Registration No. 33-96716
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 6 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 (Primary Standard Industrial
of incorporation or organization) Classification Code No.)
100 Corporate Woods
Rochester, New York 14623
16-1485632 (716) 272-2300
-------------------------------- --------------------------------
(IRS Employer ID No.) (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>
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"). [For the period November 24, 1995 through
June 30, 1997, the Partnership has paid fees to the General Partner totaling
approximately $740,400. See "Prospectus Summary" and "Compensation of General
Partner and Managing Dealer."]
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.
As of the date of this Prospectus, the Partnership has acquired three
properties, the Solon Property and the Erie Property, and property in Warwick,
Rhode Island (the "Warwick Property," as more specifically described herein);
the Partnership has used or committed approximately $10.7 million of Gross
Offering Proceeds, together with External Financing; and approximately $1.0
million remains available for investment in the Erie Property. See "Estimated
Use of Proceeds."
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.
<PAGE>
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.
ESSEX CAPITAL MARKETS INC.
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 the Warwick
Property with the intention of constructing 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.
- 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.
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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
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>
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<PAGE>
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 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
4
<PAGE>
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.
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".
5
<PAGE>
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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<PAGE>
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
THE OFFERING............................................................103
Subscription...................................................103
Plan of Distribution...........................................104
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<PAGE>
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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<PAGE>
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 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.
9
<PAGE>
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. The Partnership has obtained a License Agreement
from Promus Hotel and the Solon Hampton Inn hotel was opened August 1, 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 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
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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. [See "Pro Forma
Financial Statements of the Partnership."]
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
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 Partnership has
obtained a License Agreement from Promus Hotel and the Solon Hampton Inn hotel
opened on August 1, 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
11
<PAGE>
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 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."
12
<PAGE>
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.
13
<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 and The Notes may be redeemed in whole or in part, at the option
Mandatory of the Partnership, at any time without payment of any premium
Redemption: or penalty, together with accrued 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.
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
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<PAGE>
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 Partnership must secure approximately $7.2 million of
External Financing or a General Partner Loan to finance the
construction of a Hampton Inn hotel on the Erie Property. No
commitments have been received as of the date of this
Prospectus for any External Financing.]
- 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 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.
- 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.
- Since the Partnership will only have two Hotels, the
operations of the Partnership will have relatively little
geographic diversity.
17
<PAGE>
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.
18
<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 filing
obligations and income and other taxes in the states in which
the Partnership is doing business, including New York State
and 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.
19
<PAGE>
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
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
20
<PAGE>
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 $471,646
Organization and Offering
Management Fee 259,400
Acquisition Fee 220,000
Development Fee 216,000
Financing Fee 45,000
--------
Total $1,212,046
=========
</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.
21
<PAGE>
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."
22
<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.
Continuing Debt Obligations and Construction Delays.
The Partnership will have continuing debt service requirements under
the Notes, notwithstanding the Partnership's inability to secure the necessary
financing for the construction of the Erie Hampton Inn hotel or any delays in
the construction of the hotel. The Partnership's continuing obligations under
the Notes could have an adverse effect on the Partnership's financial condition
since the Partnership would not have any income derived from operations of the
Erie Hampton Inn hotel.
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.
23
<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."
24
<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."
Lack of Diversification of Investment
Since the Partnership will only have two Hotels, the performance of
either one of the Hotels will have a significant impact on the Partnership. In
addition, the results of operations of the Partnership will be significantly
affected by the economic conditions of the Solon Hampton Inn hotel market and
the Erie Hampton Inn hotel market, exposing the Partnership's operations to
greater risk than if the Partnership's investments were geographically
diversified.
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, 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.
25
<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 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.
26
<PAGE>
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 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.
<PAGE>
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 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
27
<PAGE>
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
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. o 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;
28
<PAGE>
- 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 [filing
obligations and income, franchise, estate, inheritance or
other] taxes in the states in which the [Partnership is doing
business, including New York State and 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 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.
29
<PAGE>
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."
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:
30
<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
31
<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>
32
<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:
Selling Commissions $ 471,646
Organization and Offering
Management Fee 259,400
Acquisition Fee 220,000
Development Fee 216,000
Financing Fee 45,000
Total $1,212,046
==========
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.
