the Company from time
to time acquired by Pledgor in any manner (any such additional membership
interests shall constitute part of the Assigned Interests), including, without
limitation, those covered in SECTION 5 below.
(c) the property and interests in property described in SECTION 3
below.
(d) all proceeds of the foregoing.
Notwithstanding the foregoing, so long as no Event of Default (defined below)
has occurred and continues beyond any applicable cure period, Pledgee shall not
be entitled to exercise its rights to the Pledged Collateral.
2. SECURITY FOR OBLIGATIONS. The Pledged Collateral secures the prompt
payment, performance and observance of Borrower's obligations under the Loan
Documents and Pledgor's obligations under this Pledge, in each case as hereafter
amended, supplemented or otherwise modified.
3. DELIVERY OF PLEDGED COLLATERAL. All certificates or instruments
representing or evidencing the Pledged Collateral, if any, shall be delivered to
and held by Pledgee pursuant hereto and either shall be in suitable form for
transfer by delivery or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to
Pledgee. Any such executed instruments of transfer or assignment in blank shall
be updated, revised or replaced from time to time if circumstances change so
that they shall be in usable, current, form.
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4. REGISTRATION AND ACKNOWLEDGMENTS. Pledgor hereby agrees to register
in the books and records of the Company the pledges of the Assigned Interests to
Pledgee. Pledgor, as a partner of the Company, does hereby acknowledge and agree
that Pledgee or its designee shall be treated as an "assignee" for all purposes
under the Operating Agreement of the Company.
5. PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this
Pledge:
(a) any reclassification, readjustment or other change is
declared or made in the membership or other organizational structure of the
Company, or any option included within the Pledged Collateral is exercised, or
both, or
(b) any subscription warrants or any other rights or options shall
be issued in connection with the Pledged Collateral,
then all new, substituted and additional membership interests, warrants, rights,
options or other securities issued by reason of any of the foregoing shall be
immediately delivered to and held by Pledgee under the terms of this Pledge and
shall constitute Pledged Collateral hereunder.
6. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL.
(a) Pledgor shall not amend, supplement, terminate or otherwise
modify the Operating Agreement, as amended to the date hereof, of the Company or
permit the same to be amended, supplemented, terminated or otherwise modified,
and
(b) Pledgor shall not amend, supplement, terminate or otherwise
modify the agreement of limited partnership, certificate of limited partnership,
articles of incorporation, certificate of incorporation, bylaws, declaration of
trust, articles of organization, operating agreement or other organizational
documents of Pledgor, or permit the same to be amended, supplemented, terminated
or otherwise modified, except to the extent that such amendment, supplement,
termination or other modification does not adversely affect Pledgee's security
interest in the Pledged Collateral.
7. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants,
as of the date hereof, to Pledgee as follows:
(a) Pledgor is the sole member of the Company and holds a one
hundred percent (100%) interest as such member in the Company. Pledgor is the
sole legal and beneficial owner of such membership interests, free and clear of
any lien, security interest, claim, tax assessment, encumbrance or other
restriction except for the security interest created by this Pledge.
(b) Pledgor has full power and authority to enter into this
Pledge.
(c) There are no restrictions upon the voting rights associated
with, or upon the transfer of, any of the Pledged Collateral.
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(d) Pledgor has the right to vote, pledge, assign and grant a
security interest in or otherwise transfer the Pledged Collateral free of any
liens, security interests, claims, tax assessments, encumbrances or other
restrictions, without the necessity of obtaining any consents or authorizations
from any third parties.
(e) No authorization, approval, or other action by, and no notice
to or filing with, any governmental authority is required either (i) for the
pledge and assignment of the Pledged Collateral pursuant to this Pledge or for
the execution, delivery or performance of this Pledge by Pledgor, or (ii) for
the exercise by Pledgee of the voting or other rights provided for in this
Pledge or the remedies in respect of the Pledged Collateral pursuant to this
Pledge (except as may be required in connection with such disposition by laws
affecting the offering and sale of securities generally).