33
<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."
34
<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,
together with External Financing, 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] 471,646 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] 1,399,699 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 $ 10,744,608 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.
35
<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
opened August 1, 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."
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
36
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 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
37
<PAGE>
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.
38
<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.
39
<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]
40
<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
41
<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.
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<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.
43
<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.
<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
44
<PAGE>
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.
45
<PAGE>
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
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."
46
<PAGE>
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."
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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 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
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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 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 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
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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.
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
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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 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 opened August 1, 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."
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[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
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.
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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 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
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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.
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 consists
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 has 96 standard guest rooms and 7 two-room suites.
The suites have separate living and sleeping areas and small kitchen areas. The
hotel has an expanded lobby/breakfast area, where a daily complimentary
continental breakfast is 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."
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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 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.
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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
Partnership has obtained a License Agreement from Promus Hotel and the Solon
Hampton Inn hotel opened on August 1, 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 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 net proceeds of the loan are being advanced in three installments.
Approximately $1.0 million was advanced at the closing of the loan,
approximately $2.0 million was advanced on August 27, 1997, and the balance of
the net loan proceeds is expected to be advanced in the third installment on
or about September 30, 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
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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. 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
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Commons. In Beachwood, at Chagrin Boulevard and I-271, there are four lodging
facilities containing an aggregate 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 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 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 been 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.
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.
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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 west end 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 1993.
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 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."
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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. See "Pro Forma Financial Statements of the
Partnership."
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 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.
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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 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 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.
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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.
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.
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- 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.
- 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.
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.
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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 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
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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 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.
Special Rules for Electing Large Partnerships
The Taxpayer Relief Act of 1997 (the "1997 Tax Act"), enacted into law
on August 5, 1997, provides new audit rules applicable to "Electing Large
Partnerships" for partnership tax years beginning on or after December 31, 1997.
An "Electing Large Partnership" is defined as a partnership that elects to apply
the simplified reporting provisions added by the 1997 Tax Act, provided that the
number of partners in the partnership during the preceding tax year equaled or
exceeded 100. Service partnerships (defined generally as partnerships in which
substantially all of the partners either perform or previously performed
substantial services in connection with the partnership's activities) and
commodity trading partnerships are not eligible to make this election. Once
made, an election to be treated as an Electing Large Partnership will apply to
all subsequent tax years and will be irrevocable without the consent of the IRS.
However, a partnership may cease to be treated as an Electing Large Partnership
if the number of partners falls below 100 during any partnership tax year.
If a qualifying partnership elects to be treated as an Electing Large
Partnership, special tax audit rules will apply in lieu of the audit rules
applicable to partnerships generally. Under these rules, partners of an Electing
Large Partnership must in all cases report on their tax returns their respective
shares of the partnership's income, gain, loss, deductions and credits in a
manner consistent with the Form K-1s distributed to them. If an Electing Large
Partnership is audited, any final adjustment imposed by the IRS or agreed to by
the partnership will be binding on the partners. The partners will have no right
to individually participate in the audit proceedings or to seek judicial review
of any final adjustment. Any audit adjustment will generally take affect in the
tax year it becomes final and the resulting adjustment in income will be passed
through to the current partners and treated as though it arose in the current
year. Former partners and prior tax years of current partners are not generally
affected by such adjustments. Alternatively, instead of passing through such
adjustment to the partners, an Electing Large Partnership may elect to pay an
additional tax directly to the IRS, calculated by using the highest individual
or corporate tax rate in effect during the applicable tax year.
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Based on the representation by the General Partner that the Partnership
had and expects to have at least 100 partners at all times during the 1997 tax
year, it appears that the Partnership will be eligible to elect to be treated as
an Electing Large Partnership. However, the Partnership has not determined as
yet whether it will make such an election. Under the 1997 Tax Act, the IRS is
authorized to issue regulations governing elections to be treated as, and the
tax treatment of, Electing Large Partnerships. These regulations, once issued,
could effect the Partnership's decision as whether to make this election.