(f) The pledge and assignment of the Pledged Collateral
pursuant to this Pledge creates a valid and perfected first priority security
interest in the Pledged Collateral in favor of Pledgee securing the payment and
performance of the obligations under the Note.
(g) This Pledge has been duly executed and delivered by and on
behalf of Pledgor and constitutes the legal, valid and binding obligation of
Pledgor, enforceable against Pledgor in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally and except
as to limitations under general equitable principles on the availability of
specific relief.
(h) Pledgor has delivered to Pledgee a true, accurate and complete
copy of the Operating Agreement.
8. VOTING RIGHTS. During the term of this Pledge, and except as
otherwise provided in this Section, Pledgor shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Pledged Collateral
on all corporate, limited liability company, membership or other entity
questions in a manner not inconsistent with the terms of this Pledge. After the
occurrence of a default (after the expiration of any applicable notice and cure
period) under the Note (an "EVENT OF DEFAULT"), Pledgee may, at Pledgee's option
and without further notice, exercise all voting and other consensual rights
pertaining to the Pledged Collateral, including the right to take action by
consent of partners.
9. DIVIDENDS AND OTHER DISTRIBUTIONS. Upon the occurrence of an Event
of Default and its continuation beyond any applicable cure period, any and all
dividends, interest and distributions paid in respect of the Pledged Collateral,
including, but not limited to, any and all:
(a) dividends, interest and distributions paid or payable other
than in cash with respect to, and instruments and other property received,
receivable or otherwise distributed with respect to, or in exchange for, any of
the Pledged Collateral;
(b) dividends and other distributions paid or payable in cash with
respect to
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any of the Pledged Collateral on account of a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus; and
(c) cash paid, payable or otherwise distributed with respect to
principal of, or in redemption of, or in exchange for, any of the Pledged
Collateral;
shall be delivered to Pledgee and shall, if received by Pledgor, be received in
trust for Pledgee, be segregated from the other property or funds of Pledgor,
and be delivered immediately to Pledgee in the same form as so received (with
any necessary endorsement). Pledgor shall execute and deliver (or cause to be
executed and delivered) to Pledgee all such proxies and other instruments as
Pledgee may reasonably request for the purpose of enabling Pledgee to receive
the dividends or interest payments which it is authorized to receive and retain
pursuant to the preceding sentence. Pledgor will reimburse Pledgee for all
expenses incurred by Pledgee, including, without limitation, reasonable
attorneys' and accountants' fees and expenses, in connection with the foregoing.
10. TRANSFERS AND OTHER LIENS. Pledgor agrees that he will not (a)
sell, transfer or otherwise dispose of, or grant any option with respect to, any
of the Pledged Collateral, (b) create or permit to exist any lien upon or with
respect to any of the Pledged Collateral, except for the security interest under
this Pledge or (c) consent or approve the creation of any other membership
interest in the Company. Pledgor further covenants to maintain its existence and
the existence of the Company.
11. REMEDIES.
(a) If an Event of Default occurs, Pledgee shall have, in addition
to any other rights given under this Pledge, the Note or by law, all of the
rights and remedies with respect to the Pledged Collateral of a secured party
under the Uniform Commercial Code as in effect in the State of Ohio. In
addition, after the occurrence of such an Event of Default, Pledgee shall have
such powers of sale and other powers as may be conferred by applicable law. With
respect to the Pledged Collateral or any part thereof which shall then be in or
shall thereafter come into the possession or custody of Pledgee or which Pledgee
shall otherwise have the ability to transfer under applicable law, Pledgee may,
in his sole discretion, without notice except as specified below, after the
occurrence of an Event of Default, sell or cause the same to be sold at any
exchange, broker's board or at public or private sale, in one or more sales or
lots, at such price as Pledgee may deem best, for cash or on credit or for
future delivery, without assumption of any credit risk, and the purchaser of any
or all of the Pledged Collateral so sold shall thereafter own the same,
absolutely free from any claim, encumbrance or right of any kind whatsoever.
Pledgee may, in his own name, or in the name of a designee or nominee, buy the
Pledged Collateral at any public sale and, if permitted by applicable law, buy
the Pledged Collateral at any private sale. Pledgor will pay to Pledgee all
expenses (including, without limitation, court costs and reasonable attorneys'
and paralegals' fees and expenses) of, or incident to, the enforcement of any of
the provisions hereof. To the extent permitted by applicable law, Pledgee agrees
to distribute any proceeds of the sale of the Pledged Collateral in accordance
with SECTION 11(D) hereof and Pledgor shall remain liable for any deficiency
following the sale of the Pledged Collateral.
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(b) Unless any of the Pledged Collateral threatens to decline
speedily in value or is or becomes of a type sold on a recognized market,
Pledgee will give Pledgor reasonable notice of the time and place of any public
sale thereof, or of the time after which any private sale or other intended
disposition is to be made. Any sale of the Pledged Collateral conducted in
conformity with reasonable commercial practices of banks, commercial finance
companies, insurance companies or other financial institutions disposing of
property similar to the Pledged Collateral shall be deemed to be commercially
reasonable. Notwithstanding any provision to the contrary contained herein,
Pledgor agrees that any requirements of reasonable notice shall be met if such
notice is received by Pledgor at least ten (10) days before the time of the sale
or disposition; provided, however, that Pledgee may give any shorter notice that
is commercially reasonable under the circumstances. Any other requirement of
notice, demand or advertisement for sale is waived, to the extent permitted by
law.
(c) In view of the fact that federal and state securities laws may
impose certain restrictions on the method by which a sale of the Pledged
Collateral may be effected after an Event of Default, Pledgor agrees that after
the occurrence of an Event of Default Pledgee may, from time to time, attempt to
sell all or any part of the Pledged Collateral by means of a private placement
restricting the bidders and prospective purchasers to those who are qualified
and will represent and agree that they are purchasing for investment only and
not for distribution. In so doing, Pledgee may solicit offers to buy the Pledged
Collateral, or any part of it, from a limited number of investors deemed by
Pledgee, in his reasonable judgment, to be financially responsible parties who
might be interested in purchasing the Pledged Collateral. If Pledgee solicits
such offers from not less than three (3) such investors, then the acceptance by
Pledgee of the highest offer obtained therefrom shall be deemed to be a
commercially reasonable method of disposing of the Pledged Collateral; provided,
however, that this Section does not impose a requirement that Pledgee solicit
offers from three or more investors in order for the sale to be commercially
reasonable.
(d) Upon the occurrence of an Event of Default and the sale of any
or all of the Pledged Collateral, the proceeds from such sale shall be applied
by Pledgee as follows:
FIRST: to payment of the costs and expenses of such sale,
including the expenses of Pledgee and the fees and expenses of counsel employed
in connection therewith;
SECOND: to the payment of the remainder of Pledgor's
obligations under the and the Loan Documents;
THIRD: to the payment of any other amounts required by
applicable law;
FOURTH: the balance, if any, of such proceeds shall be paid
to Pledgor, its successors and assigns, or as a court of competent jurisdiction
may direct.
12. SECURITY INTEREST ABSOLUTE. All rights of Pledgee and security
interests hereunder, and all obligations of Pledgor hereunder, shall be absolute
and unconditional irrespective of:
- 6 -
<PAGE>
(a) any lack of validity or enforceability of the Loan Documents
or any other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of the cash
flow and other economic benefits encumbered by this Pledge;
(c) any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any part of the obligations set forth in the Loan
Documents or any other agreement or instrument relating thereto; or
(d) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, Pledgor in respect of the obligations
under the Loan Documents or of this Pledge or any other agreement or instrument
relating thereto.