Tax Status of the Partnership
On December 18, 1996 the IRS revised and published in final form the
"Check the Box" regulations. See, generally, Treas. Reg. ss.ss.301.7701-1,-2 and
- -3. The "Check the Box" regulations were effective as of January 1, 1 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
representati 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
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circumstances, the parties are readily able to buy, sell or exchange their
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 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.
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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 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.
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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
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
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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.
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 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.
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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, 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
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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.
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
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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.
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.
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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 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.
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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
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.
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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.
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") reduced the
maximum rate of tax imposed on long term capital gains of individuals from 28%
to 20%, effective for sales or exchanges made and installment payments received
after May 6, 1997. Under the 1997 Tax Act, if the amount realized by the
Partnership on the sale, casualty or foreclosure of a Hotel exceeds the
Partnership's basis in the Hotel and the Partnership owned the Hotel for more
than 18 months, that portion of the resulting gain that is attributable to
depreciation previously taken on the Hotel would be taxed at a maximum rate of
25% and the balance would be taxed at a maximum rate of 20%. If the Partnership
owned the Hotel for 18 months or less but more than 1 year, the maximum tax rate
imposed on such gain would be 28%. Notwithstanding the reduced tax rate, 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.
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. Under the 1997 Tax Act, the resulting gain will be treated as a capital
gain which generally will be taxed at a maximum 20% marginal rate, if the
Partnership interest being sold or exchanged was held by the Partner for more
than 18 months. However, to the extent set forth in regulations to be
promulgated by the United States Treasury Department under the 1997 Tax Act, the
portion of such gain which is attributable to depreciation previously taken on
the Hotels held by the Partnership will be taxed at a maximum 25% marginal rate.
If the Partner held such partnership interest for more than one year and up to
18 months the resulting gain would be taxed at a maximum 28% marginal tax 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
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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 placed in service prior to
January 1, 1999. 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 40 years. However, under the 1997 Tax Act, property placed in
service after December 31, 1998, shall for purposes of calculating AMTI, be
depreciated using the same depreciation life as it would for regular tax
purposes. 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.
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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 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, 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
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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.
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
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
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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 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 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
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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
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.
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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
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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 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.
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
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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.
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 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
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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.
LIQUIDITY AND FINANCIAL CONDITIONS
As of June 30, 1997 the Partnership had approximately $5.3 million of
outstanding long term indebtedness comprised of the Notes. In addition,
subsequent to June 30, 1997, the Partnership secured the $4.5 million GMAC-
Solon Loan, such that as of the date of this Prospectus the Partnership has
approximately $9.8 million of outstanding long term indebtedness. The Notes are
due in December 2001, unless extended by their terms for one year to December
2002. The GMAC-Solon Loan is due in July, 2001, unless extended by its terms for
one year to July, 2002. Once the Solon Hampton Inn hotel reaches more stabilized
operations, the Partnership expects to be able to place a larger new first
mortgage on the property, such that when it needs to refinance the total
outstanding indebtedness, which is expected to total approximately $9.6 million
in July, 2001, it can do so through a combination of retained excess working
capital, new first mortgage financing and, if necessary, new subordinated note
financing. If additional Offering proceeds are sold and the Partnership secures
External Financing and/or a General Partner Loan to finance construction of the
Erie Hampton Inn hotel, it is expected the Partnership's long term indebtedness
would total between $12.5 million and $14.5 million. Again, once the Solon
Hampton Inn and the Erie Hampton Inn hotels reach more stabilized operations,
the Partnership would expect to be able to refinance the total outstanding
indebtedness through a combination of retained excess working capital, larger
new first mortgage loans and, if necessary, new subordinated note financing.
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 secure 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, construction of the Erie Hampton Inn hotel can be delayed until
the required additional financing can be obtained. If no additional offering
proceeds are sold and the Partnership is unable to secure sufficient External
Financing, however, the Partnership will not be able to construct the Erie
Hampton Inn hotel and it will try to sell the Erie Property. A portion of any
excess working capital generated as a result of the sale of the Erie Property
(and the Warwick Property) can also be used to reduce the outstanding
indebtedness.
The Partnership included a working capital reserve in its total costs
for the Solon Hampton Inn hotel, and expects to include the same for the Erie
Hampton Inn hotel. The Partnership expects that the working capital reserves
will be sufficient to fund any operating deficits.
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 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:
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(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 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
100
<PAGE>
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
---------- ---------- ----------- -----------
<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 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
101
<PAGE>
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.
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
102
<PAGE>
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 $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.
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<PAGE>
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.
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.
104
<PAGE>
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.
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.
<PAGE>
105
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.
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.
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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 Statements 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)
- - Statements of [Operations]for the six months ended June 30, 1997 (Unaudited)
and June 30, 1996 (Unaudited)
- - Statements of Cash Flows for the six months ended June 30, 1997 (Unaudited)
[and June 30, 1996 (unaudited)]
- - Notes to Financial Statements
Pro Forma Financial Statements of the Partnership
- - Pro Forma Financial Information
- - Pro Forma Condensed Statement of Operations for the year ended December 31,
1996
- - Pro Forma Condensed Statement of Operations for the six months ended June
30, 1997.
- - Notes to Pro Forma Condensed Financial Statements]
Financial Statements of Essex Glenmaura L.P.
- - Balance Sheet as of June 30, 1997 (Unaudited)
- - Statement of [Operations] for the six months ended June 30, 1997 (Unaudited)
and June 30, 1996 (Unaudited)
- - Statement of Cash Flows for the six months ended June 30, 1997 (Unaudited) -
Notes to Financial Statements
106
<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)
F-1
<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
F-2
<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.
F-3
<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.
F-4
<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)
F-5
<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.
F-6
<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)
F-7
<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)
F-8
<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)
F-9
<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)
F-10
<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)
F-11
<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)
F-12
<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.
F-13
<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
depreciation of $87,988 81,684
-----------
955,014
-----------
$2,952,790
==========
</TABLE>
See accompanying notes to unaudited financial statements
F-14
<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
F-15
<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 this financial statement 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.
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)
F-16
<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)
F-17
<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)
F-18
<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)
F-19
<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.
F-20
<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)
F-21
<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
F-22
<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.
F-23
<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.
F-24
<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.
F-25
<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>
F-26
<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.
F-27
<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)
F-28
<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)
F-29
<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)
F-30
<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)
F-31
<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 $ 4,294,243
1998 1,500,000
1999 -
2000 -
2001 4,920,000
--------------
$ 10,714,243
==============
(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)
F-32
<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)
F-33
<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)
F-34
<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.
F-35
<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 -
---------
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
Due to affiliate 596,156
Subordinated notes payable 5,298,000
---------
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.
F-36
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statements of Operations
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
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.
F-37
<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.
F-38
<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.
F-39
<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:
F-40
<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.
F-41
<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.
F-42
<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.
F-43
<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 $ -
1998 -
1999 -
2000 -
2001 5,298,000
-----------
$ 5,298,000
===========
</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.
F-44
<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.
F-45
<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>
F-46
<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.
F-47
<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>
F-48
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The Partnership's unaudited pro forma financial statements are derived from
historical financial statements of the Partnership, and are adjusted to give
effect to the disposition of 1.05 limited partnership units of the investment in
Glenmaura as if the transaction was consummated as of January 1, 1996 for the
purposes of the December 31, 1996 pro forma statement of operations and January
1, 1997 for purposes of the June 30, 1997 statement of operations. The sale of
the 1.05 limited partnership units of the investment in Glenmaura results in the
Partnership's ownership interest changing from 54.3% to 49.8%. As a result,
accounting for the investment in Glenmaura has changed from the consolidation
method to the equity method.
The unaudited pro forma condensed financial statements are presented for
informational purposes only and do not purport to represent what the
Partnership's results of operations would have been had the event actually
occurred on the dates indicated, or to project the Partnership's results of
operations for any future period. The unaudited pro forma adjustments are based
upon available information and certain assumptions that the Partnership believes
are reasonable. The unaudited pro forma condensed financial statements should be
read in conjunction with "Management's Discussion and Analysis," the
consolidated financial statements of the Partnership and the related notes
thereto and other financial information included elsewhere in this Prospectus.