13. CONTINUING SECURITY INTEREST. This Pledge shall create a
continuing security interest in the Pledged Collateral and shall (a) remain in
full force and effect until the payment in full of all amounts payable under
this Pledge, (b) be binding upon Pledgor, his successors and assigns, and (c)
inure, together with the rights and remedies of Pledgee hereunder, to the
benefit of, and be enforceable by, Pledgee and his successors, transferees and
assigns. Upon the payment in full of all amounts payable under this Pledge, the
security interest granted hereby shall terminate and all rights to the Pledged
Collateral shall revert to Pledgor. Upon any such termination, Pledgee will, at
Pledgor's expense, return to Pledgor such of the Pledged Collateral as shall not
have been sold or otherwise applied pursuant to the terms hereof and execute and
deliver to Pledgor such documents as Pledgor shall reasonably request to
evidence such termination.
14. REINSTATEMENT; LIENS. This Pledge and the obligations and security
interests hereunder shall continue to be effective or be reinstated, as the case
may be, if at any time payment and performance of the obligations under this
Pledge, the Loan Documents and/or under any agreement or instrument related
hereto (collectively, the "OBLIGATIONS") by Pledgor or any other obligor, or any
part thereof (including the receipt of any collateral or proceeds thereof), is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned. Pledgor shall not contest or support any other
person or entity in contesting, in any actions or proceedings, the priority or
validity of any security interest or other claim in any collateral or other
interest granted under any agreement or document by Pledgor or any other obligor
to Pledgee.
15. PLEDGEE APPOINTED ATTORNEY-IN-FACT. Pledgor hereby appoints
Pledgee his attorney-in-fact, with full authority in the name of Pledgor or
otherwise, from time to time in Pledgee's sole discretion, to take any action
and to execute any instrument which Pledgee may deem necessary or advisable to
accomplish the purposes of this Pledge, including, without
- 7 -
<PAGE>
limitation, to receive, endorse and collect all instruments made payable to
Pledgor representing any dividend, interest payment or other distribution in
respect of the Pledged Collateral or any part thereof and to give full discharge
for the same and to arrange for the transfer of all or any part of the Pledged
Collateral on the books of the Company to the name of Pledgee or Pledgee's
nominee; provided, however, that so long as no Event of Default has occurred and
continues beyond any applicable cure period, Pledgee shall not be entitled to
exercise the foregoing power.
16. PLEDGEE'S DUTY OF CARE. Pledgee shall not be liable for any acts,
omissions, errors of judgment or mistakes of fact or law including, without
limitation, acts, omissions, errors or mistakes with respect to the Pledged
Collateral, except for those arising out of or in connection with Pledgee's (a)
gross negligence or willful misconduct, or (b) failure to use reasonable care
with respect to the safe custody of the Pledged Collateral in Pledgee's
possession. Without limiting the generality of the foregoing, Pledgee shall be
under no obligation to take any steps necessary to preserve rights in the
Pledged Collateral against any other parties but may do so at his option. All
expenses incurred in connection therewith shall be for the sole account of
Pledgee, and shall constitute part of the obligations secured hereby.
17. NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be given in the manner set forth in the
Mortgage.
18. INDEMNITY AND EXPENSES.
(a) Pledgor agrees to indemnify Pledgee from and against any and
all claims, losses and liabilities (including reasonable attorneys' fees)
growing out of or resulting from this Pledge (including, without limitation,
enforcement of this Pledge), except claims, losses or liabilities resulting from
Pledgee's gross negligence or willful misconduct.
(b) Pledgor will upon demand pay to Pledgee the amount of any and
all expenses, including the reasonable fees and expenses of his counsel and of
any experts and agents, which Pledgee may incur in connection with (i) the
administration of this Pledge, (ii) the custody, preservation, use or operation
of, or the sale of, collection from or other realization upon, any of the
Pledged Collateral, (iii) the exercise or enforcement of any of the rights of
Pledgee hereunder or (iv) the failure by Pledgor to perform or observe any of
the provisions hereof.
19. TERM. This Pledge shall remain in full force and effect until all
obligations under the Loan Documents have been fully and indefeasibly performed.
Upon the termination of this Pledge as provided above (other than as a result of
the sale of the Pledged Collateral), Pledgee will promptly, and without
condition or delay, release the security interest created hereunder, and, upon
the request of Pledgor, will promptly, and without condition or delay, execute
and deliver in recordable form all necessary UCC-3 termination statements to
accomplish such release.