F-49
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1996
------------------------------------
Pro Forma
Historical Adjustments (1) Pro Forma
---------- --------------- ---------
<S> <C> <C> <C>
Revenue:
Rooms ................................................ $ 394,134 $(394,134) -
Food and beverage .................................... 54,048 (54,048) -
Telephone and other commissions ...................... 34,880 (34,880) -
----------- -------- -------
483,062 (483,062) -
----------- -------- -------
Operating expenses:
Rooms ................................................ 249,766 (249,766) -
Administrative ....................................... 155,429 (153,854) 1,575
Food and beverage .................................... 128,541 (128,541) -
Marketing ............................................ 89,240 (89,240) -
Repairs and maintenance .............................. 82,573 (81,196) 1,377
Utilities ............................................ 28,822 (28,822) -
Management fees to affiliate ......................... 25,338 (25,338) -
Telephone and other commissions ...................... 19,869 (19,869) -
Royalty fees ......................................... 15,766 (15,766) -
Insurance ............................................ 12,058 (12,058) -
Property taxes ....................................... 6,569 (6,569) -
Depreciation and amortization ........................ 345,756 (273,476) 72,280
Miscellaneous ........................................ 72,214 (53,554) 18,660
----------- -------- -------
1,231,941 (1,138,049) 93,892
----------- -------- -------
Loss from operations .............................. (748,879) 654,987 (93,892)
----------- -------- -------
Other income (expense):
Interest income....................................... 74,202 (3,217) 70,985
Interest expense...................................... (548,788) 162,807 (385,981)
Equity income (loss) of partnership .................. 0 (422,947) (422,947)
----------- -------- -------
(474,586) (263,357) (737,943)
----------- -------- -------
Loss before minority interest ..................... (1,223,465) 391,630 (831,835)
in loss of partnership
Minority interest in loss of partnership ................ 356,524 (356,524) -
----------- -------- -------
Net loss .......................................... $ ( 866,941) 35,106 (831,835)
=========== ======== ========
Net loss - general partner............................... (8,669) 351 (8,318)
limited partners ............................. (858,272) 34,755 (823,517)
----------- -------- -------
$ ( 866,941) 35,106 (831,835)
=========== ======== ========
Net loss per limited partnership unit ................... $ ( 551) 22 (529)
=========== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements
F-50
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Statement of Operations
For the Period Ended June 30, 1997
------------------------------------
Pro Forma
Historical Adjustments (1) Pro Forma
---------- --------------- ---------
<S> <C> <C> <C>
Revenue:
Rooms ..................................... $ 754,675 (754,675) -
Food and beverage ......................... 95,678 (95,678) -
Telephone and other commissions ........... 54,703 (54,703) -
--------- -------- --------
905,056 (905,056) -
--------- -------- --------
Operating expenses:
Rooms ..................................... 210,552 (210,552) -
Administrative ............................ 85,521 (84,971) 550
Food and beverage ......................... 108,148 (108,148) -
Marketing ................................. 52,310 (52,310) -
Repairs and maintenance ................... 45,917 (45,917) -
Utilities ................................. 61,810 (61,810) -
Management fees to affiliate .............. 44,401 (44,401) -
Telephone and other commissions ........... 24,097 (24,097) -
Royalty fees .............................. 26,245 (26,245) -
Insurance ................................. 13,506 (13,506) -
Property taxes ............................ 15,835 (15,835) -
Depreciation and amortization ............. 247,925 (222,365) 25,560
Miscellaneous ............................. 22,687 (8,288) 14,399
--------- -------- --------
958,954 (918,445) 40,509
--------- -------- --------
Loss from operations ................... (53,898) 13,389 (40,509)
--------- -------- --------
Other income (expense):
Interest income............................ 37,898 (440) 37,458
Interst expense............................ (368,967) 230,495 (138,472)
Loss on termination of franchise agreement. (40,000) 0 (40,000)
Equity income (loss) of partnership ....... (12,763) (121,235) (133,998)
--------- -------- --------
(383,832) 108,820 (275,012)
--------- -------- --------
Loss before minority interest
in loss of partnership............... (437,730) 122,209 (315,521)
Minority interest in loss of partnership...... 111,254 (111,254) -
--------- -------- --------
Net loss ............................... $ (326,476) 10,955 (315,521)
========= ======== ========
Net loss - general partners................... (3,265) 110 (3,155)
limited partners .................. (323,211) 10,845 (312,366)
--------- -------- --------
$ (326,476) 10,955 (315,521)
========= ======== ========
Net loss per limited partnership unit......... $ ( 135) 5 (130)
========= ======== ========
</TABLE>
See accompanying note to pro forma financial statements.