20. JOINT AND SEVERAL OBLIGATIONS. The obligations of Pledgor
hereunder and of other pledgors under certain other pledge agreements similar
hereto and of even or approximate date herewith (as they may be amended from
time to time) are joint and several. If any other
- 8 -
<PAGE>
pledgor is added to this Pledge at any time, the obligations of Pledgor and such
other pledgor under this Pledge shall be joint and several.
21. FURTHER ASSURANCES. Pledgor agrees that at any time and from time
to time, at the expense of Pledgor, Pledgor will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or desirable, or that Pledgee may request, in order to perfect and
protect any security interest granted or purported to be granted hereby or to
enable Pledgee to exercise and enforce his rights and remedies hereunder with
respect to any Pledged Collateral.
22. SUCCESSORS AND ASSIGNS. This Pledge shall be binding upon and
inure to the benefit of Pledgor, Pledgee and their respective heirs, personal
administrators, successors and assigns. Pledgor's successors and assigns shall
include, without limitation, a receiver, trustee or debtor-in-possession of or
for Pledgor or any representative, executor or administrator of Pledgor's
estates. Pledgee may designate other beneficiaries of his rights and remedies
hereunder from time to time without assigning his position as Pledgee, and, if
and when so notified to do so by Pledgee, Pledgor shall make payments hereunder
directly to such designees.
23. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any
provision of this Pledge nor consent to any departure by Pledgor herefrom shall
in any event be effective unless the same shall be in writing and signed by
Pledgee, and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
24. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The covenants,
agreements, representations and warranties of the parties hereto made in this
Pledge shall survive the closing of the transactions contemplated hereby for a
period of one (1) year from the date hereof.
25. SECTION HEADINGS. The section headings herein are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Pledge. Unless otherwise specified, references in this
Pledge to Sections are references to Sections of this Pledge.
26. DEFINITIONS. The singular shall include the plural and vice versa
as the context may require. All genders shall include all other genders
(including the neuter gender for any entity).
27. ENTIRE AGREEMENT. This Pledge, the Loan Documents and all other
documents or instruments related thereto set forth the entire understanding of
the parties hereto and supersede all prior agreements between them with respect
to the subject matter hereof and all prior negotiations between the parties are
merged in this Pledge and such other documents and there are no promises,
agreements, conditions, undertakings, warranties or representations, oral or
written, express or implied, between them other than as herein set forth.
28. SEVERABILITY. If this Pledge or any one or more of the provisions
contained in this Pledge should be held to be invalid, illegal or unenforceable
in any respect, the validity, legality
- 9 -
<PAGE>
and enforceability of all remaining provisions shall not in any way be affected
or impaired.
29. GOVERNING LAW. This Pledge shall be construed in accordance with
the laws of the State of New York, without regard to its conflict of laws
principles.
30. WAIVER OF TRIAL BY JURY. PLEDGOR HEREBY WAIVES TRIAL BY JURY IN
ANY ACTION OR PROCEEDING TO WHICH IT AND PLEDGEE MAY BE PARTIES ARISING OUT OF
OR IN ANY WAY PERTAINING TO (A) THIS PLEDGE, (B) THE NOTE OR THE LOAN DOCUMENTS
OR (C) ANY DOCUMENT RELATED TO ANY OF THE FOREGOING. IT IS AGREED AND UNDERSTOOD
THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL
PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE
NOT PARTIES TO THIS PLEDGE.
31. SUBMISSION TO JURISDICTION. PLEDGOR AND PLEDGEE EACH HEREBY
IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY OHIO STATE OR FEDERAL COURT
SITTING IN CUYAHOGA COUNTY OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS NOTE AND HEREBY AGREE NOT TO ASSERT THAT IT IS NOT SUBJECT TO
THE JURISDICTION OF THE FOREGOING COURTS. EITHER PLEDGOR OR PLEDGEE MAY, AT ITS
SOLE DISCRETION, ELECT THE STATE OF OHIO, CUYAHOGA COUNTY, OR THE UNITED STATES
OF AMERICA FEDERAL DISTRICT COURT HAVING CUYAHOGA COUNTY AS THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. PLEDGOR AND PLEDGEE EACH HEREBY IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE TO SUCH VENUE AS BEING AN INCONVENIENT FORUM OR IMPROPER VENUE.