F-51
<PAGE>
Notes to Pro Forma Condensed Financial Statements
(1) The pro forma adjustments are the adjustments necessary to reflect the
change in accounting method from the consolidation method to the equity
method. The adjustments remove the income and expense amounts relating to
Glenmaura from the separate income and expense accounts. In addition, the
pro forma equity loss of the partnership reflects a 49.8% interest in
Glenmaura from the beginning of the respective period.
F-52
<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.
F-53
<PAGE>
<TABLE>
<CAPTION>
Essex Glenmaura L.P.
Statements of Operations
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.
F-54
<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.
F-55
<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.
F-56
<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 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.
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.
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.
F-57
<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.
F-58
<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.
F-59
<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
F-60
<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.
F-61
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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
<PAGE>
(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.
6
<PAGE>
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").
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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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<PAGE>
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
<PAGE>
(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.
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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
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<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";
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(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
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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.
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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>
PART II
Information Not Required in Prospectus
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses in connection with the issuance
and distribution of the Units and Notes registered, other than underwriting
discounts and commissions. All amounts except the filing fee payable to the
Securities and Exchange Commission and the NASD are estimates.
SEC Filing Fee .............................. $ 7,241.42
NASD Filing Fees ............................ 2,600.00
Legal Fees and Expenses ..................... 85,000.00
Accountants Fees and Expenses ............... *
Printing and Engraving Fees ................. *
Blue Sky qualification fees and expenses..... 21,275.00
Miscellaneous ............................... *
-------------
Total ....................................... $ *.
=============
- ----------
No securities to be registered are to be offered for the account of security
holders.
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Partnership Agreement of the Registrant provides
that the Registrant shall indemnify the General Partner and any persons
affiliated with the General Partner for any liability, loss or damage incurred
by it or the Registrant by reason of any act performed or omitted to be
performed by it when acting in connection with the business of the Registrant
including costs, attorney's fees and amounts expended, provided that such course
of conduct did not constitute fraud or gross negligence by it. Persons
affiliated with the General Partners shall be indemnified only for liabilities
arising out of activities in which they engage on behalf of the Registrant or in
connection with its business which are permitted to be performed by them under
the Partnership Agreement and which are duly authorized by the General Partner.
No person may be indemnified from any liability, loss or damage incurred in
connection with violations of federal or securities laws, or any liability
imposed by law, such as liability for fraud, bad faith or gross negligence;
provided, however, that indemnification will be allowed in certain instances 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; or (ii) a court dismisses such count involving
alleged securities laws violations with prejudice; or (iii) a court approves
settlement and finds that indemnification should be made.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has made no prior offers or sales of its securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Furnish exhibits as required by Item 601 of Regulation S-K.
II-1
<PAGE>
1. (a) Form of Dealer Manager Agreement to be entered into between the
Registrant and Essex Capital Markets Inc.*
(b) Form of Soliciting Dealer Agreement to be entered into between
Essex Capital Markets Inc. and other broker-dealers selling Units
and Notes.*
3. (a) Amended and Restated Limited Partnership Agreement is appended to
the Prospectus as Exhibit A.
(b) Certificate of Limited Partnership of the Registrant.*
4. (a) Form of Subscription Agreement and Partner Note for investors
purchasing Limited Partnership Units are appended to the
Prospectus as Exhibit C.
(b) Form of Indenture for Mortgage Notes to be entered into between
the Registrant and Manufacturers and Traders Trust Company,
as Trustee.*
(c) Form of Indenture for Subordinated Notes to be entered into
between the Registrant and Manufacturers and Traders Trust
Company, as Trustee.*
(d) Form of Subordinated Note is appended to the Prospectus as
Exhibit B.(1)
(e) Form of Mortgage Note is appended to the Prospectus as
Exhibit B-2.*(2)
(f) Form of Fee Mortgage and Security Agreement to be granted by the
Registrant to Manufacturers and Traders Trust Company,
as Trustee.*
(g) Form of Leasehold Mortgage and Security Agreement to be granted
by the Registrant to Manufacturers and Traders Trust Company,
as Trustee.*
(h) Form of Mortgage Consolidation, Spreader, Modification, Extension
and Security Agreement to be entered into between the Registrant
and Manufacturers and Traders Trust Company, as Trustee.*
(i) Form of Guaranty of Completion to be given by Essex Partners Inc.
to the Registrant is appended to the Prospectus as Exhibit D.*(2)
5. Opinion of Harris Beach & Wilcox, LLP as to the legality of the
securities being registered (including consent).*
8. Opinion of Harris Beach & Wilcox, LLP as to tax matters.
10. Form of Escrow Agreement to be entered into between the Registrant and
Manufacturers and Traders Trust Company.*
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.*
II-2
<PAGE>
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 experts.
(a) Consent of counsel is included in Exhibit 5 above.
(b) Consent of KPMG Peat Marwick, LLP.
(c) Consent of Coopers & Lybrand, LLP.*
25. Statement of Eligibility and Qualification under Trust Indenture Act
of 1939 on Form T-1 for Manufacturers and Traders Trust Company.*
27. Article 5 Financial Data Schedule*
28. (a) Forms of Agreements - Promus Hotel Corporation.*
(b) Form of Franchise Agreement - Marriott International, Inc.
(Courtyard by Marriott(R)).*
(c) Form of Franchise Agreement - Microtel Franchise and Development
Corporation.*
(d) Form of Management Agreement to be entered into between the
Registrant and Essex Partners Inc.*
(e) Form of Franchise Agreement - Marriott International, Inc.
(Fairfield Inn).*
(f) Form of Franchise Agreement - Microtel Inns and Suites
Franchising, Inc.*
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.*
- ----------
* Previously filed.
(1) Appended as Exhibit B-1 to the Prospectus contained in Registrant's
Registration Statement on Form S-1 (Registration No. 33-96716) and all
Post-Effective Amendments thereto up to an including Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form S-1.
(2) Appended as Exhibits to the Prospectus contained in Registrant's
Registration Statement on Form S-1 (Registration No. 33-96716) and all
Post-Effective Amendments thereto up to an including Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form S-1.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Rule 415 Offerings:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereto) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement:
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any of
the securities being registration which remain unsold at the termination of the
offering.
ACCELERATION OF EFFECTIVENESS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
GUIDE 5
The registrant undertakes: (a) to file any prospectuses required by Section
10(a)(3) as post-effective amendments to the registration statement, (b) that
for the purpose of determining any liability under the Act each such
post-effective amendment may be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time may be deemed to be the initial bona fide offering thereof, (c)
that all post-effective amendments will comply with the applicable forms, rules
and regulations of the Commission in effect at the time such post-effective
amendments are filed, and (d) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain at
the termination of the offering.
The registrant undertakes to send to each Limited Partner at least on an
annual basis a detailed statement of any transactions with the General Partner
or its affiliates, and of fees, commissions, compensation and other benefits
paid, or accrued to the General Partner or its affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the services
performed.
II-4
<PAGE>
The registrant undertakes to provide to the Limited Partners the financial
statements required by Form 10-K for the first full year of operations of the
partnership.
The registrant undertakes to file a sticker supplement pursuant to Rule
424(c) under the Securities Act of 1933 during the distribution period
describing each property not identified in the prospectus at such time as there
arises a reasonable probability that such property will be acquired and to
consolidate all such stickers into a post-effective amendment filed at least
once every three months, with the information contained in such amendment
provided simultaneously to the existing Limited Partners. Each sticker
supplement shall also disclose all compensation and fees received by the General
Partner and its affiliates in connection with any such acquisition. The
post-effective amendment shall include audited financial statements meeting the
requirements of Rule 3-14 of Regulation S-X only for properties acquired during
the distribution period.