32. REPRESENTATIONS OF PLEDGOR. PLEDGOR REPRESENTS AND WARRANTS THAT
THE WAIVER OF TRIAL BY JURY CONTAINED HEREIN IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY PLEDGOR, AND PLEDGOR HEREBY REPRESENTS THAT NO
REPRESENTATIONS OF FACT OR AGREEMENTS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE
THE WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.
PLEDGOR FURTHER REPRESENTS THAT HE HAS BEEN REPRESENTED IN THE SIGNING OF THIS
PLEDGE AND IN THE MAKING OF THE WAIVER OF TRIAL BY JURY AND BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF HIS OWN FREE WILL, AND THAT HE HAS HAD THE OPPORTUNITY TO
DISCUSS THE WAIVER OF TRIAL BY JURY WITH SUCH COUNSEL.
33. EXECUTION IN COUNTERPARTS. This Pledge may be executed in any
number of counterparts, each of which shall be an original, but all of which
shall together constitute one and the same agreement.
- 10 -
<PAGE>
IN WITNESS WHEREOF, Pledgor and Pledgee have executed this
Pledge as of the date first set forth above.
PLEDGOR:
ESSEX HOSPITALITY ASSOCIATES IV L.P.,
a New York limited partnership
By: Essex Partners Inc., a New York
corporation, its general partner
By: /S/ BARBARA J. PURVIS (SEAL)
Name: Barbara J. Purvis
Title: Senior Vice President
PLEDGEE:
GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation
By: /S/ MORGAN G. EARNEST, II (SEAL)
Morgan G. Earnest, II
Senior Vice President
- 11 -
EXHIBIT 23(a)
CONSENT OF KPMG PEAT MARWICK LLP
ACCOUNTANTS' CONSENT
The Partners
Essex Hospitality Associates IV L.P.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement (No. #33-96716).
/s/ KPMG Peat Marwick LLP
Rochester, New York
August 4, 1997
<PAGE>
EXHIBIT 23(a)
CONSENT OF KPMG PEAT MARWICK LLP
ACCOUNTANTS' CONSENT
The Board of Directors of
Essex Partners Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement (No. #33-96716).
/s/ KPMG Peat Marwick LLP
Rochester, New York
August 4, 1997
EXHIBIT 99.1
ARTICLES OF ORGANIZATION
OF
SOLON HOTEL LLC
UNDER SECTION 203 OF THE LIMITED LIABILITY COMPANY LAW
The undersigned, for the purpose of forming a limited liability company
pursuant to Section 203 of the New York Limited Liability Company Law, hereby
certifies:
1. The name of the limited liability company is SOLON HOTEL LLC (the
"Company").
2. The office of the Company shall be located in the County of Monroe,
State of New York.
3. The Company is not to have a specific date of dissolution in
addition to the events of dissolution set forth in Section 701 of the New York
Limited Liability Company Law.
4. The Secretary of State of the State of New York is hereby
designated as the agent of the Company upon whom process in any action or
proceeding against it may be served and the address to which the Secretary of
State shall mail a copy of process in any action or proceeding against the
Company which may be served upon him is: 100 Corporate Woods, Rochester, New
York 14623.
5. The Company shall be managed by one or more members.
6. The Company is organized solely to acquire, own, operate, mortgage,
sell and otherwise deal in and with a single hotel, to be operated as a Hampton
Inn, in the Cuyahoga County of the State of Ohio, and to engage in and perform
all acts and activities required in connection with or incident to the
foregoing.
IN WITNESS WHEREOF, I have signed these Articles of Organization this
6th day of June, 1997 and hereby affirm the truth of the statements contained
herein under penalties of perjury.