The registrant also undertakes to file, after the end of the distribution
period, a current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment (i.e. the signing of a binding purchase agreement) made after the end
of the distribution period involving the use of 10 percent or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to the Limited Partners at least once each
quarter after the distribution period of the offering has ended.
II-5
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933, the Registrant has duly caused this
Post-Effective Amendment No. 6 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 September 11, 1997.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
By: Essex Partners Inc.
Its: General Partner
By: /S/ JOHN E. MOONEY
John E. Mooney
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 6 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: September 11, 1997 /S/ JOHN E. MOONEY
------------------
John E. Mooney
President and Chief Executive Officer
Principal Financial and Accounting Officer
of General Partner:
Dated: September 11, 1997 /S/ RICHARD C. BRIENZI
----------------------
Richard C. Brienzi
Vice President and Treasurer
Executive Vice President of General Partner:
*
Jerald P. Eichelberger
Executive Vice President
The Board of Directors of General Partner:
Dated: September 11, 1997 /S/ JOHN E. MOONEY
------------------
John E. Mooney, Director
*
Jerald P. Eichelberger, Director
*
Barbara J. Purvis, Director
II-6
<PAGE>
*
Thomas W. Blank, Director
Dated: September 11, 1997 /S/ RICHARD C. BRIENZI
----------------------
Richard C. Brienzi, Director
Dated: September 11, 1997 * By /S/ JOHN E. MOONEY
------------------
John E. Mooney, as Attorney-in-Fact
II-7
HARRIS
BEACH &
WILCOX
A LIMITED LIABILITY PARTNERSHIP
ATTORNEYS AT LAW
THE GRANITE BUILDING
130 EAST MAIN STREET
ROCHESTER, N.Y. 14604-1687
(716) 232-4440
September 10, 1997
Essex Hospitality Associates IV L.P.
100 Corporate Woods
Rochester, New York 14623
Ladies and Gentlemen:
We have represented Essex Hospitality Associates IV L.P., a New York
limited partnership (the "Partnership"), in connection with its offering 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 "Subordinated Notes"). This
opinion is being given in connection with the Partnership's Post-Effective
Amendment No. 6 to the Partnership's Registration Statement on Form S-1
(Registration No. 33-96716) (the "Post-Effective Amendment No. 6), to be filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, including the prospectus forming a part thereof (the "Prospectus") and
any subsequent post-effective amendments, prospectus supplements or exhibits
thereto.
In our capacity as legal counsel to the Partnership, we have examined
the Amended and Restated Limited Partnership Agreement of the Partnership (the
"Partnership Agreement'), the Certificate of Limited Partnership of the
Partnership, the form of the Subordinated Notes, the form of Indenture to be
entered into by and between the Partnership and Manufacturers and Traders Trust
Company, as Trustee, the Post- Effective Amendment No. 6 and other documents
upon which the transactions described in the Post-Effective Amendment No. 6 are
based, and such other documents as we have deemed necessary and appropriate in
rendering this opinion. We have assumed for purposes of this opinion that the
limited partners will act only in compliance with the Partnership Agreement.
Based upon the foregoing, it is our opinion that the statements made in
the portion of the Prospectus entitled "Tax Considerations - Discussions of Tax
Consequences of Owning Notes" and "Discussion of Tax Consequences of Owning
Limited Partnership Units" (including the Tax Status of Solon Hotel LLC and Erie
Hotel LLC), concerning our opinions as to the material tax aspects of an
investment in the Partnership, accurately reflect our opinions on the issues
discussed, subject to the assumptions and limitations set forth therein.
This opinion is rendered with respect to the federal laws of the United
States and the laws of the State of New York and does not address the laws of
any other jurisdiction. Furthermore, we hereby consent to the filing of this
opinion as an exhibit to the Post-Effective Amendment No. 6, and we further
consent to the use of our name in the sections of the Prospectus captioned
"Legal Matters" and "Tax Considerations."
Very truly yours,
HARRIS BEACH & WILCOX, LLP
By: /S/ THOMAS E. WILLETT
Thomas E. Willett,
Member of the Firm
EXHIBIT 23(b)
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
September 9, 1997
<PAGE>
EXHIBIT 23(b)
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
September 9, 1997