/S/ AMY C. ABBINK
Amy C. Abbink
Organizer
EXHIBIT 99.2
ARTICLES OF ORGANIZATION
OF
ERIE HOTEL LLC
UNDER SECTION 203 OF THE LIMITED LIABILITY COMPANY LAW
The undersigned, for the purpose of forming a limited liability company
pursuant to Section 203 of the New York Limited Liability Company Law, hereby
certifies:
1. The name of the limited liability company is ERIE HOTEL LLC (the
"Company").
2. The office of the Company shall be located in the County of Monroe,
State of New York.
3. The Company is not to have a specific date of dissolution in
addition to the events of dissolution set forth in Section 701 of the New York
Limited Liability Company Law.
4. The Secretary of State of the State of New York is hereby
designated as the agent of the Company upon whom process in any action or
proceeding against it may be served and the address to which the Secretary of
State shall mail a copy of process in any action or proceeding against the
Company which may be served upon him is: 100 Corporate Woods, Rochester, New
York 14623.
5. The Company shall be managed by one or more members.
6. The Company is organized solely to acquire, own, operate, mortgage,
sell and otherwise deal in and with a single hotel, to be operated as a Hampton
Inn, in the Summit Township of the State of Pennsylvania, and to engage in and
perform all acts and activities required in connection with or incident to the
foregoing.
IN WITNESS WHEREOF, I have signed these Articles of Organization this
30th day of May, 1997 and hereby affirm the truth of the statements contained
herein under penalties of perjury.
/S/ AMY C. ABBINK
Amy C. Abbink
Organizer
EXHIBIT 99.3
ARTICLES OF ORGANIZATION
OF
ESSEX HOTELS LLC
UNDER SECTION 203 OF THE LIMITED LIABILITY COMPANY LAW
The undersigned, for the purpose of forming a limited liability company
pursuant to Section 203 of the New York Limited Liability Company Law, hereby
certifies:
1. The name of the limited liability company is ESSEX HOTELS LLC (the
"Company").
2. The office of the Company shall be located in the County of Monroe,
State of New York.
3. The Company is not to have a specific date of dissolution in
addition to the events of dissolution set forth in Section 701 of the New York
Limited Liability Company Law.
4. The Secretary of State of the State of New York is hereby
designated as the agent of the Company upon whom process in any action or
proceeding against it may be served and the address to which the Secretary of
State shall mail a copy of process in any action or proceeding against the
Company which may be served upon him is: 100 Corporate Woods, Rochester, New
York 14623.
5. The Company shall be managed by one or more members.
IN WITNESS WHEREOF, I have signed these Articles of Organization this
30th day of May, 1997 and hereby affirm the truth of the statements contained
herein under penalties of perjury.
/S/ AMY C. ABBBINK
Amy C. Abbink
Organizer
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
ARTICLES OF ORGANIZATION
OF
ESSEX HOTELS LLC
UNDER SECTION 211 OF THE LIMITED LIABILITY COMPANY LAW
1. The name of the limited liability company is ESSEX HOTELS LLC.
2. The Articles of Organization were filed by the Department of State
on June 2, 1997.
3. The Articles of Organization, as now in full force and effect, are
hereby amended as follows:
(a) To add the specific business purpose for which the Company is
formed. A new paragraph designated Paragraph "6" in the Articles of Organization
is hereby added to read in its entirety as follows:
6. The Company is organized solely to act as the managing member of
Solon Hotel LLC and to manage the business and affairs of that company pursuant
to the Operating Agreement of Solon Hotel LLC, as such agreement may be amended,
and to do any and all things necessary, convenient or incidental to that
purpose.
IN WITNESS WHEREOF, I have signed this Certificate of Amendment this
25th day of June, 1997 and hereby affirm the truth of the statements contained
herein under penalty of perjury.
Essex Hospitality Associates IV LP,
Managing Member
By: /S/ BARBARA J. PURVIS
Barbara J. Purvis,
Vice President of Essex Partners Inc.,
General Partner of Managing Member
Essex Hospitality Associates IV LP
EXHIBIT 99.4
ARTICLES OF ORGANIZATION
OF
ESSEX HOTELS II LLC
UNDER SECTION 203 OF THE LIMITED LIABILITY COMPANY LAW
The undersigned, for the purpose of forming a limited liability company
pursuant to Section 203 of the New York Limited Liability Company Law, hereby
certifies:
1. The name of the limited liability company is ESSEX HOTELS II LLC
(the "Company").
2. The office of the Company shall be located in the County of Monroe,
State of New York.
3. The Company is not to have a specific date of dissolution in
addition to the events of dissolution set forth in Section 701 of the New York
Limited Liability Company Law.
4. The Secretary of State of the State of New York is hereby
designated as the agent of the Company upon whom process in any action or
proceeding against it may be served and the address to which the Secretary of
State shall mail a copy of process in any action or proceeding against the
Company which may be served upon him is: 100 Corporate Woods, Rochester, New
York 14623.
5. The Company shall be managed by one or more members.
6. The Company is organized solely to act as the managing member of
Erie Hotel LLC and to manage the business and affairs of that company pursuant
to the Operating Agreement of Erie Hotel LLC, as such agreement may be amended,
and to do any and all things necessary, convenient or incidental to that
purpose.
IN WITNESS WHEREOF, I have signed these Articles of Organization this
24th day of June, 1997 and hereby affirm the truth of the statements contained
herein under penalties of perjury.
/S/ AMY C. ABBINK
Amy C. Abbink
Organizer
EXHIBIT 99.5
TABLE VI
ESSEX PARTNERS AND AFFILIATES
ACQUISITIONS OF PROPERTIES BY PROGRAMS
Table VI presents information with respect to the acquisition and
development of properties during the three year period ending December 31, 1996
by programs in which Essex Partners or affiliates acted as general partners.
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS AND AFFILIATES
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Three Years Ending December 31, 1996)
Essex Glenmaura
Essex Hospitality Associates III L.P. L.P.
------------------------------------- ----
<S> <C> <C> <C> <C>
Name Microtel Hampton Inn Microtel Courtyard
Location Birmingham, Rochester, Chattanooga, Scranton, PA
AL NY TN
Type of property hotel hotel hotel hotel
Number of units 102 118 100 120
Date of purchase 12/30/93 6/28/94 12/30/94 7/07/95
Debt financing 2,800,000 4,100,000 3,100,000 5,400,000
Cash downpayment 145,000 1,141,000 145,000 2,981,000
Contract purchase price plus
acquisition fee (1) 2,812,000 4,989,000 3,103,000 7,541,000
Other cash expenditures
expensed (2) 54,000 112,000 62,000 401,000
Other cash expenditures
capitalized (3) 133,000 252,000 142,000 439,000
Total acquisition cost 2,999,000 5,353,000 3,307,000 8,381,000
</TABLE>
<PAGE>
TABLE VI
ESSEX AND AFFILIATES
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(1) For projects involving construction of new facilities, the contract
purchase price includes the cost of the land, the building construction
cost, cost for furniture and fixtures, architectural and engineering costs
and the costs of any permits.
(2) For projects involving construction of new facilities, the other cash
expenditures expensed includes any operating supplies, utilities costs and
payroll costs incurred prior to the opening of the property.
(3) For projects involving construction of new facilities, the other cash
expenditures capitalized includes taxes, insurance and interest costs
during construction, opening linen inventory, any travel costs and the
initial franchise fee.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> OTHER
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<FN>
<F1> UNCLASSIFIED BALANCE SHEET USED
</FN>
<PP&E> 6,881
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,100
<CURRENT-LIABILITIES> 0
<BONDS> 5,298
<COMMON> 0
0
0
<OTHER-SE> 639
<FN>
<F2> EQUITY IS PARTNERS' CAPITAL
</FN>
<TOTAL-LIABILITY-AND-EQUITY> 8,100
<SALES> 905
<TOTAL-REVENUES> 905
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> (326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (326)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F3> ENTITY IS A PARTNERSHIP
</FN>
</TABLE>
